NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note 1. Organization and Basis of Preparation
United Health Products, Inc. ("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.
Interim financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 8 of Regulation S-X, as appropriate. In the opinion of management, all adjustments, which are of a normal recurring nature, considered necessary for the fair presentation of financial statements for the interim period, have been included. Operating results for the interim periods presented are not necessarily indicative of the results to be expected for a full year.
These interim condensed financial statements should be read in conjunction with the Company's audited financial statements and notes for the period ended December 31, 2017 filed with the Securities and Exchange Commission on Form 10-K filed on April 17, 2018. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, as permitted by the SEC, although we believe the disclosures which are made are adequate to make the information presented not misleading.
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 recurring net losses and 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, there is substantial doubt about the Company's ability to continue as a going concern. 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.
Trade Accounts Receivable and Concentration Risk
There was $100,000 and $0 of provision for doubtful accounts recorded at September 30, 2018 and December 31, 2017, respectively. The Company recorded $100,000 and $20,226 in bad debt expenses for the nine months ended September 30, 2018 and for the year ended December 31, 2017, respectively.
For the nine months ended September 30, 2018, one customer made up approximately 99% of the Company’s outstanding accounts receivable balance. For the nine months ended September 30, 2018, three customers accounted for 48%, 29% and 12% of the Company’s net revenue, respectively.
For the year ended December 31, 2017, one customer made up 99% of the Company’s outstanding accounts receivable balance. For the year ended December 31, 2017 one customer accounted for 93% of the Company’s net revenue.
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 and finished goods.
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Raw materials
|
|
$
|
34,270
|
|
|
$
|
34,270
|
|
Finished goods
|
|
|
126,563
|
|
|
|
129,264
|
|
|
|
$
|
160,833
|
|
|
$
|
163,534
|
|
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.
In January 2018, the Company issued 14,150,000 shares of common stock and placed them in escrow during the period. The shares are to be issued to various individuals upon change of control of the Company. The Company is unable to estimate when a change of control may occur and has not recorded any expenses related to these shares. The shares were valued at their fair market value of $1.09 per share and have a total value of $15,423,500.
Per Share Information
Basic earnings per share are calculated using the weighted average number of common shares outstanding for the period presented. Diluted earnings per share is computed using the weighted-average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the shares of common stock held in escrow. The dilutive effect of potential common shares is not reflected in diluted earnings per share because the Company incurred a net loss for the three and nine month periods ended September 30, 2018 and 2017 and the effect of including these potential common shares in the net loss per share calculations would be anti-dilutive. The Company did not have any potential common shares as of September 30, 2018 and 2017.
The total potential common shares as of September 30, 2018 and December 31, 2017 include 14,150,000 and 0, respectively, of common stock held in escrow until a change of control in the Company occurs.
New Accounting Pronouncements, Recently Adopted Accounting Pronouncements
Revenue Recognition
Effective January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the sale of its HemoStyp product by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied.
The Company evaluated the impact on the financial statements and there would have been no impact on the financial statements as a result of adopting ASC 606 for the three and nine months ending September 30, 2017.
Leases
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.
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.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.
Note 3. Related Party Transactions
As of September 30, 2018 and December 31, 2017, notes payable to related parties totaled $169,828 and $268,328, respectively. These amounts are owed to Douglas Beplate, our Chief Executive Officer. During the nine months ended September 30, 2018 the Company repaid a net amount of $128,500 of the outstanding notes payable and he gave a personal vehicle to a scientific advisor of the Company valued at $30,000 in lieu of the Company paying travel expenses and consulting expenses. These loans were for operating expenses of the Company, are due on demand and have no interest rate.
Per his employment agreement, he receives a monthly salary of $15,000 per month. During the year ended December 31, 2017, he received $93,500 of compensation and the remaining balance of $86,500 was recorded as accrued liabilities – related party on the balance sheet. He received $135,000 in compensation during the period ended September 30, 3018 and as of September 30, 2018, $86,500 remains owed to Mr. Beplate.
During the nine months ended September 30, 2018, the Company issued 1,600,000 shares to Nate Knight who is the Chief Financial Officer of the Company, 500,000 shares issued to the office administrator, who is a person affiliated with the Company’s CEO and 5,000,000 shares to our Chief Operating Officer. These shares have a fair market value of $2,289,000 and were placed in escrow and will be released when a change of control occurs. Management is unable to determine when a change of control will occur and $0 has been expensed as of September 30, 2018.
The Company by board resolution approved an executive compensation stock bonus package for Mr. Beplate such that 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, or in the event that no such transaction occurs by December 31, 2019, Mr. Beplate shall receive an amount equal to 15% post issuance of the then outstanding shares of the Company's common stock on a fully diluted basis. It is intended that the board approved stock bonus package will be in lieu of the 5% stock bonus that Mr. Beplate is already entitled to in the event of a sale of the Company’s assets or change in control or merger transaction per his employment agreement.
Note 4. Issuances of Securities
During the nine months ended September 30, 2018, the Company issued an aggregate of 19,853,475 shares of common stock. The Company issued 850,000 shares of common stock with a total fair market value of $674,500 for services, 1,283,728 shares of common stock were sold for total proceeds of $980,200, $125,000 of the proceeds received were for 181,159 shares of common stock not yet issued and recorded as liability for unissued shares, 69,747 shares of common stock were issued related to $10,000 of previously recorded liability for unissued shares during 2017 and 14,150,000 shares of common stock with a fair market value of $15,423,500 were issued to officers and various consultants for services to be provided related to a change of control of the Company and placed in escrow. The shares will be released from escrow upon the change of control of the Company. Management is unable to determine when a change of control will occur and $0 has been expensed as of September 30, 2018. The Company also issued 3,500,000 shares of common stock to convert $172,500 of notes payable and $10,000 of accrued interest. The shares were valued at their fair market value of $1.09 which resulted in a loss on debt settlement of $3,632,500.
Note 5. 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 follow:
During 2017, a Complaint was filed with the United States District Court, Southern District of New York by Steven Safran as Plaintiff against the Company and Douglas Beplate, its CEO, as Defendant. This court case was transferred to the United States District Court in Las Vegas, Nevada. Mr. Safran is seeking damages and monies allegedly owed pursuant to an employment agreement and allegedly unpaid loans of $245,824 provided to Defendants. The Company has denied Plaintiff’s allegations and intends to vigorously defend said lawsuit.
Note 6. Other Notes Payable
During the year ended December 31, 2016, the Company received $150,000 related to a note payable. The note is due on demand and interest accrues at the rate of 10% per annum. During the nine month period ended September 30, 2018, the Company issued 2,500,000 shares of common stock to settle the outstanding balance of $150,000 and accrued interest of $10,000. The balance was $0 and $150,000 as of September 30, 2018 and December 31, 2017, respectively.
During the year ended December 31, 2017, the Company received a total of $75,000 related to a note payable. The note had a maturity date of May 15, 2017 and interest accrued at the rate of 20% per annum. The Company paid $42,500 during 2017. During the nine months ended September 30, 2018, the Company paid $10,000 and issued 1,000,000 shares of common stock to settle the remaining balance of $22,000. The balance was $0 and $32,500 as of September 30, 2018 and December 31, 2017, respectively.
The Company has recognized a "Liability for unissued shares" for shares granted to employees and consultants along with shares purchased by investors, 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 September 30, 2018 and December 31, 2017 was as follows:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Balance, beginning
|
|
$
|
211,843
|
|
|
$
|
145,543
|
|
Reclass of previous shares purchased and recorded in equity
|
|
|
-
|
|
|
|
66,300
|
|
Shares purchased by investors but unissued
|
|
|
125,000
|
|
|
|
-
|
|
Issuance of shares in satisfaction of liability
|
|
|
(10,000
|
)
|
|
|
-
|
|
Balance, ending
|
|
$
|
326,843
|
|
|
$
|
211,843
|
|
The total number of shares granted but unissued were 2,595,218 and 2,483,806, as of September 30, 2018 and December 31, 2017, respectively.
Note 7. Subsequent Events
The Company has evaluated events from September 30, 2018, through the date whereupon the financial statements were issued and has determined that the following items needed to be disclosed.
On October 1, 2018, the Company filed an Answer and Statement of Counterclaim with FINRA related to Maxim Group LLC filing a Statement of Claim with FINRA alleging breach of contract and the Company’s failure to remove the restrictive legend from a stock certificate in the amount of 500,000 shares. In this filing, the Company asserted an affirmative defense of Maxim Group’s failure to serve the Company with a written demand for arbitration. The Company also asserted a second affirmative defense that Maxim Group did not have clean hands and was entitled to no relief due to Maxim Group’s breach of contract. The Company counterclaimed stated that it filed a demand for arbitration between the parties and alleged Maxim Group’s failure to perform the required services under its Financial Advisory Agreement of July 9, 2015, as amended on January 10, 2018. The Company is seeking the return of the 4,000,000 shares of common stock it previously paid to Maxim Group and damages in the amount determined at the hearing.