The financial statements required by Item 8 can be found beginning on Page F-1 of this report.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
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.
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 and accordingly, raises substantial doubt as to the Company’s ability to continue as a going concern. 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 $934,968 and $535,735 for the years ending December 31, 2017 and 2016, respectively. The Company's history of recurring losses resulted in an accumulated deficit of $13,730,851. 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, 2017 and 2016. 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 2012.
As of December 31, 2017 and 2016, the Company has approximately $12.1 and $11.4 million of net operating loss carry-forwards, respectively, 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
Revenues are attributable to the sale of medical products. 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.
Trade Accounts Receivable and Concentration Risk
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, 2017 and 2016. The Company recorded $20,226 and $0 in bad debt expense for the years ended December 31, 2017 and 2016.
For the year ended December 31, 2017, one customer made up 99.9% of the Company’s outstanding accounts receivable balance. For the year ended December 31, 2017 one customer accounted for 93.2% 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.
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Raw materials
|
|
$
|
34,270
|
|
|
$
|
61,968
|
|
Finished goods
|
|
|
129,264
|
|
|
|
-
|
|
|
|
$
|
163,534
|
|
|
$
|
61,968
|
|
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred. The Company incurred $53,050 and $0 in advertising and marketing costs during the years ended December 31, 2017 and 2016, respectively.
Shipping and Handling Costs
The Company includes shipping and handling cost as part of cost of goods sold.
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 there are no potentially dilutive securities as of December 31, 2017 and 2016.
New Accounting Pronouncements, Recently Adopted Accounting Pronouncements
In August 2016, the FASB issued Accounting Standards Update (ASU) No. ASU 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments”
and in November issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash.
ASU 2016-15 addresses the presentation and classification of certain cash receipts and payments in the statement of cash flows. ASU 2016-18 is intended to reduce diversity in the presentation of restricted cash and restricted cash equivalents in the cash flows statement. The statement requires that restricted cash and restricted cash equivalents to be included as components of total cash and cash equivalents as presented on the statement of cash flows. These pronouncements go into effect for periods beginning after December 15, 2017. The Company does not believe these standards will have a material impact on its 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 May 2014, FASB issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers
. This guidance on revenue from contracts with customers will supersede most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. In March 2016, the FASB issued ASU 2016-08, “
Revenue from Contracts with Customers: Principal versus Agent Considerations
”. ASU 2016-08 clarifies implementation guidance on principal versus agent considerations in ASU 2014-09. ASU 2016-10 was issued to clarify ASC Topic 606 related to (i) identifying performance obligations; and (ii) the licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12, “
Revenue from Contracts with Customers - Narrow-Scope Improvements and Practical Expedients
”, to clarify certain narrow aspects of Topic 606 such as assessing the collectability criterion, presentation of sales taxes and other similar taxes collected from customers, noncash consideration, contract modifications at transition, completed contracts at transition, and technical correction. The guidance is effective for the interim and annual periods beginning on or after December 15, 2017 (early adoption is permitted but not sooner than the annual reporting periods beginning after December 15, 2016). The guidance permits the use of either a retrospective or cumulative effect transition method. The Company has evaluated its various agreements subject to these updates and completed its assessment. The Company has concluded that the adoption of this pronouncement will not have a material effect on its financial statements and related disclosures in 2018.
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 December 31, 2017 and 2016, notes payable to related parties totaled $268,328 and $178,328, respectively. These amounts are owed to Doug Beplate, our Chief Executive Officer. During the years ended December 31, 2017 and 2016, Mr. Beplate provided loans to the Company of $111,500 and $66,138, respectively. 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 with a monthly salary of $8,333, which was later increased to $15,000. 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 2016 or 2017 as such stock bonuses were immaterial and were waived by Mr. Beplate. 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. During the year ended December 31, 2017, he received $93,500 of compensation and the remaining balance of $86,500 has been recorded as accrued liabilities – related party on the balance sheet.
In November 2014, the Company entered into employment agreement with Nate Knight, our Chief Financial Officer. Mr. Knight received 500,000 shares as a signing bonus and a monthly salary of $4,000 (which has been increased to $5,000) 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 (which has been increased to $5,000).
Note 4. 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. 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.
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. Maxim and the Company entered into an amendment to this agreement in January 2018 pursuant to which Maxim continues to perform merger and acquisition services in exchange for the original consideration paid in 2015. The 4,000,000 shares are subject to a lock-up agreement and release provisions during 2018.
During 2016, the Company issued 5,777,016 shares of common stock for total proceeds of $424,725, of which 1,861,666 shares were issued for the $139,625 of common stock subscribed on the balance sheet as of December 31, 2015. Exemption from registration is claimed under Rule 506 of Regulation D of the Securities Act of 1933, as amended.
In 2017, the Company sold 7,694,269 shares of its Common Stock in a private placement offering for gross proceeds of $683,975. Exemption from registration is claimed under Rule 506 of Regulation D of the Securities Act of 1933, as amended.
During 2017, the Company issued 200,000 shares of stock with a fair value of $144,000 to settle an accounts payable balance of $31,850. The Company recorded $112,150 as loss on settlement of debt.
During 2017, a consultant converted $162,500 in accounts payable to a promissory note. The consultant then converted this promissory note into 2,500,000 shares of common stock. The shares of stock had a fair value of $235,000 and the Company recorded $72,500 as loss on settlement of debt.
In December 2017, the Company issued 1,700,000 shares of common stock to various individuals and consultants for services performed. The shares had a fair market value of $429,000.
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:
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. 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, restricted shares of the Company's Common Stock valued at $231,270, 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. The Company’s operating agreement with Hemo Manufacturing was terminated in the first quarter of 2017.
See also Notes 3 and 4 for material agreements entered into with officers and directors of the Company and Maxim Group, LLC.
Note 7. Other Notes Payable
At December 31, 2015, included in other current liabilities were four outstanding notes to various individuals aggregating $177,370 in principle and accrued interest, respectively. Interest accrued at the rate of 9% - 14% per annum. These notes were related to the former management and officers of the Company who were removed from their positions beginning in December 2013, when Doug Beplate became CEO and appointed new management and officers. The former management and officers have not been involved with the Company since that time and it was determined these amounts were not owed. Accordingly, the loan balances and related accrued interest totaling $258,338 were written off and recorded in additional paid-in capital during 2016. The Company also determined $40,390 of prior related party accounts payable should be written-off and was recorded in additional paid-in capital during 2016.
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. The balance of $150,000 was owed as of December 31, 2017 and 2016.
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 accrues at the rate of 20% per annum and is currently in default. The Company paid $42,500 during the period and the balance of $32,500 and $0 was owed as of December 31, 2017 and December 31, 2016, respectively.
The Company borrowed $35,000 in April 2017 related to a note payable, with original issue discount of $3,500. The note was paid off in full in May 2017.
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 December 31 was as follows:
|
|
2017
|
|
|
2016
|
|
Balance, beginning
|
|
$
|
145,543
|
|
|
$
|
145,543
|
|
Reclass of previous shares purchased and recorded in equity
|
|
|
66,300
|
|
|
|
-
|
|
Issuance of shares in satisfaction of liability
|
|
|
-
|
|
|
|
-
|
|
Balance, ending
|
|
$
|
211,843
|
|
|
$
|
145,543
|
|
The total number of shares granted but unissued were 2,483,806 and 1,579,044, as of December 31, 2017 and 2016, respectively.
Note 8. 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.
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted into law including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. The Company does not have any foreign earnings and therefore, we do not anticipate the impact of a transition tax. We have remeasured our U.S. deferred tax assets at a statutory income tax rate of 21%. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, we consider the accounting of any transition tax, deferred tax re-measurements, and other items to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. We expect to complete our analysis within the measurement period in accordance with SAB 118, and no later than fiscal year end December 31, 2018.
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, 2017 or 2016.The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. No such interest or penalties were recognized during the period presented. The Company had no accruals for interest and penalties at December 31, 2017.
The Company's federal income tax returns for the years ended December 31, 2014 through December 31, 2017 remain subject to examination by the Internal Revenue Service as of December 31, 2017.
During 2017 and 2016, the Company incurred net losses and, therefore, has no tax liability. The net deferred tax asset generated by the loss carry-forward has been fully reserved.
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Income tax provision (benefit) at statutory rate
|
|
$
|
(196,000
|
)
|
|
$
|
(182,000
|
)
|
Change in valuation allowance
|
|
|
196,000
|
|
|
|
182,000
|
|
Income Tax Expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets and liabilities were comprised of the following:
|
|
|
|
|
|
|
|
|
Net Operating Losses
|
|
$
|
2,522,000
|
|
|
$
|
3,884,000
|
|
Accrued officer compensation
|
|
|
34,800
|
|
|
|
-
|
|
Stock for services
|
|
|
170,000
|
|
|
|
-
|
|
Valuation allowance
|
|
|
(2,726,800
|
)
|
|
|
(3,884,000
|
)
|
Deferred tax asset, net
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2017 and 2016, the Company has taxable net loss carryovers of approximately $12.1 million and $11.4 million, respectively. The change in the valuation allowance for the years ended December 31, 2017 and 2016 was ($1,331,435) and $182,000, respectively. The Company reduced its valuation allowance by approximately $1,485,000 during 2017 due to the change in tax rates to 21%. Under the Internal Revenue Code of 1986, as amended, these losses can be carried forward twenty years. Net operating losses will expire through 2037.
Note 9. Subsequent Events
The Company has evaluated events from December 31, 2017, through the date whereupon the financial statements were issued and has determined that the items below need to be disclosed.
In January 2018, the Company issued an aggregate of 17,987,500 shares of common stock to various persons, including 17,700,000 shares for services rendered and the remaining 287,500 shares for cash consideration. Included in the stock issuance were 750,000 shares and 1,600,000 shares issued to Robert Denser and Nate Knight, respectively, who are executive officers and/or directors of the Company and 500,000 shares issued to the office administrator, who is a person affiliated with the Company’s CEO.
On April 16, 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.