The financial statements required by Item 8 can be found beginning on Page F-2 of this report.
See notes to financial statements.
See notes to financial statements.
See notes to financial statements.
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
Note 1. Description of the Business
United Health Products, Inc. (the “Company”) develops, manufactures, and markets a patented hemostatic gauze for the healthcare and wound care sectors. Our gauze product, HemoStyp®, is a neutralized, oxidized, regenerated cellulose (“NORC”) derived from cotton and designed to absorb exudate/drainage from superficial wounds and help control bleeding. We are in the process of seeking regulatory approval to sell our Hemostyp product line into the U.S. Class III and European Union CE Mark surgical market.
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, 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 factors, there is substantial doubt about the Company's ability to continue as a going concern. The Company intends to finance 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 and other business 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.
On March 11, 2020, the World Health Organization declared the outbreak of a coronavirus (COVID-19) as a pandemic. As a result, economic uncertainties have arisen which have the potential to negatively impact the Company’s ability to raise funding. Other factors that carry financial implications for the Company could occur although the potential impacts are unknown at this time.
Basis of Presentation
The Company prepares its financial statements on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.
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, 2021 and 2020. 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.
As of December 31, 2021 and 2020, the Company has approximately $20.0 and $17.8 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
The Company recognizes revenue in accordance with 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 receives orders for its HemoStyp products directly from its customers. Revenues are recognized based on the agreed upon sales or transaction price with the customer when control of the promised goods are transferred to the customer. The transfer of goods to the customer and satisfaction of the Company’s performance obligation will occur either at the time when products are shipped or when the products arrive and are received by the customer depending on the shipping terms. No discounts are offered by the Company as part of payment terms. The Company does not provide an estimate for returns as there is no anticipation for any returns in the normal course of business.
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, 2021 and 2020. The Company recorded $0 in bad debt expense for the years ended December 31, 2021 and 2020.
For the year ended December 31, 2021 one customer accounted for 100% of the Company’s net revenue.
For the year ended December 31, 2020 one customer accounted for 100% of the Company’s net revenue.
Inventory
Inventory is valued at the lower of cost or net realizable value 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, 2021 | | | December 31, 2020 | |
Raw materials | | $ | - | | | $ | 50,654 | |
Finished goods | | | - | | | | 19,020 | |
| | $ | - | | | $ | 69,674 | |
During the years ended December 31, 2021 and 2020, the Company determined that $69,649 and $6,979, needed to be impaired and written-off, respectively.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred. The Company incurred $166,510 and $206,572 in advertising and marketing costs during the years ended December 31, 2021 and 2020, respectively.
Shipping and Handling Costs
The Company includes shipping and handling cost as part of cost of goods sold.
Research and Development
The Company charges research and development costs to expense when incurred. The Company incurred $237,458 and $245,218 in research and development expenses during the years ended December 31, 2021 and 2020, respectively.
Stock Based Compensation
The Company accounts for share-based compensation under the provisions of ASC 718, Compensation-Stock Compensation. Under the fair value recognition provisions, stock-based compensation expense is measured at the fair value of the consideration received, or the fair value of the equity instruments issued, or liabilities incurred, whichever is more reliably measured. Share-based compensation for all stock-based awards to employees and directors is recognized as an expense over the requisite service period, which is generally the vesting period.
The Company accounts for stock compensation arrangements with non-employees in accordance with Accounting Standard Update (ASU) 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which requires that such equity instruments are recorded at the value on the grant date.
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. The dilutive effect of potential common shares is not reflected in diluted earnings per share because the Company incurred a net loss for the years ended December 31, 2021 and 2020 and the effect of including these potential common shares in the net loss per share calculations would be anti-dilutive.
The total potential common shares as of December 31, 2021 include 28,190,000 of restricted stock units. The total potential common shares as of December 31, 2020 include 59,330,000 of restricted stock units and 1,867,500 shares of common stock for convertible notes payable – related party.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on the straight-line method. The depreciation and amortization methods are designed to amortize the cost of the assets over their estimated useful lives, in years, of the respective assets as follows:
Maintenance and repairs are charged to expense as incurred. Improvements of a major nature are capitalized. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any gains or losses are reflected in income.
Impairment of Long-lived Assets
The Company applies the provisions of ASC 360, Property, Plant and Equipment, where applicable to all long-lived assets. ASC 360 addresses accounting and reporting for impairment and disposal of long-lived assets. The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with ASC 360. ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal.
When equipment is sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the results of operations. During the years ended December 31, 2021 and 2020 the Company determined its property and equipment should be impaired and $101,350 and $0 was written off, respectively.
New Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity.
Under current GAAP, there are five accounting models for convertible debt instruments. ASU 2020-06 removes from U.S. GAAP the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, after adopting the ASU’s guidance, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (2) a convertible debt instrument was issued at a substantial premium. Additionally, for convertible debt instruments with substantial premiums accounted for as paid-in capital, the FASB decided to add disclosures about (1) the fair value amount and the level of fair value hierarchy of the entire instrument for public business entities and (2) the premium amount recorded as paid-in capital.
ASU 2020-06 will be effective for public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. 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.
Note 3. Related Party Transactions
Related party convertible notes payables
As of December 31, 2021 and 2020, convertible notes payable – related parties totaled $0 and $456,032, respectively.
During the year ended December 31, 2020, Mr. Beplate loaned the Company $251,730 which was convertible at $0.65. These loans resulted in a beneficial conversion feature of $83,156 which was recorded to interest expense – related party upon issuance. The Company made repayments to Mr. Beplate totaling $505,765, $87,750 was assigned to the Company’s legal counsel and $24,000 was forgiven during the year ended December 31, 2020, leaving a balance of $0 owed to Mr. Beplate as of December 31, 2020. These loans were made to pay for operating expenses of the Company, due on demand and carried no interest rate.
During the year ended December 31, 2020, Brian Thom, the Chief Executive Officer loaned the Company $450,000 and also converted $105,000 of accrued compensation into a convertible note. The note and loans were convertible at $0.50 per share at the discretion of the Mr. Thom, had a maturity date of March 31, 2021 and carried an interest rate of 3%. The loans resulted in a beneficial conversion feature totaling $338,105 which was recorded as a debt discount. The debt discount was amortized through the maturity dates and $138,792 was amortized to interest expense – related party during the year ended December 31, 2020. As of December 31, 2020, the total outstanding balance of the note and loans was $555,000 and the remaining unamortized debt discount was $199,314.
During the year ended December 31, 2021, Mr. Thom converted $45,000 of accrued compensation into a convertible note. The note was convertible at $0.50 per share at the discretion of Mr. Thom, had a maturity date of March 31, 2021 and carried an interest rate of 3%. The note resulted in a beneficial conversion feature of $45,000 which was recorded as a debt discount. The debt discount was amortized through the maturity date and a total of $244,314 for all of Mr. Thom’s notes was amortized to interest expense – related party during the year ended December 31, 2021, which included the unamortized debt discount of $199,314 as of December 31, 2020 and the debt discount of $45,000 recorded during the current year. The remaining unamortized debt discount is $0.
The total outstanding principal balance of $600,000 which was related to $450,000 of loans to the Company and $150,000 of accrued compensation along with accrued interest of $10,135 was converted into 1,220,272 shares of common stock leaving $0 owed to Mr. Thom as of December 31, 2021.
During the year ended December 31, 2020, Louis Schiliro, the Chief Operating Officer loaned the Company $130,000 and also converted $150,000 of accrued compensation into a convertible note. The note and loans are convertible at $0.50 per share at the discretion of Mr. Schiliro, have a maturity date of March 31, 2021 and have an interest rate of 3%. During the year ended December 31, 2020, $110,000 of the convertible note payable along with $1,028 of accrued interest was assigned to the Company’s legal counsel leaving a total outstanding balance of the note and loans of $170,000. The loans and note resulted in a beneficial conversion feature totaling $174,985 which was recorded as a debt discount. The debt discount was amortized through the maturity dates and $105,331 was amortized to interest expense – related party during the year ended December 31, 2020.
During the year ended December 31, 2021, Mr. Schiliro converted $45,000 of accrued compensation into a convertible note. The note was convertible at $0.50 per share at the discretion of Mr. Schiliro, had a maturity date of March 31, 2021 and carried an interest rate of 3%. The note resulted in a beneficial conversion feature of $45,000 which was recorded as a debt discount. The debt discount was amortized through the maturity date and a total of $114,654 for all of Mr. Schiliro’s notes was amortized to interest expense – related party during the year ended December 31, 2021, which included the unamortized debt discount of $69,654 as of December 31, 2020 and the debt discount of $45,000 recorded during the current year. The remaining unamortized debt discount is $0.
During the year ended December 31, 2021, $175,000 of the convertible note payable along with $1,502 of accrued interest was assigned to one of the Company’s legal counsel leaving a total outstanding balance of $40,000. The remaining balance of $40,000 along with accrued interest was converted into 80,173 shares of common stock leaving $0 owed to Mr. Schiliro as of December 31, 2021.
During the year ended December 31, 2020, Kristofer Heaton, the Principal Financial Officer, converted $3,750 of accrued compensation into a convertible loan. The loan was convertible at $0.50 per share at the discretion of Mr. Heaton, had a maturity date of March 31, 2021 and carried an interest rate of 3%. This note resulted in a beneficial conversion feature totaling $3,750 which was recorded as a debt discount. The debt discount is being amortized through the maturity date and $0 was amortized to interest expense – related party during the year ended December 31, 2020.
During the year ended December 31, 2021, Mr. Heaton, converted $22,500 of accrued compensation into a convertible note. The note was convertible at $0.50 per share at the discretion of Mr. Heaton, had a maturity date of March 31, 2021 and carried an interest rate of 3%. The note resulted in a beneficial conversion feature totaling $22,500 which was recorded as a debt discount. The debt discount is being amortized through the maturity date and a total of $26,250 for all of Mr. Heaton’s notes was amortized to interest expense – related party during the year ended December 31, 2021, which included the unamortized debt discount of $3,750 as of December 31, 2020 and the debt discount of $22,500 recorded during the current period. The remaining unamortized debt discount is $0.
The total outstanding principal balance of $26,250 along with accrued interest was converted into 52,666 shares of common stock leaving $0 owed to Mr. Heaton as of December 31, 2021.
Interest expense – related party on the above convertible notes was $392,112 ($6,894 interest expense along with $385,218 of debt discount amortization) and $336,203 ($8,925 interest expense along with $327,278 of debt discount amortization) during the years ended December 31, 2021 and 2020, respectively. Accrued interest – related party due to these convertible notes was $2,308 and $7,503 as of December 31, 2021 and 2020, respectively.
Loans payable/Advances from related parties
During the year ended December 31, 2021, Mr. Schiliro advanced the Company $34,000 to pay for operating expenses and paid $30,000 of expenses on behalf of the Company.
During the year ended December 31, 2021, the Company issued 25,000 shares of common stock to settle $20,000 of the outstanding balance. The shares of common stock had a fair market value of $26,750 and the Company recorded a loss on debt settlement of $6,750.
As of December 31, 2021 and December 31, 2020, the balance owed to Mr. Schiliro was $44,000 and $0, respectively. These amounts were converted to a loan payable and have an interest rate of 10% and are due on demand.
During the year ended December 31, 2021, Mr. Thom loaned the Company a total of $175,000 to pay for operating expenses. As of December 31, 2021, the amount of $175,000 is owed to Mr. Thom. The loans have an interest rate of 10% and are due on demand.
Interest expense – related party on the above loans payable – related party was $2,308 during the year ended December 31, 2021 leaving an accrued interest – related party balance of $2,308.
Accrued liabilities
During the year ended December 31, 2020, $188,375 was paid to Mr. Beplate, $100,000 of accrued compensation was converted to a convertible note payable and then assigned to the Company’s legal counsel and $8,395 of accrued compensation was forgiven. The note was convertible at $0.50 per share at the discretion of the note holder, had a maturity date of March 31, 2021 and carried an interest rate of 3%. The note resulted in a beneficial conversion feature totaling $100,000 which was recognized into interest expense. As of December 31, 2021 and 2020, $0 and $0 was owed to Mr. Beplate, respectively.
As of December 31, 2021 and December 31, 2020, $0 and $74,056 was owed to Nate Knight, who was the Company’s Chief Financial Officer until November 2020, for accrued compensation and reimbursable expenses. During the year ended December 31, 2021, the Company issued 78,500 shares of common stock to settle the total balance owed of $74,056. The shares of common stock had a fair market value of $82,425 and the Company record a loss on debt settlement of $8,368.
As of December 31, 2021 and December 31, 2020, $899 and $0 was owed to Brian Thom, the Chief Executive Officer, for accrued compensation and reimbursable expenses. During the years ended December 2021 and 2020, $45,000 and $105,000 of compensation were converted into convertible loans as mentioned above. In the year ended December 31, 2021, $135,000 of accrued compensation was settled with the issuance of 270,000 shares of common stock. The stock had a fair market value of $221,400 which resulted in a $86,400 loss on settlement of debt (see Note 6).
As of December 31, 2021 and December 31, 2020, $0 and $59,467 was owed to Louis Schiliro, the Chief Operating Officer, for accrued salary and reimbursable expenses, respectively. During the years ended December 31, 2021 and 2020, $45,000 and $150,000 of compensation were converted into a convertible loan as mentioned above and in the year ended December 31, 2020 $30,000 was paid in cash.
During the year ended December 31, 2021, the Company issued 74,335 shares of common stock to settle the total prior year balance owed of $59,467 and issued 270,000 shares of common stock to settle $135,000 of accrued compensation. The shares of common stock had a total fair market value of $300,938 and the Company recorded a loss on settlement of debt in the amount of $106,471 (see Note 6).
As of December 31, 2021 and December 31, 2020, $0 and $52,625 was owed to Mr. Heaton, for accrued compensation and services provided. During the years ended December 31, 2021 and 2020, $22,500 and $3,750 of compensation were converted into a convertible note as described above.
During the year ended December 31, 2021, 320,250 shares of common shares of stock were issued to settle $105,000 of accrued compensation and $52,625 of prior accruals. The shares of common stock had a total fair market value of $262,605 and the Company recorded a loss on settlement of debt in the amount of $104,980 (see Note 6).
Equity transactions
On July 21, 2020, the Board of Directors approved amendments to RSU Agreements put in place on March 25, 2019 (“2019 RSU Agreement”). The approved amendments increased the amount of RSU’s granted to Mr. Beplate from 33,000,000 to 33,800,000, increased the amount of RSU’s granted to Mr. Schiliro from 8,000,000 to 10,000,000, increased the amount of RSU’s granted to Mr. Heaton from 50,000 to 500,000, increased the amount of RSU’s granted to the office administrator, who is a person affiliated with the Company’s former CEO from 250,000 to 500,000 and increased the amount of RSU’s granted to the Technical Product Supervisor, who is the son of the former office administrator from 250,000 to 500,000.
The July 21 amendment also changed the vesting terms so that 15% of RSUs vested on July 15, 2020, an additional 15% of RSU units upon FDA approval of a PMA Class III awarded to the Company, an additional 20% of RSU units on January 1, 2021 and the balance of all unvested RSU units on the earliest date that (a) the Company achieves $20 million in gross cumulative sales commencing as of January 1, 2020, (b) a Covered Transaction is consummated or (c) a Trigger Event occurs. Each Grantee has the option to delay the Vesting Date of all or part of his RSUs until no later than an event described in (b) or (c) above, by serving written notice to the Company prior to such Vesting Date.
The change in vesting terms resulted in a total of 6,795,000 of the RSU’s vesting on July 15, 2020 with 5,070,00 being issued to Mr. Beplate, 1,500,000 being issued to Mr. Schiliro, 75,000 being issued to Mr. Heaton, 75,000 being issued to the former office administrator, who is a person affiliated with the Company’s former CEO and 75,000 being issued to the Technical Product Supervisor, who is the son of the former office administrator. The change in vesting terms also resulted in a total of 50,000 of the RSU’s vesting on July 20, 2020 with 50,000 being issued to the Marketing and Advertising Supervisor, who is the daughter of the former office administrator. The vesting of the 6,845,000 RSU’s resulted in stock-based compensation expense of $4,859,950 which was the fair value of the stock on the vesting date.
The former office administrator resigned during the year ended December 31, 2020 and forfeited 425,000 of the remaining unvested RSU’s with a value of $301,750 ($70,567 of which had been recognized and reversed).
In November 2020, the Company granted Mr. Thom 11,500,000 RSU’s which subject to certain conditions, shall vest upon the achievement of certain Company objectives and milestones.
In December 2020, the Company entered into a second restricted stock unit agreement with Mr. Heaton. The second agreement issued an additional 1,000,000 RSU’s, 500,000 of which were granted on the award date and 500,000 of which would be granted on May 15, 2021 provided his professional services agreement was in effect on that date. The 500,000 RSU’s were granted during 2021 per the agreement. The RSU’s, subject to certain conditions, shall vest upon the achievement of certain Company objectives and milestones.
During the year ended December 31, 2020, the Company issued a total of 125,000 shares of restricted common stock to Mr. Thom, prior to becoming Chief Executive Officer, for services rendered. The shares had a fair market value of $100,625.
Per the vesting schedules of certain of the Company’s amended RSU Agreements, on January 1, 2021, 6,760,000 shares of common stock were issued to Mr. Beplate, 2,000,000 shares of common stock were issued to Mr. Schiliro and 100,000 shares of common stock were issued to Mr. Heaton.
On January 6, 2021, the Board of Directors approved the second amendment to the RSU Agreement between the Company and Mr. Beplate in conjunction with Mr. Beplate’s retirement from his day-to-day management role with the Company. The amendment accelerated the vesting and immediately settled his remaining RSU’s by issuing 21,970,000 shares of common stock. Further, as a bonus in recognition of Mr. Beplate’s service to the Company and in recruitment of new executive management, the Company issued to Mr. Beplate an additional 2,000,000 shares of common stock. The Company recorded $26,127,300 of stock-based compensation expense during the year ended December 31, 2021 related to the accelerated vesting of these RSU’s and issuance of common stock.
During the year ended December 31, 2021, 200,000 of Mr. Heaton’s RSU’s mentioned above vested due to achievement of certain Company objectives. The Company recorded stock-based compensation expense $220,000 related to the vesting of these RSU’s which was the grant date fair value.
During the year ended December 31, 2021, the Company issued 30,000 shares of common stock to Mr. Thom, 30,000 shares of common stock to Mr. Schiliro and 25,000 shares of common stock to Mr. Heaton for services rendered. The 85,000 shares of common stock had a total fair market value of $69,700.
Note 4. Convertible Notes
Convertible notes 2020
During the year ended December 31, 2020, certain service providers and a medical advisor converted $205,000 of accrued compensation into convertible notes. The notes were convertible at $0.50 per share at the discretion of the note holders, had a maturity date of March 31, 2021 and carried an interest rate of 3%. As of December 31, 2020, the convertible loans had a principal balance of $205,000 and the balance on the loans net of the debt discount was $103,920
During the year ended December 31, 2020, the Company’s legal counsel was assigned $298,778 worth of loans after paying various outstanding balances on behalf of the Company. In addition, the Company’s legal counsel converted $45,000 of accrued fees into a convertible note payable. The note was convertible at $0.50 per share at the discretion of the note holder, had a maturity date of March 31, 2021 and carried an interest rate of 3%. The note resulted in a beneficial conversion feature totaling $45,000 which was recorded as a debt discount, to be amortized through its maturity date. The Company’s legal counsel converted all of the convertible loans into 557,056 shares of common stock in accordance with the original conversion features of the notes, therefore no gain or loss on debt settlement was recognized and the total debt discount of $45,000 was recognized into interest expense. As of December 31, 2020, no amounts were owing to the Company’s legal counsel related to these transactions.
Interest expense was $1,537 and $0 during the year ended December 31, 2020 and the entire amount was accrued.
Convertible notes 2021
During the year ended December 31, 2021, the service providers and medical advisor converted $90,000 of accrued compensation into convertible notes. The notes were convertible at $0.50 per share at the discretion of the note holders, had a maturity date of March 31, 2021 and carried an interest rate of 3%. These notes resulted in a beneficial conversion feature of $90,000 which was recorded as a debt discount. The debt discount was amortized through the maturity dates and a total of $191,080 was amortized to interest expense during the year ended December 31, 2021, which included the unamortized debt discount of $101,080 as of December 31, 2020 and the $90,000 recorded during the year. The remaining unamortized debt discount is $0.
The total outstanding principal balance of $295,000 ($205,000 principal balance from 2020 and $90,000 principal balance from 2021) along with accrued interest of $3,569 was converted into 597,139 shares of common stock leaving $0 owed to the service providers and medical advisor as of December 31, 2021.
During the year ended December 31, 2021, one of the Company’s legal counsel was assigned $175,000 worth of convertible notes payable and $1,502 of accrued interest after paying outstanding balances owed to Mr. Schiliro (see Note 3). The Company’s legal counsel converted the entire balance of $176,502 into 350,000 shares of common.
During the year ended December 31, 2021, the Company issued a total of $115,000 in convertible notes to two unaffiliated individuals to pay for operating expenses. The notes were convertible at $0.85 per share provided that in the event the Company issues any shares of common stock before the maturity date at a price that is lower than $0.85 per share, the conversion price shall be reduced to equal such lower issue price per share. The notes had a maturity date of June 30, 2021 and carried an interest rate of 3%. These notes resulted in a beneficial conversion feature of $32,412 which was recorded as a debt discount. The debt discount was amortized through the maturity dates of the notes. A total amount of $32,412 was amortized to interest expense related to these two notes during the year ended December 31, 2021.
During the year ended December 31, 2021, the $115,000 principal balance and $397 of accrued interest was converted into 137,996 shares of common stock leaving a balance of $0 owed on the two convertible notes.
Note 5. Property and Equipment
As of December 31, 2021 and December 31, 2020, the balance of property and equipment consisted of the following:
| | December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
Equipment (not placed in service) | | $ | - | | | $ | 101,350 | |
Accumulated depreciation | | | - | | | | - | |
| | $ | - | | | $ | 101,350 | |
During the year ended December 31, 2021, the equipment was fully impaired and $101,350 was written-off. The equipment had not yet been placed in service and therefore depreciation expense for the years ended December 31, 2021 and 2020 was $0 and $0, respectively.
During the years ended December 31, 2021 and 2020, the Company acquired property and equipment of $0 and $101,350, respectively.
Note 6. Issuances of Securities
Share issuances 2020
During the year ended December 31, 2020, the Company had the following common stock issuances:
| · | 2,000,500 shares of common stock were sold to non-affiliated investors in a private placement for total cash proceeds of $1,130,696 |
| · | 50,000 shares of common stock were issued to a former medical advisor for services rendered with a fair value of $47,500 |
| · | 250,000 shares of common stock were issued to a consultant for services rendered with a fair value of $153,750 |
| · | 125,000 shares of common stock were issued to Mr. Thom, prior to becoming Chief Executive Officer, for services rendered with a fair value of $100,625 |
| · | 1,058,634 shares of common stock with a fair value of $866,482 were issued for debt which resulted in a loss on debt settlement of $316,915 |
| · | 22,381 shares of common stock were cancelled reducing common stock by $22 and increasing additional paid-in capital by the same amount. |
Share issuances 2021
During the year ended December 31, 2021, the Company had the following common stock issuances:
| · | A total of 32,490,000 shares of common stock were issued to officers, directors and various consultants related to vesting of RSU’s with a total stock-based compensation cost of $24,467,597. |
| · | 2,000,000 shares of common stock were issued to Mr. Beplate as a stock bonus with a stock-based compensation cost of $2,180,000. |
| · | 125,000 shares of common stock were sold to an affiliated investor in a private placement for total cash proceeds of $100,000. |
| · | 370,455 shares of common stock were sold to non-affiliated investors in a private placement for total cash proceeds of $326,000. |
| · | 61,000 shares of common stock were sold to Triton Funds LP (“Triton”) for cash proceeds of $53,802 (see below for discussion of the purchase agreement). |
| · | 100,000 shares of common stock were issued for settlement of a business consulting agreement with a fair value of $111,000. |
| · | 40,000 shares of common stock with a fair value of $32,800 were issued to consultants for services provided. |
| · | 85,000 shares of common stock with a fair value of $69,700 were issued to officers of the Company for services provided (see Note 3). |
| · | 25,000 shares of commons stock with a fair value of $26,750 were issued to settle $20,000 of related party advances which resulted in a loss on settlement of debt of $6,750 (see Note 3). |
| · | 1,013,085 shares of common stock were issued to settle accrued liabilities – related party worth $561,548 and recorded at market value of $867,368 which resulted in a loss on settlement of debt of $306,220 (see Note 3). |
| · | 380,000 shares of common stock with a fair value of $311,600 were issued to settle accrued compensation worth $190,000 which resulted in $121,600 loss of settlement of debt. |
| · | 1,085,135 shares of common stock were issued due to the conversion of convertible notes payable and accrued interest of $590,467 (see Note 4) |
| · | 1,353,111 shares of common stock were issued due to the conversion of convertible notes payable and accrued interest – related party of $676,555 (see Note 3) |
| · | 300,000 shares of common stock were issued for litigation settlement with a fair value of $312,000 |
| · | 117,647 shares of common stock were cancelled reducing common stock by $117 and increasing additional paid-in capital by the same amount. |
Triton Purchase Agreement
On June 25, 2021, the Company entered into a common stock purchase agreement (the “Purchase Agreement”) with Triton to sell Triton up to $6,000,000 of common stock. Subject to the terms and conditions of the Purchase Agreement, Triton agreed to purchase from the Company $4,000,000 in value of common shares at closing, based on a purchase price determined by dividing $200,000,000 by the number of outstanding shares of Common Stock, as reported by the Company on its most recently filed Form 10-K or 10-Q. Among customary closing conditions in the Purchase Agreement, closings under the Purchase Agreement may occur after a registration statement covering the resale of the shares which Triton has agreed to purchase from the Company is filed by the Company and declared effective by the SEC, if and when the Company issues a purchase notice to Triton for the number of shares in the purchase notice. Under the terms of the Purchase Agreement, Triton has the right to reduce the amount requested in the purchase notice or not close if the marketplace of the Company’s shares is below a certain threshold at the time of closing.
In addition, the Purchase Agreement grants Triton the option to purchase up to $2,000,000 worth of additional shares of common stock at the same purchase price at any time prior to the second anniversary of the closing of the transaction.
On June 29, 2021, we filed a registration statement on Form S-3 covering the above shares. The Company’s S-3 registration statement was declared effective by the SEC on September 29, 2021.
The market value of the Company’s shares has remained below the level under which Triton is not obligated to complete a purchase of shares. Until such time as the market price for the Company’s shares rises above the threshold price defined in the Purchase Agreement, the Company will not have access to this funding.
Restricted stock units
As discussed in Note 3, during the year ended December 31, 2020 the Board of Directors approved amendments to the 2019 RSU Agreement.
The amendment resulted in 9,960,000 of the RSU’s vesting on January 1, 2021. The fair value of the 9,960,000 RSU’s was $7,071,600. The compensation expense was being amortized on a straight-line basis from the date of the amendment through January 1, 2021 which is the vesting date. Stock-based compensation of $43,121 was recognized as expense during the year ended December 31, 2021.
On January 6, 2021, the Board of Directors approved the second amendment to the Restricted Stock Unit Agreement between the Company and Mr. Beplate, former Chief Executive Officer and current Chairman of the Board, in conjunction with Mr. Beplate’s retirement from his day-to-day management role with the Company. The amendment accelerated the vesting and immediately settled his remaining RSU’s by issuing 21,970,000 shares of common stock. Per ASC 718-20-35, the change in vesting conditions resulted in a modification of the stock-based compensation awards. The modification is considered a Type III modification as described in ASC 718-20-55 and resulted in recording $23,947,300 of stock-based compensation expense which was the fair value of the shares on the date of the modification.
As discussed in Note 3, during the year ended December 31, 2020, Mr. Thom was granted 11,500,000 RSU’s and Mr. Heaton was granted 500,000 RSU’s. The vesting conditions are contingent upon the achievement of certain Company objectives and milestones which the management is unable to determine when they will be achieved.
In April 2021, the Company entered into an RSU agreement with a service provider granting 750,000 RSU’s on the date of the agreement and will grant an additional 750,000 RSU’s, upon the receipt by the Company of an FDA Class III PMA. The 750,000 RSU’s had a grant date fair value of $664,875. The RSUs, subject to certain conditions, shall vest upon the achievement of certain Company objectives and milestones which management is unable to determine when they will be achieved therefore no compensation expense was recognized during the year ended December 31, 2021.
During the year ended December 31, 2021, the Company terminated the services of one of its legal counsels who had an RSU agreement in place. Per the RSU agreement, all of the unvested RSU’s owed to the legal counsel vested immediately upon termination of services. This resulted in 325,000 shares of common stock being issued and $230,750 of stock-based compensation being recorded which was the fair value of the shares on the original grant date of the RSU agreement.
During the year ended December 31, 2021, the Company recorded the grant of 100,000 RSU’s to one of its legal counsels and 35,000 of the RSU’s vested. The vested RSU’s had a grant date fair value of $26,425 which was recorded as stock-based compensation expense.
As discussed in Note 3, Mr. Heaton was granted 500,000 RSU’s in December of 2020 and an additional 500,000 RSU’s in May of 2021. The vesting conditions are contingent upon the achievement of certain Company objectives and milestones. During the year ended December 31, 2021, certain objectives were achieved which resulted in the vesting of 200,000 of RSU’s granted to Mr. Heaton. The 200,000 RSU’s had a grant date fair value of $220,000 which was recorded as stock-based compensation expense.
Management is unable to determine if and when FDA approval of a PMA Class III will be awarded to the Company or when a change of control will occur, if at all, and as of December 31, 2021, there was a total of $27,017,200 unrecognized compensation cost related to the restricted stock unit awards.
Activity related to our restricted stock units during the year ended December 31, 2020 was as follows:
| | Number of Units | | | Weighted Average Grant Date Fair Value | |
Total awards outstanding at December 31, 2019 | | | 50,350,000 | | | $ | 0.94 | |
Units granted | | | 62,350,000 | | | $ | 0.80 | |
Units Exercised/Released | | | (7,595,000 | ) | | $ | 0.71 | |
Units Cancelled/Forfeited | | | (45,775,000 | ) | | $ | 0.94 | |
Total awards outstanding at December 31, 2020 | | | 59,330,000 | | | $ | 0.82 | |
Activity related to our restricted stock units during the year ended December 31, 2021 was as follows:
| | Number of Units | | | Weighted Average Grant Date Fair Value | |
Total awards outstanding at December 31, 2020 | | | 59,330,000 | | | $ | 0.82 | |
Units granted | | | 23,320,000 | | | $ | 1.08 | |
Units Exercised/Released | | | (32,490,000 | ) | | $ | 0.97 | |
Units Cancelled/Forfeited | | | (21,970,000 | ) | | $ | 0.71 | |
Total awards outstanding at December 31, 2021 | | | 28,190,000 | | | $ | 0.96 | |
Note 7. Litigation
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 case was transferred to the United States District Court in Las Vegas, Nevada. Mr. Safran sought damages and monies allegedly owed pursuant to an employment agreement of approximately $734,000 and allegedly unpaid loans of $245,824 provided to Defendants. The Company denied the Plaintiff’s allegations. On July 21, 2021, Mr. Safran and the Defendants entered into a Settlement Agreement and General Release whereby the Company agreed to pay $250,000 in cash and issue 300,000 shares of common stock to Mr. Safran. The 300,000 shares have a fair market value of $312,000. As of December 31, 2021, the 300,000 shares of common stock have been issued and $250,000 in cash has been paid.
In March 2021, the Company received payment of $304,273 from Maxim Group LLC, representing the full settlement payment in accordance with a Settlement Agreement in a previously disclosed arbitration between the Company and Maxim that was reached in December 2019.
Philip Forman, who served as Chairman, a director, Chief Executive Officer and Chief Medical Advisor of the Company at various times between 2011 and October 2015, filed a lawsuit against the Company and our then-Chief Executive Officer, Douglas Beplate, in the United States District Court of the District of Nevada. The plaintiff has claimed, among other things: that the June 25, 2015 Amendment to his November 10, 2014 Employment Agreement with the Company, which terminated the Employment Agreement on October 1, 2015, is not enforceable due to lack of consideration; that a July 22, 2015 Stock Purchase Agreement pursuant to which the plaintiff sold Company shares issued to him under the Amendment to a third a party is unenforceable (despite the fact that all payment for the shares under the Stock Purchase Agreement was made); that the plaintiff’s 2014 Employment Agreement remains valid and that he is entitled to cash and stock compensation under that Employment Agreement (without giving regard to the Amendment); that if the Amendment is enforceable, he is entitled to the shares issued under the Amendment (without mention that those shares were sold to a third party under the Stock Purchase Agreement described above); and that the Company and Mr. Beplate defrauded the plaintiff relating to the foregoing. The plaintiff is seeking declaratory judgment regarding the parties’ relative rights under the Employment Agreement, the Amendment and the Stock Purchase Agreement; money damages of no less than $2,795,000; and punitive damages of $8,280,000. The Company filed a motion to dismiss the plaintiff’s claims which was denied on March 19, 2020. On May 5, 2021, the plaintiff provided a deposition as instructed by the Court, subsequent to which the Company filed a motion for dismissal of this proceeding. On February 14, 2022, the Court issued an Order which declared the Amendment to be unenforceable and thus the terms of the original Employment Agreement to remain in effect. The Order also noted that the Company is not a party to the Stock Purchase Agreement, and the Employment Agreement does not constitute a prior agreement that could have been superseded by the Stock Purchase Agreement. The parties are currently engaged in settlement discussions.
In 2018 an action was commenced in the United States District Court Southern District of New York entitled JEC Consulting Associates, LLC. Liquidator of Lead Dog Capital LP against United Health Products t/k/a United EcoEnergy Corp and Douglas K. Beplate under Docket Number 18-cv-1139 (ER). The third party action sought to remove a restrictive legend from a particular stock certificate for Three Million Fifty Thousand (3,050,000) shares and declare the shares to be free trading. The third party plaintiff alleges that the Company and Mr. Beplate refused to have the restrictive legend on the stock certificate removed under Rule 144 and sought compensatory and punitive damages. The Federal court issued an order that the Securities Exchange Commission should review the claim before the District Court renders a final ruling. Discovery appears to be substantially complete and settlement discussions between the third party plaintiff and the Company have been initiated.
Due to uncertainties inherent in litigation, we cannot predict the outcome of the above legal proceedings.
The Company has commenced the following legal proceedings:
On February 7, 2020, the Company filed the Original Petition for Fraud and Breach of Contract in the Texas District Court for the 215th Judicial District of Harris County against defendants Patterson Companies Inc., Patterson Management, L.P., Patterson Veterinary, Inc. and Patterson Logistics Services, Inc., and Animal Health International, Inc. On March 5, 2020, the defendants removed the case to U.S. District Court for Southern District of Texas. The defendants filed their answer in federal court on March 12, 2020. The original August 25, 2020 pretrial deadlines were extended. On January 18, 2022, the Company’s claims were dismissed, with prejudice, by the court. On February 9, 2022, the Company and Patterson reached an agreement on settlement of Patterson’s counterclaim. The Company agreed to pay $120,000 which has been accrued as of December 31, 2021.
The defendants filed a Motion for Summary Judgment which was denied by the court on March 11, 2021.
In August 2020, United Health Products filed suit against its former auditors, Haynie & Company, in Utah State Court, asserting claims related to professional negligence and breach of fiduciary duty. Haynie & Company has denied the allegations. Discovery is largely complete and the parties have each submitted a report by their respective expert witness to the Court.
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.
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, 2021 and 2020. 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, 2021 or 2020.
The Company’s federal income tax returns for the years ended December 31, 2018 through December 31, 2021 remain subject to examination by the Internal Revenue Service as of December 31, 2021.
During 2021 and 2020, 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.
Net deferred tax assets consist of the following components as of December 31, 2021 and 2020
| | 2021 | | | 2020 | |
Deferred tax assets: | | | | | | |
Net operating loss carryover | | $ | 4,203,500 | | | $ | 3,735,500 | |
Accrued related party payroll | | | (14,000 | ) | | | (6,200 | ) |
Valuation allowance | | | (4,189,500 | ) | | | (3,729,300 | ) |
Net deferred tax asset | | $ | - | | | $ | - | |
The income tax provision differs from the amount of income tax determined by applying the U.S federal income tax rate (21%) for the years ended December 31, 2021 and 2020 due to the following: |
| | | | | | | | |
| | 2021 | | | 2020 | |
Book income | | $ | (6,415,300 | ) | | $ | (3,299,400 | ) |
Related party accrued payroll | | | (14,000 | ) | | | (6,200 | ) |
(Gain) Loss on debt settlement | | | 91,300 | | | | 66,500 | |
Stock for services and compensation | | | 5,706,400 | | | | 2,671,800 | |
Interest amortization | | | 127,800 | | | | 112,500 | |
Inventory write-off | | | 14,600 | | | | 1,500 | |
Property and equipment write-off | | | 21,300 | | | | - | |
Valuation allowance | | | 467,900 | | | | 453,300 | |
Income tax expense | | $ | - | | | $ | - | |
As of December 31, 2021 and 2020, the Company has taxable net loss carryovers of approximately $20.0 and $17.8 million, respectively, that may be offset against future taxable income.
Note 9. Other Income
As described in Note 7 above, during the year ended December 31, 2021, the Company received payment of $304,273 from Maxim Group LLC, as full and final settlement of its previously disclosed arbitration between the Company and Maxim that was settled in December 2019. The $304,273 was recorded as other income in the Statement of Operations.
Note 10. Subsequent Events
The Company has evaluated events from December 31, 2021, through the date whereupon the financial statements were issued and has determined that there are no material events that need to be disclosed, except as follows:
The issued a total of 162,662 shares of common stock for the following:
| · | 6,252 shares of common stock were issued to a consultant for the reimbursement of expenses. |
| · | 136,410 shares of common stock were sold to unaffiliated investors for total proceeds of $57,292 |
| · | 20,000 shares of common stock were issued to legal counsel for services provided |
The Company received a total of $165,000 in advances from its CEO and $20,000 from a former officer.
The Company entered into a $100,000 promissory note. The note accrues interest at 1% and requires monthly payments of $9,136 until the balance is paid in full.