During the six months ended June 30, 2014, the Company entered into a Securities Purchase Agreements with Daniel James Management (Daniel) for the sale of 8% to 9.5% convertible note in aggregate principal amount of $60,000 (the Daniel Notes).
The Daniel Notes bear interest at the rate of 8% to 9.5% per annum. As of the quarter ended June 30, 2014, all interest and principal must be repaid one year from the issuance dated, with the last note being due May 29, 2015. The Daniel Notes are convertible into common stock, at holders option, at a 47% discount to the average of the three lowest closing bid prices of the common stock during the 10 trading day period prior to conversion. The Company has identified the embedded derivatives related to the Daniel Note. These embedded derivatives included certain conversion features and reset provision.
The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of Daniel Notes and to fair value as of each subsequent reporting date which at June 30, 2014 was $105,778. At the inception of the Daniel Note, the Company determined the aggregate fair value of $126,337 of the embedded derivatives.
During the six months ended June 30, 2014, the Company entered into a Securities Purchase Agreements with Fourth Man, LLC. (Fourth Man), for the sale of an 8% to 9.5% convertible note in the aggregate principal amount of $50,000 (the Note).
The Notes bears interest at the rate of 8% to 9.5% per annum. As of the quarter ended June 30, 2014, all interest and principal must be repaid one year from the issuance dated, with the last note being due June 26, 2015. The Notes are convertible into common stock, at Fourth Mans option, at a 47% discount to the average of the three lowest closing bid prices of the common stock during the 10 trading day period prior to conversion. The Company has identified the embedded derivatives related to the Fourth Man Notes. These embedded derivatives included certain conversion features and reset provision.
The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of Fourth Man Notes and to fair value as of each subsequent reporting date which at June 30, 2014 was $89,051. At the inception of the Fourth Man Notes, the Company determined the aggregate fair value of $87,090 of the embedded derivatives.
The fair value of the embedded derivatives of the Asher, Daniel and Fourth Man Notes, was determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 169.92% to 171.91%, (3) weighted average risk-free interest rate of 0.10% to 0.11%, (4) expected lives of 0.76 to 1.00 years, and (5) estimated fair value of the Companys common stock from $0.024 to $0.0486 per share. The initial fair value of the embedded debt derivative of $568,876 was allocated as a debt discount up to the proceeds of the note ($288,000) with the remainder ($280,876) charged to current period operations as interest expense. For the three and six months ended June 30, 2014, the Company amortized an aggregate of $108,011 and $201,615 of debt discounts to current period operations as interest expense, respectively. For the three and six months ended June 30, 2013 , the Company amortized $52,485 and $242,635 of debt discount to operations as interest expense, respectively.
BIOHEART, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2014
NOTE 7 RELATED PARTY TRANSACTIONS
Advances
As of June 30, 2014 and December 31, 2013, the Company officers and directors have provided advances in the aggregate of $247,657 and $416,198 respectively, for working capital purposes. The advances are unsecured, due on demand and non-interest bearing.
During the six months ended June 30, 2014, the Company issued an aggregate of 6,604,177 shares of common stock in settlement of $153,635 of related party advances and outstanding accounts payable.
Notes payable-related party
Northstar Biotechnology Group, LLC
On February 29, 2012, a note issued to BlueCrest Master Fund Limited was assigned to Northstar Biotechnology Group, LLC (Northstar), owned partly by certain directors and existing shareholders of the Company, including Dr. William P. Murphy Jr., Dr. Samuel Ahn and Charles Hart. At the date of the assignment, the principal amount of the BlueCrest note was $544,267.
On March 30, 2012, the Company and Northstar agreed to extend until May 1, 2012 the initial payment date for any and all required monthly under the Note, such that the first of the four monthly payments required under the Note will be due and payable on May, 2012 and all subsequent payments will be due on a monthly basis thereafter commencing on June 1, 2012, and to waive any and all defaults and/or events of default under the Note with respect to such payments. As of September 30, 2012, the Company was in default, however, subsequent to September 30, 2012, the Company renegotiated the terms of the Note, Northstar has agreed to suspend the requirement of principal payments by the Company and allow payment of interest-only in common stock.
On September 21, 2012, the Company issued 5,000,000 common stock purchase warrants to Northstar that was treated as Additional interest expense upon issuance.
On October 1, 2012, the Company and Northstar entered into a limited waiver and forbearance agreement providing a recapitalized new note balance comprised of all sums due Northstar with a maturity date extended perpetually. The Company agreed to issue 5,000,000 shares of Series A Convertible Preferred Stock and 10,000,000 of common stock in exchange for $210,000 as payment towards outstanding debt, default interest, penalties, professional fees outstanding and due Northstar. In addition, the Company executed a security agreement granting Northstar a lien on all patents, patent applications, trademarks, service marks, copyrights and intellectual property rights of any nature, as well as the results of all clinical trials, know-how for preparing Myoblasts, old and new clinical data, existing approved trials, all right and title to Myoblasts, clinical trial protocols and other property rights.
In addition, the Company granted Northstar a perpetual license on products as described for resale, relicensing and commercialization outside the United States. In connection with the granted license, Northstar shall pay the Company a royalty of up to 8% on revenues generated.
Effective October 1, 2012, the effective interest rate was 12.85% per annum. The parties agreed, as of February 28, 2013, to reduce the interest rate to 7% per annum.
16
BIOHEART, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2014
In connection with the consideration paid, Northstar waived, from the effective date through the earlier of termination or expiration of the agreement, satisfaction of the obligations as described in the forbearance agreement. In 2012, 5,000,000 shares of Series A Convertible Preferred Stock were approved to be issued, which was
subsequently increased to 20,000,000 shares of preferred stock as Series A Convertible Preferred Stock. In addition, the Company is obligated to issue additional preferred stock equal in lieu of payment of cash of accrued and unpaid interest on each six month anniversary of the effective date (October 1, 2012). In lieu of the initial two payments in preferred stock, the parties have determined to modify the voting rights of the Series A Convertible Preferred Stock from 20 votes per share on matters to be voted on by the common stock holders to 25 votes per share on matters to be voted on by the common stock holders and all prior and subsequent payments of interest will be in common stock. The Company is required to issue additional shares of its common stock (as amended), in lieu of cash, each six month anniversary of the effective date for any accrued and unpaid interest.
On April 2, 2014, the Company issued 274,681 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $12,635 due April 1, 2014 per the forbearance agreement.
As of June 30, 2014 and December 31, 2013, the principle of this note was $362,000.
Officer and Director Notes
At June 30, 2014 and December 31, 2013, the Company has outstanding notes payable to officers and directors with interest at 8% per annum due at maturity in aggregate $240,000 and $365,000, respectively. The remaining subordinated notes $100,000 and $140,000 were previously due on November 30, 2012 and June 4, 2011 respectively, and are unsecured. The Company is not obligated to make payment until Northstar loan is paid off.
On September 30, 2013, the Company issued an aggregate of 15,350,876 shares of its common stock in settlement of $175,000 of these related party notes payable.
On June 20, 2014, the Company issued 4,045,796 shares of its common stock in settlement of $125,000 of related party note payable and accrued interest of $36,832.
On August 1, 2013, the Company issued an aggregate of $500,000 promissory notes due on demand to officers and employee in settlement of accrued compensation. The promissory notes bear interest of 5% per annum and due at various maturity dates. During the six months ended June 30, 2014, the Company paid off $223,340 of the outstanding promissory notes. The principle outstanding balance of these notes as of June 30, 2014 is $206,124.
Subordinated debt, related party
As of June 30, 2014 and December 31, 2013, the Company officers and directors have outstanding notes in aggregate of $786,628 and $1,500,000, respectively. The notes are at from 4.75% to 8% per annum and are due upon payoff of the Northstar note payable described above.
On June 20, 2014, the Company issued 10,333,475 shares of its common stock in settlement of $300,385 of related party note payable and accrued interest of $112,954.
17
BIOHEART, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2014
NOTE 8 DERIVATIVE LIABILITIES
Reset warrants
On October 1, 2012, in connection with the forbearance agreement with Northstar as discussed in Note 7 above, the Company issued an aggregate of 15,000,000 common stock purchase warrants to purchase the Companys common stock with an exercise price of $0.014 per share for ten years with anti-dilutive (reset) provisions.
The Company has identified embedded derivatives related to the issued warrants. These embedded derivatives included certain and anti-dilutive (reset) provisions. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date and to fair value as of each subsequent reporting date.
At June 30, 2014, the fair value of the reset provision of $400,829 was determined using the Binomial Option Pricing model with the following assumptions: dividend yield: 0%; volatility: 170.55%; risk free rate: 2.13%; and expected life: 8.26 years. The Company recorded a gain (loss) on change in derivative liabilities of $265,657 and $(253,974) during the three and six months ended June 30, 2014.
Convertible notes
In 2013 and the six months ended June 30, 2014, the Company issued convertible notes (see Note 6 above).
These notes are convertible into common stock, at holders option, at a discount to the market price of the Companys common stock. The Company has identified the embedded derivatives related to these notes relating to certain anti-dilutive (reset) provisions. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of Asher Note and to fair value as of each subsequent reporting date.
The fair value of the embedded derivatives at June 30, 2014, in the amount of $473,324, was determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 170.55%, (3) weighted average risk-free interest rate of 0.04 to 0.11%, (4) expected lives of 0.30 to 0.99 years, and (5) estimated fair value of the Companys common stock of $0.027 per share. The Company recorded a gain on change in derivative liabilities of $45,757 and $76,017 during the three and six months ended June 30, 2014.
Based upon ASC 840-15-25 (EITF Issue 00-19, paragraph 11) the Company has adopted a sequencing approach regarding the application of ASC 815-40 to its outstanding convertible notes. Pursuant to the sequencing approach, the Company evaluates its contracts based upon earliest issuance date.
At June 30, 2014, the aggregate derivative liabilities was valued at $874,153, the Company believes an event under the contract that would create an obligation to settle in cash or other current assets is remote and has classified the obligation as a long term liability.
18
BIOHEART, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2014
NOTE 9 STOCKHOLDERS EQUITY
Preferred stock
On August 17, 2012, the board of directors designated 5,000,000 shares of preferred stock as Series A Convertible Preferred Stock which was increased to 20,000,000 shares of preferred stock as Series A Convertible Preferred Stock (currently held by Northstar Biotechnology Group, LLC). Each share of preferred stock is convertible into equal number of common shares at the option of the holder; entitled to 20 votes on all matters presented to be voted by the holders of common stock; upon event of liquidation, entitled to amount equal to stated value plus any accrued and unpaid dividends or other fees before distribution to junior securities. In lieu of the initial two payments due to Northstar on April 1, 2013 and October 1, 2013, the parties have determined to modify the voting rights of the Series A Convertible Preferred Stock from 20 votes per share on matters to be voted on by the common stock holders to 25 votes per share on matters to be voted on by the common stock holders (see Note 7 above).
Common stock
Effective May 19, 2014, the Company amended its articles of incorporation to increased the authorized shares of
capital stock of the Company from nine hundred and fifty million (950,000,000) shares of common stock and
twenty million (20,000,000) shares of preferred stock, both $.001 par value respectively, to two billion
(2,000,000,000) shares of shares of common stock and twenty million (20,000,000) shares of preferred stock, both
$.001 par value respectively.
During the six months ended June 30, 2014, the Company issued an aggregate of 31,052,689 shares of its common stock in settlement of outstanding accounts payable and accrued expenses. In connection with the issuance, the Company incurred $190,966 loss in settlement of debt.
During the six months ended June 30, 2014, the Company issued an aggregate of 51,823,229 shares of its common stock for the conversion of $1,516,095 of notes payable and related accrued interest of $88,688. In connection with the issuance, the Company incurred $255,890 gain in settlement of debt.
During the six months ended June 30, 2014, the Company issued an aggregate of 3,839,832 shares of its common stock for services provided to the Company.
NOTE 10 STOCK OPTIONS AND WARRANTS
Stock Options
In December 1999, the Board of Directors and shareholders adopted the 1999 Officers and Employees Stock Option Plan, or the Employee Plan, and the 1999 Directors and Consultants Stock Option Plan, or the Director Plan. The Employee Plan and the Director Plan are collectively referred to herein as the Plans. The Plans are administered by the Board of Directors and the Compensation Committee. The objectives of the Plans include attracting and retaining key personnel by encouraging stock ownership in the Company by such persons. In February 2010, the Directors & Consultants Plan was amended to extend the termination date of the Plan to December 1, 2011.
In April 1, 2013, the Board of Directors approved, subject to shareholder approval, the establishment of the Bioheart 2013 Omnibus Equity Compensation Plan, or the 2013 Omnibus Plan. The 2013 Omnibus Plan reserves up to fifty million shares of common stock for issuance.
A summary of options at June 30, 2014 and activity during the three months then ended is presented below:
19
BIOHEART, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
|
|
|
|
Options outstanding at January 1, 2013
|
|
|
7,853,376
|
|
|
$
|
0.67
|
|
8.2
|
Granted
|
|
|
17,400,000
|
|
|
$
|
0.016
|
|
9.9
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
Forfeited/Expired
|
|
|
(1,340,433
|
)
|
|
$
|
1.08
|
|
|
Options outstanding at December 31, 2013
|
|
|
23,912,943
|
|
|
$
|
0.15
|
|
9.0
|
Granted
|
|
|
24,648,487
|
|
|
$
|
0.021
|
|
10.0
|
Exercised
|
|
|
|
|
|
|
|
|
|
Forfeited/Expired
|
|
|
(62,087
|
)
|
|
$
|
1.08
|
|
|
Options outstanding at June 30, 2014
|
|
|
48,499,343
|
|
|
$
|
0.075
|
|
9.1
|
Options exercisable at June 30, 2014
|
|
|
16,775,856
|
|
|
$
|
0.18
|
|
8.7
|
Available for grant at June 30, 2014
|
|
|
1,500,657
|
|
|
|
|
|
|
|
The following information applies to options outstanding and exercisable at June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
Shares
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Weighted-
Average
Exercise
Price
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.00 $0.70
|
|
47,938,487
|
|
9.2
|
|
$
|
0.03
|
|
16,215,000
|
|
$
|
0.04
|
$0.71 $1.28
|
|
162,286
|
|
3.9
|
|
$
|
0.80
|
|
162,286
|
|
$
|
0.80
|
$5.25 $5.67
|
|
373,858
|
|
1.8
|
|
$
|
5.55
|
|
373,858
|
|
$
|
5.55
|
$7.69
|
|
24,712
|
|
2.1
|
|
$
|
7.69
|
|
24,712
|
|
$
|
7.69
|
|
|
48,499,343
|
|
9.1
|
|
$
|
0.075
|
|
16,775,856
|
|
$
|
0.18
|
On February 24, 2014, the Company issued an aggregate 15,000,000 options to purchase the Companys common stock at $0.019 per share to officers, vesting at 25% immediately and the remainder over approximately 42 months, exercisable over 10 years. The aggregate fair value of $282,597, determined using the Black Scholes option pricing model with the following assumptions: Dividend yield: 0%; Volatility: 163.63% and Risk free rate: 2.75%.
On February 24, 2014, the Company issued an aggregate 4,800,000 options to purchase the Companys common stock at $0.019 per share to officers, vesting immediately and exercisable over 10 years. The aggregate fair value of $90,431, determined using the Black Scholes option pricing model with the following assumptions: Dividend yield: 0%; Volatility: 163.63% and Risk free rate: 2.75%.
20
BIOHEART, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2014
On May 12, 2014, the Company issued an aggregate 4,848,487 options to purchase the Companys common stock at $0.0272 per share to officers and employees, vesting over four years at anniversary and exercisable over 10 years. The aggregate fair value of $130,135, determined using the Black Scholes option pricing model with the following assumptions: Dividend yield: 0%; Volatility: 161.36% and Risk free rate: 2.66%.
The fair value of all options vesting during the three and six months ended June 30, 2014 of $48,805 and $243,370, respectively, was charged to current period operations.
Warrants
A summary of common stock purchase warrants at June 30, 2014 and activity during the three months then ended is presented below:
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (in
years)
|
|
|
|
|
|
|
|
Outstanding at January 1, 2013
|
74,073,322
|
|
$
|
0.37
|
|
4.5
|
Issued
|
50,350,536
|
|
$
|
0.16
|
|
9.2
|
Exercised
|
|
|
$
|
0.00
|
|
|
Forfeited
|
(6,345,002)
|
|
$
|
0.38
|
|
|
Outstanding at December 31, 2013
|
118,078,856
|
|
$
|
0.22
|
|
6.3
|
Issued
|
36,292,783
|
|
$
|
0.02
|
|
7.7
|
Exercised
|
(11,918,181
|
)
|
$
|
0.01
|
|
|
Expired
|
(2,314,575
|
)
|
$
|
0.18
|
|
|
Outstanding at June 30, 2014
|
140,138,883
|
|
$
|
0.18
|
|
6.1
|
Exercisable at June 30, 2014
|
105,301,650
|
|
$
|
0.12
|
|
5.4
|
The following information applies to common stock purchase warrants outstanding and exercisable at June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding
|
|
Warrants Exercisable
|
|
|
Shares
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Weighted-
Average
Exercise
Price
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.01 $0.50
|
|
133,889,750
|
|
6.1
|
|
$
|
0.02
|
|
100,596,967
|
|
$
|
0.02
|
$0.52 $0.68
|
|
2,699,675
|
|
4.8
|
|
$
|
0.58
|
|
2,699,675
|
|
$
|
0.58
|
$0.70 $1.62
|
|
848,176
|
|
5.5
|
|
$
|
0.71
|
|
848,176
|
|
$
|
0.71
|
$5.67 $7.69
|
|
2,701,282
|
|
8.4
|
|
$
|
7.55
|
|
1,156,832
|
|
$
|
7.35
|
|
|
140,138,883
|
|
6.1
|
|
$
|
0.18
|
|
105,301,650
|
|
$
|
0.12
|
21
BIOHEART, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2014
In conjunction with the authorized issuance of common stock, the Company granted 24,292,783 common stock purchase warrants during the six months ended June 30, 2014.
During the six months ended June 30, 2014, the Company issued an aggregate of 8,000,000 warrants in connection with a joint venture agreement dated March 10, 2014. The warrants are exercisable at $0.0217 for four years vesting from June 8, 2014 through March 10, 2016. During the three and six months ended June 30, 2014, the Company charged $56,710 and $79,256 to current period operations for the vesting portion.
During the six months ended June 30, 2014, the Company issued an aggregate of 4,000,000 warrants in connection with use of certain intellectual property. The warrants are exercisable at $0.0481 for four years vesting from July 6, 2014 through April 6, 2017. During the three and six months ended June 30, 2014, the Company charged $32,814 to current period operations for the vesting portion.
NOTE 11 COMMITMENTS AND CONTINGENCIES
Joint Venture Agreement
On March 10, 2014, the Company entered into a profits sharing agreement (the Agreement) with Global Stem Cells, Group, LLC and its subsidiaries whereby both parties will participate in marketing for obtaining patients and provide physician training for stem cell treatments under the names of Regenestem and Stem Cell Training, respectively. In addition, each party will be responsible for selling equipment and kit to existing and previous customers. Profits are divided on a fifty/fifty basis with distribution within 10 days of the accounting for patients and physician training and 30 day with sales of equipment and kits.
In consideration of Global Stem Cell Group, LLCs participation, the Company issued an aggregate of 8,000,000 warrants to purchase the Companys common stock for four years at $0.0217 per share with 2,000,000 warrants vesting 90 days from the effective date, 2,000,000 vesting on each anniversary date for three years. During the three and six months ended June 30, 2014, the Company charged $71,532 and $94,078 to current period operations for the vesting portion.
William Beaumont Hospital
In June 2000, the Company entered into an agreement with William Beaumont Hospital, or WBH, pursuant to which WBH granted to the Company worldwide, exclusive, non-sublicenseable license to two U.S. method patents covering the inducement of human adult myocardial cell proliferation in vitro, or the WBH IP. The term of the agreement is for the life of the patents, which expire in 2015. The Company did not use this license in any of our technologies. The Company had not made any payments to WBH other than the initial payment to acquire the license. The Company has received confirmation from WBH that it has no obligation under the patent license agreement and WBH agreed to terminate the patent license agreement. (See Note 4)
Accordingly, the Company has recognized approximately $2,122,130 in settlement of debt which represents the accumulative accrual and related interest from past years under the 2000 patent license agreement.
22
BIOHEART, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2014
Litigation
The Company is subject to other legal proceedings that arise in the ordinary course of business. In the opinion of management, as of June 30, 2014, the amount of ultimate liability with respect to such matters, if any, in excess of applicable insurance coverage, is not likely to have a material impact on the Companys business, financial position, results of operations or liquidity. However, as the outcome of litigation and other claims is difficult to predict significant changes in the estimated exposures could exist.
Consulting agreements
On November 20, 2013, the Company entered into an investment banking agreement with Cassel Salpeter & Co. (CSC), who will act as exclusive third party financial advisor in connection with investment banking matters. The term of the Investment Banking Agreement shall be for a period of twenty four months unless terminated or extended in accordance with its terms. For these services, CSC will receive a one-time $25,000 fee, $5,000 monthly
fees and 5,207,630 ten year common stock purchase warrants, exercisable at $.0113 and applicable consideration in the event the closing of a Mezzanine Financing consisting of non-convertible subordinated debt and/or sale of equity securities. The Company will also reimburse CSC for its reasonable out-of-pocket expenses associated with the services provided pursuant to the Investment Banking Agreement. As of June 30, 2014 and December 31, 2013, the Company accrued $36,964 and $32,424 under the agreement, respectively.
NOTE 12 FAIR VALUE MEASUREMENT
The Company adopted the provisions of Accounting Standards Codification subtopic 825-10, Financial Instruments (ASC 825-10) on January 1, 2008. ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
23
BIOHEART, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2014
All items required to be recorded or measured on a recurring basis are based upon level 3 inputs.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
Upon adoption of ASC 825-10, there was no cumulative effect adjustment to beginning retained earnings and no impact on the financial statements.
The carrying value of the Companys cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings (including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity.
As of June 30, 2014 or December 31, 2013, the Company did not have any items that would be classified as level 1 or 2 disclosures.
The Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed in notes 7 and 9. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed in Notes 7 and 9 are that of volatility and market price of the underlying common stock of the Company.
As of June 30, 2013 and December 31, 2013, the Company did not have any derivative instruments that were designated as hedges.
The derivative liability as of June 30, 2014, in the amount of $874,153 has a level 3 classification.
The following table provides a summary of changes in fair value of the Companys Level 3 financial liabilities as of June 30, 2014:
|
|
|
|
|
|
|
|
|
Excess
Share
Derivative
|
|
Warrant
Liability
|
|
Debt
Derivative
|
Balance, December 31, 2012
|
|
$
|
390,048
|
|
|
|
221,179
|
|
|
$
|
—
|
|
Total (gains) losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial fair value of debt derivative at note issuance
|
|
|
|
|
|
|
—
|
|
|
|
673,219
|
|
Initial fair value of derivative relating to reset warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Mark-to-market at December 31, 2013:
|
|
|
84.906
|
|
|
|
(74,324
|
)
|
|
|
(39,761
|
)
|
Transfers out of Level 3 upon increase in authorized shares
|
|
|
(474,954
|
)
|
|
|
—
|
|
|
|
—
|
|
Transfers out of Level 3 upon conversion and settlement of notes
|
|
|
|
|
|
|
|
|
|
|
(376,502
|
)
|
Balance, December 31, 2013
|
|
$
|
—
|
|
|
$
|
146,855
|
|
|
$
|
256,956
|
|
Total (gains) losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial fair value of debt derivative at note issuance
|
|
|
—
|
|
|
|
—
|
|
|
|
568,876
|
|
Mark-to-market at June 30, 2014:
|
|
|
—
|
|
|
|
253,974
|
|
|
|
(76,017
|
)
|
Transfers out of Level 3 upon conversion of notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
(276,491
|
)
|
Balance, June 30, 2014
|
|
$
|
—
|
|
|
$
|
400,829
|
|
|
$
|
473,324
|
|
Net (Loss) Gain for the period included in earnings relating to the liabilities held at June 30, 2014
|
|
$
|
—
|
|
|
$
|
(253,974
|
)
|
|
$
|
76,017
|
|
24
BIOHEART, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2014
Fluctuations in the Companys stock price are a primary driver for the changes in the derivative valuations during each reporting period. The Companys stock price increased approximately 170% from December 31, 2013 to June 30, 2014. As the stock price increases for each of the related derivative instruments, the value to the holder of the instrument generally increases, therefore increasing the liability on the Companys balance sheet. Additionally, stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Companys derivative instruments. The simulated fair value of these liabilities is sensitive to changes in the Companys expected volatility. Increases in expected volatility would generally result in a higher fair value measurement.
NOTE 13 SUBSEQUENT EVENTS
Officer compensation
On July 28, 2014, the Companys Board of Directors approved the 2014/2015 salary for Mike Tomas, Chief Executive Officer, at $525,000 per year, beginning July 1, 2014 with an incentive bonus ranging from $150,000 to $500,000. In addition, the Board of Directors will grant Mr. Tomas options to be determined on or before June 30, 2015. The Companys Board of Directors approved a bonus of $500,000 and options to acquire 10,000,000 shares of the Companys common stock for ten years with four year vesting and a cashless exercise provision at an exercise price equal to the five day average closing price of the Companys common stock as of August 1, 2014. The cash bonus may be paid in the form a six month promissory note.
On July 28, 2014, the Companys Board of Directors approved the 2014/2015 salary for Kristin Comella, Chief Scientific Officer, at $250,000 per year, beginning July 1, 2014 with an incentive bonus ranging from $100,000 to $300,000. In addition, the Board of Directors will grant Ms. Comella options to be determined on or before June 30, 2015. The Companys Board of Directors approved a bonus of $300,000 and options to acquire 5,000,000 shares of the Companys common stock for ten years with four year vesting and a cashless exercise provision at an exercise price equal to the five day average closing price of the Companys common stock as of August 1, 2014. The cash bonus may be paid in the form a six month promissory note.
Subsequent issuances
In July 2014, the Company issued an aggregate of 1,006,451 shares of its common stock for services provided.
In July 2014, the Company issued 155,677 shares of its common stock in settlement of accounts payable of $6,227.
In July 2014, the Company issued an aggregate of 6,985,495 shares of its common stock in settlement of related party notes payable, accrued interest and other obligations in aggregate of $279,419.
In July 2014, the Company issued an aggregate of 2,640,625 shares of its common stock in settlement of notes payable of $32,500.
Subsequent financing
On July 30, 2014, the Company entered into a Securities Purchase Agreement with Daniel James Management, Inc., for the sale of an 9.5% convertible note in the principal amount of $25,000 (the Note).
The Note bears interest at the rate of 9.5% per annum. All interest and principal must be repaid on July 29, 2015, 2015. The Note is convertible into common stock, at holders option, at a 47% discount to the lowest daily trading price of the common stock during the 10 trading day period prior to conversion. In the event the Company prepays the Note in full, the Company is required to pay off all principal and accrued interest at 150%, and any other amounts.
25