NOTES TO FINANCIAL STATEMENTS
Note 1. Organization and Basis of Preparation
United Health Products, Inc. (formerly United EcoEnergy Corp.) ("United" or the "Company") is a product development and solutions company focusing its growth initiatives on the expanding wound-care industry and disposable medical supplies markets. The Company produces an innovative gauze product that absorbs exudate (fluids which have been discharged from blood vessels) by forming a gel-like substance upon contact. Epic Wound Care, Inc. ("Epic"), the Company's principal operating subsidiary, was dissolved by the State of Florida and, accordingly, all operations are now directly in the Company.
While the Company has funded its initial operations with private placements and secured loans from a related party, there can be no assurance that adequate financing will continue to be available to the Company and, if available, on terms that are favorable to the Company. The Company's ability to continue as a going concern is also dependent on many events outside of its direct control, including, among other things, improvement in the economic climate. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Note 2. Significant Accounting Policies
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred net losses of $2,591,861 and $2,144,334 for the years ending December 31, 2015 and 2014, respectively. The Company's history of recurring losses result in an accumulated deficit of $12,260,148. The Company has negative working capital and operations have not provided cash flows. Additionally, the Company does not currently have sufficient revenue producing operations to cover its operating expenses and meet its current obligations. In view of these matters, the Company's ability to continue as a going concern is dependent upon the Company's ability to expand operations and to achieve a level of profitability. The Company intends on financing its future development activities and its working capital needs largely from the sale of public equity securities with some additional funding from other traditional financing sources, including term notes until such time that funds provided by operations are sufficient to fund working capital requirements. The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Chief Executive Officer has agreed to advance funds or make payments of the Company's obligations at his discretion. There is no written agreement to continue this support.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported period. Changes in the economic environment, financial markets, as well as in the healthcare industry, and any other parameters used in determining these estimates, could cause actual results to differ.
Cash and Cash Equivalents
The Company considers all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents.
Fair Value Measurements
Accounting principles generally accepted in the United States define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1. We value assets and liabilities included in this level using dealer and broker quotations, bid prices, quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2015 and 2014. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments.
Income Taxes
The Company accounts for income taxes using a method that requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases of the Company's assets and liabilities which is commonly known as the asset and liability method. In assessing the ability to realize deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company evaluates its tax positions taken or expected to be taken in the course of preparing the Company's tax returns to determine whether the tax positions are ''more-likely-than-not'' of being sustained by the applicable tax authority. Tax positions not deemed to meet the "more-likely-than-not" threshold are recorded as an expense in the applicable year. The Company does not have a liability for any unrecognized tax benefits. Management's evaluation of uncertain tax positions may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof, with due consideration given to the fact that tax periods are open to examination by tax authorities. The Company is no longer subject to U.S federal or state income tax examinations by tax authorities before 2011.
As of December 31, 2015, the Company has approximately $10.9 million of net operating loss carry-forwards available to affect future taxable income and has established a valuation allowance equal to the tax benefit of the net operating loss carry forwards and temporary differences as realization of the asset is not assured.
Revenue Recognition
The Company recognizes revenues when persuasive evidence of an arrangement exists, product has been delivered or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. Revenue is recognized net of estimated sales returns and allowances.
Revenues are attributable to the sale of medical products through distributor agreements. The principal terms of the distributor agreements provide that the distributor orders be accompanied by partial payment in advance, which at least equals 50% of total manufactured cost, as defined, for orders for distributor inventory and, in addition, an agreed portion of the distributor's gross profit on special orders. The balance of the manufactured cost is due from the distributor at the time of shipment. The Company is also entitled to an agreed percentage of the distributor's profit on receipt by the distributor. The Company defers all amounts received in advance of shipment and recognizes as revenue the aggregate of amounts invoiced in advance and an estimate of the Company's portion of distributor's profit at the time of shipment.
Trade Accounts Receivable
We record accounts receivable at the invoiced amount and we do not charge interest. We review the accounts receivable by amounts due from customers which are past due, to identify specific customers with known disputes or collectability issues. In determining the amount of the reserve, we make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. We will also maintain a sales allowance to reserve for potential credits issued to customers. We will determine the amount of the reserve based on historical credits issued.
There was no provision for doubtful accounts recorded at December 31, 2015 and 2014, as we have not experienced any bad debts from any of our customers.
Inventory
Inventory is valued at the lower of cost or market using the first-in, first-out (FIFO) method. Inventory on the balance sheet consists of raw materials purchased by the Company. Per the Company's operating agreement with
Hemo Manufacturing LLC, the lowest price to produce and distribute a four square inch of inventory is $0.86, which will be recorded upon completion of the manufacturing process.
Stock Based Compensation
The Company issues restricted stock to consultants and employees for various services. Cost for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of the common stock for non-employees is measured at the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached and expense is recognized during the term at which the counterparty's performance is earned or at the date the shares are considered non-forfeitable. The Company recognized consulting expenses and a corresponding increase to additional paid-in-capital related to stock issued for services. Compensation for employee stock grants are recognized at the fair market value of the shares at the date of grant and recognized at the grant date, as it is considered that the shares issued are considered non-forfeitable at the date of grant. Stock compensation for the periods presented were issued for past services provided, accordingly, all shares issued are fully vested, and there is no unrecognized compensation associated with these transactions.
Per Share Information
Basic earnings per share are calculated using the weighted average number of common shares outstanding for the period presented. Diluted loss per share is the same as basic loss per share, as the effect of potentially dilutive securities (-0- options and -0- warrants at December 31, 2014 and 2015) is anti-dilutive.
New Accounting Pronouncements, Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued issued Accounting Standards Update (ASU) No. ASU 2016-09,
Compensation - Stock Compensation, Improvements to Employee Share-Based payment Accounting (Topic 718).
This update is intended to provide simplification of the accounting for share based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This update is effective for our fiscal year beginning January 1, 2017. We are currently evaluating the impact of the adoption of ASU 2016-09 on our financial statements.
In February 2016, the FASB issued Accounting Standards Update (ASU) No. ASU 2016-02,
Leases,
which amends existing lease accounting guidance, including the requirement to recognize most lease arrangements on the balance sheet. The adoption of this standard will result in the Company recognizing a right-of-use asset representing its rights to use the underlying asset for the lease term with an offsetting lease liability. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the potential impact of the adoption of this accounting pronouncement to its financial statements.
In July 2015, the FASB issued Accounting Standards Update (ASU) No. ASU 2015-11,
Simplifying the Subsequent Measurement of Inventory
, which simplifies the subsequent accounting for inventory. This standard does not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments in this Update more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). ASU 2015-11 will be effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the potential impact of the adoption of this accounting pronouncement to its financial statements.
In August 2014, FASB issued Accounting Standards Update (ASU) No. 2014-15
Preparation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern.
Under generally accepted accounting principles (GAAP), continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity's liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity's liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30,
Presentation of Financial Statements—Liquidation Basis of Accounting
. Even when an entity's liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this Update should be followed to determine whether to disclose information about the relevant conditions and events. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company will evaluate the going concern considerations in this ASU, however, at the current period, management does not believe that it has met conditions which would subject these financial statements for additional disclosure.
In May 2014, FASB issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers
. The revenue recognition standard affects all entities that have contracts with customers, except for certain items. The new revenue recognition standard eliminates the transaction-and industry-specific revenue recognition guidance under current GAAP and replaces it with a principle-based approach for determining revenue recognition. Public entities are required to adopt the revenue recognition standard for reporting periods beginning after December 15, 2016, and interim and annual reporting periods thereafter. Early adoption is not permitted for public entities. The Company has reviewed the applicable ASU and has not, at the current time, quantified the effects of this pronouncement, however it believes that there will be no material effect on the financial statements.
The Company considers all new pronouncements and management has determined that there have been no other recently adopted or issued accounting standards that had or will have a material impact on its Financial Statements.
Note 3. Acquisition of Intellectual Property Rights
In June 2009, the Company acquired the intellectual property rights of Epic Wound Care, LLC, through the then wholly-owned subsidiary, Epic Wound Care, Inc. ("Epic"). The intellectual property includes the right to manufacture and distribute innovative gauze to serve the wound care market. The acquisition cost for the rights was 30 million shares of Company's common stock. The Company valued the rights acquired at $500,000 based upon the Company's expectation for commercialization of the rights less costs to effectuate applicable approvals.
The Company amortized the intangibles acquired over a five year period and, accordingly recorded an amortization charge of $50,000 in 2014. The intellectual property is fully amortized as of December 31, 2014.
Note 4. Related Party Transactions
As of December 31, 2014, notes payable to related parties totaled $542,776. These monies, at December 31, 2014, were owed to Doug Beplate, our Chief Executive Officer. In January 2015, Douglas Beplate converted $542,776 of indebtedness and a bonus of $348,224 for a total of $891,000 into 9.9 million shares of restricted Common Stock. Between January 1, 2015 and December 31, 2015, Mr. Beplate provided loans to the Company of $112,190. These loans were for operating expenses of the Company, are due on demand and have no interest rate.
In January 2015, the Company entered into an employment agreement with Douglas Beplate pursuant to which he received a signing bonus of 11.1 million shares of restricted common stock and a monthly salary of $8,333. The common shares issued, at fair market value of $999,000, was recognized as expense in the first quarter of 2015. Mr. Beplate is entitled to an annual restricted stock bonus equal to 2 ½% of gross sales with the number of shares computed based upon the average closing sales price of the Company's common stock in the month of December of each year. No stock bonus related to gross sales was accrued for 2015. Upon the sale of all or substantially all of the assets of the Company or other change in control or merger transaction in which the Company is involved, Mr. Beplate will be rewarded with a number of shares of restricted common stock of the Company which equals 5% of the then outstanding shares of the Company's common stock on a fully diluted basis.
In November 2014, the Company entered into employment agreements with Dr. Phillip Forman, formerly Chairman of the Board, and Nate Knight, our Chief Financial Officer. Dr. Forman's employment agreement, which was terminable "at will" provided for cash compensation of $5,000 per month. Dr. Forman received 3,000,000 shares as a signing bonus, subject to his cancellation of 2,090,000 shares which he volunteered to cancel in July 2013. Dr. Forman has been reportedly unable to locate his certificates totaling 2,090,000 shares to cancel. Mr. Knight received 500,000 shares as a signing bonus and a monthly salary of $4,000 pursuant to his employment agreement, which is also terminable "at will." The spouse of our Chief Executive Officer entered into an employment agreement for her services in November 2014 as an office administrator and she received as an employee "at will" 500,000 shares as a signing bonus and a monthly salary of $4,000.
On June 25, 2015, Dr. Forman resigned from the Board and as its Chairman. The Company and Dr. Forman entered into an agreement pursuant to which Dr. Forman's employment agreement terminated effective October 1, 2015. Until that date, Dr. Forman served as a medical advisor to the Company. The Company and Dr. Forman agreed that Dr. Forman would assist the Company to cancel the 2,090,000 shares that he agreed to surrender to the Company in July 2013, which shares were cancelled in July 2015, and his 3,000,000 common stock bonus that was agreed to in November 2014, which shares had not been issued, was reduced to 1,600,000 shares to be issued pursuant to the Company's 2013 Employee Benefit and Consulting Services Compensation Plan. These 1,600,000 shares were issued on June 25, 2015. Pursuant to Dr. Forman's amended employment agreement, he was scheduled to receive additional compensation totaling $15,000 for the period of June 25 through October 1, 2015.
Note 5. Issuances of Securities
In May 2013, the Company entered into an agreement with Bibicoff & MacInnis, Inc. to provide stockholder financial community and investor relations and to serve as a consultant to the Company's Board of Directors as described in "Note 7." In connection with said agreement, Mr. Bibicoff subscribed to purchase 507,864 shares of Common Stock at $.04 per share at a subscription price of $20,314. Mr. MacInnis subscribed to purchase 338,576 shares at $.04 per share at a subscription price of $13,543. In each case the subscription price is payable pursuant to promissory notes payable with interest at 1.5% quarterly and due February 21, 2016. These shares won't be issued until the promissory notes are paid in full. The Company has not recorded the subscription receivable as of the date of this report and will recognize the transaction upon payment in part or full.
On January 18, 2014, the Company entered into a consulting agreement with an individual to assist the Company in the areas of corporate networking, sales, marketing and strategic planning. Pursuant to said agreement, the Company issued 200,000 shares of restricted stock and immediately upon executing the agreement an option to purchase an additional 300,000 shares of stock at $0.12 per share from a third party. The shares were recorded as expense at the fair market value at the date of contract, in the amount of $34,000. The options issued were valued using the Black Scholes valuation model, resulting in an expense of $21,247. The assumptions used in determining the value were:
Expected volatility
|
|
|
102.0
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
Risk-free interest rate
|
|
|
1.75
|
%
|
Expected term (in years)
|
|
|
.5
|
|
On November 7, 2014, the Board of Directors approved the issuance and sale of 9.6 million shares of its Common Stock pursuant to various employment agreements and to consultants in exchange for services rendered valued at $.083 per share. For the year ending December 31, 2014, the Company issued 6,500,000 shares, at the fair market value of $539,500. The Company has not issued 100,000 shares to a director or 3,000,000 shares to be distributed to Phillip Forman, upon the submission of cancellation of the 2,090,000 shares. The Company has accrued a liability of $324,000 for the issuance of these shares. In January 2015, the Company issued the director the 100,000 shares.
In the fourth quarter of 2014, the Company sold 4,121,486 shares of its Common Stock in a private placement offering at an offering price of $.083 per share (166,666 shares were sold at $.078 per share), for gross proceeds of $341,250 which was received in 2014. These shares were issued subsequent to the year end. Exemption from registration is claimed under Rule 506 of Regulation D of the Securities Act of 1933, as amended.
In the first quarter of 2015, the Company sold 4,536,909 shares of its Common Stock in a private placement offering at offering prices ranging from $.07 per share to $.083 per share, for gross proceeds of $339,160. These shares were issued subsequent to the year end. Exemption from registration is claimed under Rule 506 of Regulation D of the Securities Act of 1933, as amended.
In the second quarter of 2015, the Company sold 370,000 shares of its common stock in a private placement offering at offering prices ranging from $.075 per share to $.078 per share for gross proceeds of approximately $15,600. Exemption from registration is claimed under Rule 506 of Regulation D of the Securities Act of 1933, as amended.
In January 2015, Douglas Beplate converted $542,776 of indebtedness and a stock bonus of $348,224 for a total of $891,000 into 9.9 million shares of restricted Common Stock. Contemporaneously, the Company entered into an employment agreement with Douglas Beplate pursuant to which he received as a bonus 11.1 million shares of restricted Common Stock. The common shares issued, at fair market value of $999,000, was recognized as expense in the first quarter of 2015.
Previously, the Company entered into a distribution agreement with Sinc Ventures LLC. In 2014, the Company agreed to terminate the distribution agreement in June 2015 in consideration of 50,000 shares of the Company's Common Stock, which 50,000 shares were issued in June 2015.
In June 2015, the Company and Dr. Forman agreed to reduce his 3,000,000 shares signing bonus to 1,600,000 shares. See "Note 3."
In July 2015, the Company entered into a Financial Advisory Agreement with Maxim Group LLC, a leading full service investment bank, securities and wealth management firm. Pursuant to this agreement, Maxim was issued 4,000,000 shares of restricted common stock valued at $360,000.
In the third quarter of 2015, the Company sold 3,034,291 shares of its common stock in a private placement offering at offering prices ranging from $.075 per share to $.078 per share for gross proceeds of approximately $227,600. Exemption from registration is claimed under Rule 506 of Regulation D of the Securities Act of 1933, as amended. This amount is recorded in the stock subscriptions account found on the balance sheet.
In the fourth quarter of 2015, the Company sold 2,575,626 shares of its common stock in a private placement offering at $.075 per share for gross proceeds of approximately $142,725. Exemption from registration is claimed under Rule 506 of Regulation D of the Securities Act of 1933, as amended. This amount is recorded in the stock subscriptions account found on the balance sheet.
Note 6. Litigation
There are no legal proceedings pending or threatened against us, and we are unaware of any governmental authority initiating a proceeding against us, except as described below.
On November 8, 2013, the Company filed a Complaint in the Second Judicial District Court, State of Nevada, County of Washoe, against a former officer and director of the Company, LeadDog Capital LP, a corporation which in the past has loaned money to the Company, and certain other defendants. The Company sought among other things to have LeadDog Capital LP cancel its indebtedness owed by the Company. A settlement agreement was reached effective August 18, 2014 pursuant to which all monies owed by the Company to LeadDog Capital LP were cancelled.
In August 2014, the Company, a former officer and director of the Company, LeadDog Capital LP and other defendants in the litigation referenced above, agreed to settle the litigation in order to avoid the inconvenience and expense of continued litigation. The settlement made by the parties does not constitute an admission of liability. Pursuant to the Settlement Agreement, LeadDog Capital LP agreed to cancel all principal and accrued interest thereon. The forgiveness included loans payable of $504,603, accrued compensation of $50,000 and accrued interest of $39,948, for a total of $594,551, which was accounted for as a debt forgiveness from a related party and therefore a contribution of capital, in the amount of $594,551, recognized for the year ending December 31, 2014. Additionally, the former officer and director agreed as part of the settlement to sell 1.5 million shares owned by him with one-third of the proceeds to be retained by him, including an expected minimum of $55,000, and two-thirds of the proceeds to be paid to the Company. The Nevada Court confirmed the settlement agreement on October 2, 2014. Subsequent to the Court confirmation of the Settlement Agreement, the former officer and director entered into an amendment to the Settlement Agreement pursuant to which he agreed to cancel 950,000 of the 1,500,000 shares, while retaining 550,000 shares.
Note 7. Material Agreements and Other Matters
On October 1, 2013, the Company entered into an Operating Agreement with Hemo Manufacturing LLC. Hemo Manufacturing is to act as the exclusive supplier of manufactured products for the Company's products. Pursuant to said agreement, 2,000,000, valued at $231,270, restricted shares of the Company's Common Stock were issued. Under certain conditions, an additional 2,000,000 shares of the Company's Common Stock would be issued in the event the Company is bought out by a third party. The Company anticipates booking all sales directly to customers and making payment for goods directly to Hemo Manufacturing. The managing member of Hemo Manufacturing will retain 100% of the profits earned by Hemo Manufacturing unless the Company is sold to a third party. In the event of such a sale, the managing member of Hemo Manufacturing and the Company would have equal share in the gross profits.
Since 2013, the Company entered into distribution agreements for Australasia and the equestrian, veterinarian, dental and U.S. military and retail markets.
In August 2013, the Company entered into a consulting agreement with Douglas Beplate. Pursuant to said agreement, the Company retained Mr. Beplate for the exclusive purpose of developing and marketing its hemostatic gauze products. A signing bonus of 6,000,000 shares of Common Stock which resulted in recording compensation expense of $744,000 was agreed upon and was issued pursuant to the Company's 2013 Employee Benefit and Consulting Services Compensation Plan. These 6,000,000 shares were issued in September 2013 after the Plan was filed with the Securities and Exchange Commission on Form S-8.
In November 2014, the Company entered into employment agreement with Dr. Phillip Forman, Chairman of the Board, and Nate Knight, our Chief Financial Officer. Each employment agreement is terminable by the Company "at will." Dr. Forman and Mr. Knight receive cash compensation of $5,000 per month and $4,000 per month, respectively. Dr. Forman received 3,000,000 shares as a signing bonus, subject to his cancellation of 2,090,000 shares which he volunteered to cancel in July 2013. Dr. Forman has been reportedly unable to locate his certificates totaling 2,090,000 shares to cancel. Mr. Knight received 500,000 shares as a signing bonus pursuant to his employment agreement. The spouse of our Chief Executive Officer entered into an employment agreement for her services in November 2014 as an office administrator and she received as an employee "at will" 500,000 shares as a signing bonus and a monthly salary of $4,000.
On June 25, 2015, Dr. Forman resigned from the Board and as its Chairman. The Company and Dr. Forman entered into an agreement pursuant to which Dr. Forman's employment agreement will terminate effective October 1, 2015. Until that date, Dr. Forman will serve as a medical advisor to the Company. The Company and Dr. Forman agreed that Dr. Forman would assist the Company to cancel the 2,090,000 shares that he agreed to surrender to the Company in July 2013 and his 3,000,000 common stock bonus that was agreed to in November 2014, which shares had not been issued, was reduced to 1,600,000 shares to be issued pursuant to the Company's 2013 Employee Benefit and Consulting Services Compensation Plan. These 1,600,000 shares were issued on June 25, 2015. Pursuant to Dr. Forman's amended employment agreement, he will receive additional compensation totaling $15,000 for the period of June 25 through October 1, 2015.
In July 2015, the Company entered into a Financial Advisory Agreement with Maxim Group LLC, a leading full service investment bank, securities and wealth management firm. Pursuant to this agreement, Maxim was issued 4,000,000 shares of restricted common stock valued at $360,000.
Note 8. Other Current Liabilities
As of December 31, 2015 and 2014, included in other current liabilities are four outstanding notes to various individuals aggregating $177,370 and $168,223 in principal and accrued interest, respectively. Interest accrues at the rate of 9% - 14% per annum. The loans are currently in default.
The Company has recognized a "Liability for unissued shares" for shares granted to employees and consultants, but unissued as of the balance sheet date. The granted shares are recorded at the fair market value of the shares to be issued at the grant date and a corresponding current liability is recorded for these unissued shares. The activity in this account and balances, classified as Liabilities for unissued shares, as of December 31 was as follows:
|
|
2015
|
|
|
2014
|
|
Balance, beginning
|
|
$
|
567,043
|
|
|
$
|
160,543
|
|
Stock based compensation recognized
|
|
|
-
|
|
|
|
421,500
|
|
Issuance of shares in satisfaction of liability
|
|
|
(421,500
|
)
|
|
|
(15,000
|
)
|
Balance, ending
|
|
$
|
145,543
|
|
|
$
|
567,043
|
|
The total number of shares granted but unissued were 1,579,044 and 5,595,711, as of December 31, 2015 and 2014, respectively.
Note 9. Stock Option Plan
On August 8, 2013, the Board of Directors approved the 2013 Employee Benefit and Consulting Services Compensation Plan which has 15,000,000 shares that may be issued under said Plan. The Plan provides for the direct issuance of shares of common stock under the Plan and for the grant of non-statutory stock options on terms established by the Board of Directors or committee thereof. While the Plan does not require stockholder approval to be implemented, since stockholder approval was not obtained on or before August 8, 2014, incentive stock options under the 1986 Tax Code cannot be granted under the Plan. In September 2013, the Company issued 6,000,000 shares of stock under said Plan to Douglas Beplate pursuant to his consulting contract described in Note 7.
A summary of the option activity both under and outside of the 2013 Employee Benefit and Consulting Services Compensation Plan as of December 31, 2014 and 2015, and changes during the year then ended is presented below:
Options
|
|
|
|
Outstanding at January 1, 2014
|
|
|
2,150,000
|
|
Forfeited
|
|
|
(2,150,000
|
)
|
Outstanding at December 31, 2014
|
|
|
-0-
|
|
Issued or Forfeited
|
|
(-0-
|
)
|
Outstanding at December 31, 2015
|
|
|
-0-
|
|
Note 10. Income Tax
The Company accounts for income taxes under the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") No. 740, Income Taxes ("ASC 740"). Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Income tax provision (benefit) at statutory rate
|
|
$
|
(880,000
|
)
|
|
$
|
(729,000
|
)
|
Change in valuation allowance
|
|
|
880,000
|
|
|
|
729,000
|
|
Income Tax Expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets and liabilities were comprised of the following:
|
|
|
|
|
|
|
|
|
Net Operating Losses
|
|
$
|
3,702,000
|
|
|
$
|
3,287,000
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(3,702,000
|
)
|
|
|
(3,287,000
|
)
|
Deferred tax asset, net
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2015, the Company has taxable net loss carryovers of approximately $10.9 million. The change in the valuation allowance for the years ended December 31, 2015 was $880,000. Under the Internal Revenue Code of 1986, as amended, these losses can be carried forward twenty years. Net operating losses will expire through 2035.
The Company did not take any uncertain tax positions and had no adjustments to its income tax liabilities or benefits pursuant to the provisions of Section 740-10-25 for the years ended December 31, 2015 or 2014. The Company's federal income tax returns for the years ended December 31, 2011 through December 31, 2015 remain subject to examination by the Internal Revenue Service as of December 31, 2015.
Note 11. Subsequent Events
The Company has evaluated events from December 31, 2015, through the date whereupon the financial statements were issued and has determined that the items below need to be disclosed.
The Company issued 2,810,000 shares of common stock in satisfaction of the stock subscriptions recorded on the balance sheet.
The Company issued 689,656 shares of common stock for total proceeds of $50,000.