USRM US Stem Cell Inc (CE)

NOTE 2 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS

The accompanying condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements during six months ended June 30, 2019, the Company incurred net losses of $1,512,344 and has a working capital deficit (current liabilities in excess of current assets) of $7,144,380. These factors among others raise substantial doubts about the Company’s ability to continue as a going concern for a reasonable period of time.

U.S. STEM CELL, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2019

(unaudited)

The Company’s primary source of operating funds in the past has been from revenue generated from sales and cash proceeds from the sale of common stock and the issuance of convertible and other debt. The Company has experienced net losses and negative cash flows from operations since inception, and has been hindered by the recent Order of Permanent Injunction resulting from the action brought by the Department of Justice (see Note 11). Under the current business model, the Injunction is likely to significantly reduce the Company’s future revenues. Management is considering modifications to the Company business model in order to offset the loss of revenue resulting from the consequences of this Injunctive Order. As of the date herein, no specific undertakings have commenced. The Company has stockholders’ deficiencies at June 30, 2019 and requires additional financing to fund future operations.

The Company’s existence is dependent upon management’s ability to develop profitable operations and to obtain additional funding sources. There can be no assurance that the Company’s financing efforts or revenues realized from the Asset Sale and Lease Agreement will result in profitable operations or the resolution of the Company’s liquidity problems. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

NOTE 3 — INVESTMENTS

U.S. Stem Cell Clinic, LLC

The investment in U.S. Stem Cell Clinic, LLC is comprised of a 49.9% (33.3% in 2018) member interest ownership and is accounted for using the equity method of accounting. The Company’s 49.9% (33.3% in 2018) income (loss) earned by U.S. Stem Cell Clinic, LLC member interests was $(521) and $72,151 for the three and six months ended June 30, 2019 and $3,143 and $88,790 for the three and six months ended June 30, 2018, respectively (inception to date income of $620,357) which was recorded as other income/expense in the Company’s Statement of Operations in the appropriate periods.  In addition, during the six months ended June 30, 2019 and 2018, the Company received distributions totaling $64,870 and $99,000 from U.S. Stem Cell Clinic, LLC, respectively (inception to date of $663,870).  The carrying value of the investment at June 30, 2019 and December 31, 2018 is $20,636 and $8,921, respectively.

At June 30, 2019 and December 31, 2018, accounts receivable for sales of product and services to U.S. Stem Cell Clinic, LLC was $0; revenues earned from sales to U.S. Stem Clinic, LLC for the three and six months ended June 30, 2019 and 2018 were $163,512 and $295,389, and the three and six months ended June 30, 2018 were $178,399 and $346,047, respectively.

In January 2019, a member of U.S. Stem Cell Clinic, LLC contributed 16.6% of his ownership interest to the Company increasing the Company’s member interest from 33.3% to 49.9%. The Company recorded the contribution to equity of $4,435.

An affiliate of one of the Company’s officers is a minority investor in the U.S. Stem Cell Clinic, LLC.

Regenerative Wellness Clinic, LLC

The investment in Regenerative Wellness Clinic, LLC is comprised of a 49.9% (33.3% in 2018) member interest ownership and is accounted for using the equity method of accounting. The Company has provided technical expertise, but no cash investment with Regenerative Wellness Clinic, LLC’s startup in 2017. The Company’s 49.9% (33.3% in 2018) income earned by Regenerative Wellness Clinic, LLC member interests was $34,340 and $72,255 for the three and six months ended June 30, 2019 and for the three and six months ended June 30, 2018 was $4,621 and $14,316 reported, after effects of 2017 loss, of $9,695, respectively (inception to date income of $115,957) which was recorded as other income/expense in the Company’s Statement of Operations in the appropriate periods.  In addition, during the six months ended June 30, 2019 and 2018, the Company received distributions totaling $101,963 and $10,000 from Regenerative Wellness Clinic, LLC, respectively (inception to date of $101,963).  The carrying value of the investment at June 30, 2019 and December 31, 2018 is $2,911 and $21,787, respectively.

At June 30, 2019 and December 31, 2018, accounts receivable for sales of products and services to Regenerative Wellness Clinic, LLC was $0; revenues earned from sales to Regenerative Wellness Clinic, LLC for the three and six months ended June 30, 2019 was $76,736 and $116,347 and for the three and six months ended June 30, 2018 was $44,990 and $84,524, respectively.

U.S. STEM CELL, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2019

(unaudited)

In January 2019, a member of Regenerative Wellness Clinic, LLC contributed 16.6% of his ownership interest to the Company increasing the Company’s member interest from 33.3% to 49.9%. The Company recorded the contribution to equity of $10,830.

An affiliate of one of the Company’s officers is an investor in the Regenerative Wellness Clinic, LLC.

U.S. Stem Cell Clinic of the Villages LLC

On January 30, 2018, Greg Knutson, a director of the Company (“Knutson”) and the Company agreed to open and operate a regenerative medicine/cell therapy clinic providing cellular treatments for patients afflicted with neurological, autoimmune, orthopedic and degenerative diseases in Florida.  To that end, U.S. Stem Cell Clinic of The Villages LLC (the “LLC”) was formed on January 30, 2018. Knutson provided the Company with the sum of Three Hundred Thousand Dollars ($300,000) (the “Investment”) to be utilized for the formation and initial operation of the LLC.  Currently, Knutson holds a 51% member interest in the LLC and the Company holds a 49% member interest. The Company will provide operating assistance as well as management services, the latter to be compensated at fee of five percent (5%) of the LLC gross revenues.

As of December 31, 2018, upon completion of the LLC, the Company was credited with investment equity of $86,750 from Greg Knutson, the holder of the 51% member interest. The Company then recorded the investment equity as contributed capital by the Company. The Company’s 49% income (loss) incurred by the  LLC member interests was $(7,507) and $(17,150) for the three and six months ended June 30, 2019 and $(27,771) for three and six months ended June 30, 2018, respectively. In addition, during the year ended December 31, 2018, the Company received distributions totaling $63,700 from the LLC. The carrying value was $9,931 and $27,081 at June 30, 2019 and December 31, 2018, respectively

At June 30, 2019 and December 31, 2018, accounts receivable for sales of products and services to the  LLC was $0; revenues earned from sales to the U LLC three and six months ended June 30, 2019 was $39,151 and $130,352 and for the three and six months ended June 30, 2018 was $56,891 and $79,476, respectively.

During the three and six months ended June 30, 2019, the Company received $6,444 and $49,776 management fees from the LLC, respectively.

NOTE 4 — PROPERTY AND EQUIPMENT

Property and equipment are recorded on the basis of cost. For financial statement purposes, property, plant and equipment are depreciated using the straight-line method over their estimated useful lives. 

Expenditures for repair and maintenance which do not materially extend the useful lives of property and equipment are charged to operations. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts with the resulting gain or loss reflected in operations. Management periodically reviews the carrying value of its property and equipment for impairment in accordance with the guidance for impairment of long lived assets.

Property and equipment as of June 30, 2019 and December 31, 2018 is summarized as follows:

U.S. STEM CELL, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2019

(unaudited)

On March 3, 2017, the Company entered into an asset sale and lease agreement (sale/leaseback transaction, the “Asset Sale and Lease Agreement”) with GACP, whereby the Company sold certain lab, medical and other equipment relating to the cell banking business for $400,000 and leased back the sold equipment over a three year term.

The Company determined that the transaction was a capitalized lease and accordingly recorded the leased assets and liability based on the estimated present value of the minimum lease payments.

Included in net property are assets under capital leases of $624,602, less accumulated depreciation of $435,211 as of December 31, 2018 and $624,602, less accumulated depreciation of $383,559 December 31, 2018, respectively.

In connection with the sale of the lab, medical and other equipment, the Company realized a gain on sale of equipment of $386,535.  The gain is recognized ratably over the term of the lease to operations. During the three and six months ended June 30, 2019, the Company recognized $32,212 and $64,423; and $32,212 and $64,423 during the three and six months ended June 30, 2018, as the gain on sale of equipment, respectively.  As of June 30, 2019 and December 31, 2018, deferred gain on sale of equipment was $85,897 and $150,319, respectively.

Property and equipment are recorded on the basis of cost. For financial statement purposes, property, plant and equipment are depreciated using the straight-line method over their estimated useful lives. 

Depreciation expense was $51,652 and $103,304 of which $51,652 and $103,304 were included in cost of sales for the three and six months ended June 30, 2019, respectively.

Depreciation expense was $51,652 and $103,828 of which $51,652 and $103,304 were included in cost of sales for the three and six months ended June 30, 2018, respectively.

NOTE 5 — RIGHT TO USE ASSETS AND LEASE LIABILITY

The Company leases its headquarters in Sunrise, Florida which consists of 4,860 square feet of space, which it leases at a current rent of approximately $82,620 per year. In September 2013, the Company amended its facility lease to extend the term until July 31, 2016. On February 4, 2016, the Company extended its facility lease to extend the term of the lease until August 31, 2019 at a monthly base rent of $7,306 plus a pro rata share of landlord’s operating expenses.

In adopting ASC Topic 842, Leases (Topic 842), the Company has elected the ‘package of practical expedients’, which permit it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter is not applicable to the Company. In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 months or less. In determining the length of the lease term to its long term lease, the Company determined there was not an option to extend the lease. At lease commencement date, the Company estimated the lease liability and the right of use assets at present value using the Company’s estimated incremental borrowing rate of 8% and determined the initial present value, at inception, of $274,180. On January 1, 2019, upon adoption of ASC Topic 842, the Company recorded right to use assets of $56,734 and lease liability of $56,734.

Right to use assets is summarized below:

During the three and six months ended June 30, 2019, the Company recorded $34,343 and $71,325 as lease expense to current period operations, respectively.

U.S. STEM CELL, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2019

(unaudited)

Lease liability is summarized below:

Maturity analysis under these lease agreements are as follows:

Lease expense for the three months ended June 30, 2019 was comprised of the following:

Lease expense for the six months ended June 30, 2019 was comprised of the following:

During the six months ended June 30, 2019, the Company issued an aggregate of 12,117,844 shares of its common stock in settlement of outstanding accounts payable and accrued expenses. In connection with the issuance, the Company incurred a $10,035 net loss in settlement of debt.

U.S. STEM CELL, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2019

(unaudited)

Seaside Bank

On October 25, 2010, the Company entered into a Loan Agreement with Seaside National Bank and Trust for a $980,000 loan at 4.25% per annum interest that was used to refinance the Company’s loan with Bank of America. The obligation is guaranteed by certain shareholders of the Company. The Company renewed the loan with Seaside National Bank and Trust during the first quarter of 2019 to extend the maturity date to May 18, 2020.

Hunton & Williams Notes

At December 31, 2016, the Company had two outstanding notes payable with interest at 8% per annum due at maturity. The two notes, $61,150 and $323,822, are payable in one balloon payment upon the date the Noteholder provides written demand, however the Company is not obligated to make payments until the Northstar Biotech Group, LLC (or successor) Loan is paid off.

On August 31, 2017, the Company and the note holder entered into a Note Forbearance, Modification and Repayment Agreement (“Agreement”). The two notes, $61,150 and $323,822, were payable in one balloon payment upon the date of a written demand and upon certain triggering events occurring. The total of unpaid principal and accumulated interest for both notes as of August 31, 2017 was $747,680 and an accounts payable of $40,596, for an aggregate total of $788,276.

The note holder agreed to accept full payment of their obligation of over a four (4) year period in 48 monthly installments on an adjusted debt obligation in aggregate of $624,000 (reducing the outstanding balance), with such payments staggered in amounts such that the Company will pay $10,000 monthly the first year, $12,000 monthly the second year, $14,000 monthly the third year, and $16,000 monthly the final year.  In addition, the note holder agreed to suspend accrual interest on the notes commencing September 1, 2017.

The Agreement remains in full force and effect provided the Company continues to make the monthly payments, there is no event of default as defined in the notes and an agreement to a subordination agreement by Northstar Biotech Group, LLC, which has been provided.

The Company imputed an interest rate of 5% and discounted the note accordingly. The imputed debt discount of $69,700 is amortized to interest expense using the effective interest method. The imputed debt discount of $69,700 is amortized to interest expense using the effective interest method. For three and six months ended June 30, 2019, the Company amortized $1,733 and $10,740, and for three and six months ended June 30, 2018, the Company amortized $9,007 and $16,083 of debt discounts to current period operations as interest expense. The unamortized debt discount at June 30, 2019 is $24,205.

U.S. STEM CELL, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2019

(unaudited)

Weider Promissory Note

The Company, as one of the parties entered into a Settlement Agreement and General Release (the “Agreement”) dated June 3 2019 related to certain medical procedures. Without admitting any liability, and as part of that Agreement, the Company agreed to provide a five year 5.25% unsecured promissory note, dated June 15, 2019, in the principal amount of $500,000, payable in monthly increments of $5,000 per month, with a final balloon payment due on June 15, 2024. The Company recorded the promissory note to current period operations. Remaining outstanding balance as of June 30, 2019 was $500,000.

PowerUp Lending Group, Ltd

On November 8, 2018, the Company entered into a revenue based factoring agreement and received an aggregate of $137,200 (less origination fees of $2,800) in exchange for $187,600 of future receipts relating to monies collected from customers or other third party payors. Under the terms of the factoring agreement, the Company is required to make daily payments equal to $1,276 for 147 business days.  The Company received net proceeds of $93,809 along with cancellation of the previous revenue based factoring agreement issued in May 2018.  In connection with the cancellation of the January 2018 revenue based factoring agreement, the Company incurred a loss in settlement of debt of $37,604 in 2018.  This agreement was subsequently terminated (see below) in exchange for a new revenue based factoring agreement. 

On April 16, 2019, the Company entered into a revenue based factoring agreement and received an aggregate of $137,200 (less origination fees of $2,800) in exchange for $187,600 of future receipts relating to monies collected from customers or other third party payors. Under the terms of the factoring agreement, the Company is required to make daily payments equal to $1,276 for 147 business days.  The Company received net proceeds of $84,876 along with cancellation of the previous revenue based factoring agreement issued in November 2018.  In connection with the cancellation of the November 2018 revenue based factoring agreement, the Company incurred a loss in settlement of debt of $1,276 in 2019.  

The remaining principle balance of the PowerUp Lending Group promissory note payable at June 30, 2019 and December 31, 2018 is $122,514 and $145,486, net of unamortized discount of $40,952 and $43,452, respectively.

Lab and Medical Equipment Capitalized Lease

On March 3, 2017, the Company entered into an asset sale and lease agreement (sale/leaseback transaction; “Asset Sale and Lease Agreement”) with GACP, whereby the Company sold certain lab, medical and other equipment relating to the cell banking business for $400,000 and leased back the sold equipment over a three year term.  The Company recognized the arrangement as a capital lease.  The Company initially recorded the equipment and the capitalized lease liability at the estimated present value of the minimum lease payments of $619,825. 

The lease includes a base monthly rental payment of $20,000, due the first day of each calendar month plus contingent rent equal to 2.3%, 22.5%, and 31.6% of revenues collected on deposits arising from cell banking business for years 1, 2 and 3, respectively.  The contingent rent is recognized as a period expense and as interest expense at the time of collection.  At the expiration of the lease, the Company is required to return all leased equipment and along with any maintenance records, logs, etc. in the Company’s possession to the lessor with no right of repurchase.

The Company determined that the present value of the minimum lease payments exceeded 90% of the estimated fair value of the equipment and therefore classified the equipment sale/lease as a capitalized lease. The effective interest rate of the capitalized lease is estimated at 10.00% based on the Company estimated incremental borrowing rate.

The following summarizes the assets under capital leases:

U.S. STEM CELL, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2019

(unaudited)

The following summarizes the current and long-term portion of capital leases:

The following summarizes total future minimum lease payments at December 31, 2018:

Promissory note

On June 1, 2015, the Company issued an amended and restated promissory note of $1,697,762 in settlement of the $1,500,000 outstanding subordinated debt, related accrued interest of $373,469 and accumulated and unpaid guarantor fees of $624,737.

The note is unsecured and non-interest bearing with four semi-annual payments of $75,000 beginning on December 31, 2015 with the remaining unpaid balance due June 1, 2020.

The Company imputed an interest rate of 5% and discounted the promissory note accordingly. The imputed debt discount of $368,615 is amortized to interest expense using the effective interest method. For the three and six months ended June 30, 2019, the Company amortized $17,424 and $34,657; and $17,424 and $34,657 for the three and six months ended June 30, 2018, of debt discounts to current period operations as interest expense, respectively.  The unamortized debt discount at June 30, 2019 is $64,527.

As of June 30, 2019, the remaining principle due was $1,397,762.

NOTE 8 — RELATED PARTY TRANSACTIONS

Advances

As of June 30, 2019 and December 31, 2018, the Company’s officers and directors have provided advances in the aggregate of $324,901 and $234,901 respectively, for working capital purposes. The advances are unsecured, due on demand, and non-interest bearing.

Notes payable-related party

Northstar Biotechnology Group, LLC

On February 29, 2012, a promissory note issued to BlueCrest Master Fund Limited was assigned to Northstar Biotechnology Group, LLC (“Northstar”), owned partly by certain directors and existing shareholders of the Company at the time, including Dr. William P. Murphy Jr., Dr. Samuel Ahn and Charles Hart. At the date of the assignment, the principal amount of the BlueCrest note was $544,267 the (“Note”).

U.S. STEM CELL, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2019

(unaudited)

On March 30, 2012, the Company and Northstar agreed to extend until May 1, 2012 the initial payment date for any and all required monthly under the Note, such that the first of the four monthly payments required under the Note will be due and payable on May, 2012 and all subsequent payments will be due on a monthly basis thereafter commencing on June 1, 2012, and to waive any and all defaults and/or events of default under the Note with respect to such payments. The Company did not make the required payment, and as a result, was in default of the revised agreement. The Company renegotiated the terms of the Note and Northstar agreed to suspend the requirement of principal payments by the Company and allow payment of interest-only in common stock.

On September 21, 2012, the Company issued 5,000 common stock purchase warrants to Northstar that was treated as additional interest expense upon issuance.

On October 1, 2012, the Company and Northstar entered into a limited waiver and forbearance agreement providing a recapitalized new note balance comprised of all sums due Northstar with a maturity date extended perpetually. The Company agreed to issue 5,000,000 shares of Series A Convertible Preferred Stock and 10,000 shares of common stock in exchange for $210,000 as payment towards outstanding debt, default interest, penalties, professional fees outstanding and due Northstar. In addition, the Company executed a security agreement granting Northstar a lien on all patents, patent applications, trademarks, service marks, copyrights and intellectual property rights of any nature, as well as the results of all clinical trials, know-how for preparing Myoblasts, old and new clinical data, existing approved trials, all right and title to Myoblasts, clinical trial protocols and other property rights.

In addition, the Company granted Northstar a perpetual license on products as described for resale, relicensing, and commercialization outside the United States. In connection with the granted license, Northstar shall pay the Company a royalty of up to 8% on revenues generated.

Effective October 1, 2012, the effective interest rate was 12.85% per annum. The parties agreed, as of February 28, 2013, to reduce the interest rate to 7% per annum.

In connection with the consideration paid, Northstar waived, from the effective date through the earlier of termination or expiration of the agreement, satisfaction of the obligations as described in the forbearance agreement.

In 2012, 5,000,000 shares of Series A Convertible Preferred Stock were approved to be issued, which was subsequently increased to 20,000,000 shares of preferred stock as Series A Convertible Preferred Stock. In addition, the Company was obligated to issue additional preferred stock equal in lieu of payment of cash of accrued and unpaid interest on each six month anniversary of the effective date (October 1, 2012). In lieu of the initial two payments in preferred stock, the parties agreed to modify the voting rights of the subsequently cancelled Series A Convertible Preferred Stock from 20 votes per share on matters to be voted on by the common stock holders to 25 votes per share on matters to be voted on by the common stock holders and all prior and subsequent payments of interest will be in common stock. The Company is required to issue additional shares of its common stock (as amended), in lieu of cash, each six month anniversary of the effective date for any accrued and unpaid interest.

On March 1, 2017, Northstar and the Company entered into a settlement agreement (“Settlement Agreement “) related to then pending litigation (See Note 11). Pursuant to the terms and conditions of the Settlement Agreement, Northstar converted its outstanding Series A Convertible preferred stock, into twenty million (20,000,000) shares of common stock according to the original conversion terms. In addition, and separate and apart from the conversion, Northstar received Eleven Million (11,000,000) shares of the Company’s common stock. Northstar will receive ten percent (10%) of all Company international sales (based on a gross sales basis). There was no effect of the 10% obligation as there were no international sales in 2017 or, to date, in 2018 Furthermore, a Northstar designee, Greg Knutson, was appointed as a member of the Board of Directors of the Company and two Company directors, Michael Tomas and Kristin Comella, each exercised their prior Northstar options to each receive a Five percent (5%) Member Interest in Northstar.  The parties agreed to a mutual release and Northstar agreed to terminate any UCC lien on the Company assets previously filed for the benefit of Northstar. On March 9, 2017 and April 1, 2017, the Company issued 30,000,000 and 1,000,000 shares of its common stock, respectively, as described above. In connection with the settlement, the Company recorded a loss on litigation settlement of $316,800.

U.S. STEM CELL, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2019

(unaudited)

On September 30, 2013, the Company issued 8,772 shares of its common stock as payment of $100,000 towards cash advances.

On December 24, 2013, the Company issued 3,916 shares of its common stock as payment of accrued interest through June 30, 2013 of $85,447.

On April 2, 2014, the Company issued 275 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $12,635 due April 1, 2014 per the forbearance agreement.

On September 17, 2014, the limited waiver and forbearance agreement entered into on October 1, 2012 to provide that the perpetual license on products as described for resale, relicensing and commercialization outside the United States was amended as such on the condition that Northstar provide certain financing, which financing the Company, in its sole discretion, could decline and retain the license.

On October 3, 2014, the Company issued 515 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $12,705 due October 1, 2014 per the forbearance agreement.

On April 3, 2015, the Company issued 1,363 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $12,635 due April 1, 2015 per the forbearance agreement.

On October 2, 2015, the Company issued 4,156 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $12,705 due October 1, 2015 per the forbearance agreement.

On October 7, 2015, the Company issued 34,522 shares of its common stock in settlement of $100,000 principal payment towards the outstanding debt.

On April 7, 2016, the Company issued 57,778 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $12,705 due April 1, 2016 per the forbearance agreement.

On October 6, 2016, the Company issued 848,490 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $12,705 due October 1, 2016 per the forbearance agreement.

On April 1, 2017, the Company issued 286,315 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $12,703 due April 1, 2017 per the forbearance agreement.

On October 2, 2017, the Company issued 559,187 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $12,705 due October 1, 2017 per the forbearance agreement.

On October 19, 2018, the Company issued 164,523 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $9,195 due October 1, 2018 per the forbearance agreement.

On April 19, 2018, the Company issued 379,141 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $9,145 due April 1, 2019 per the forbearance agreement.

As of June 30, 2019 and December 31, 2018, the principal of this note was $262,000.

U.S. STEM CELL, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2019

(unaudited)

Notes payable, Mr. Tomas

On August 7, 2017, the Company issued a $500,000 promissory note in exchange for compensation earned. The promissory note bears interest of 5% per annum and is due one year from date of issuance. During the six months ended June 30, 2019, the Company paid off $336,607 of the outstanding promissory note. The principal outstanding balance of this note as of June 30, 2019 and December 31, 2018 is $146,786 and $483,393, respectively.

On May 7, 2018, the Company issued a $500,000 promissory note in exchange for compensation earned. The promissory note bears interest of 5% per annum and is due six months from date of issuance. The principal outstanding balance of this note as of June 30, 2019 and December 31, 2018 is $500,000.

At June 30, 2019 and December 31, 2018, the Company has recorded accrued interest on the outstanding and past notes to Mr. Tomas in the amount of $360,600 and $340,009, respectively, which is included in the accrued expenses on the balance sheet.

Notes payable, Dr. Comella

On September 6, 2016, the Company issued a $300,000 promissory note in exchange for compensation earned. The promissory note bears interest of 5% per annum and was due upon demand. During the six months ended June 30, 2019, the Company received $78,355 of previously paid balance of the outstanding promissory note. The principal outstanding balance of this note as of June 30, 2019 and December 31, 2018 is $226,066 and $147,711, respectively.

On August 7, 2017, the Company issued a $300,000 promissory note in exchange for compensation earned. The promissory note bears interest of 5% per annum and is due one year from date of issuance. The principal outstanding balance of this note as of June 30, 2019 and December 31, 2018 is $300,000.

On May 7, 2018, the Company issued a $300,000 promissory note in exchange for compensation earned. The promissory note bears interest of 5% per annum and is due six months from date of issuance. The principal outstanding balance of this note as of June 30, 2019 and December 31, 2018 is $300,000.

At June 30, 2019 and December 31, 2018, the Company has recorded accrued interest on the outstanding notes to Dr. Comella in the amount of $121,953 and $102,974, respectively, which is included in the accrued expenses on the balance sheet.

Transactions with Pavillion

On May 1, 2016, the Company entered into a consulting agreement with Pavillion, Inc., whose owner is related to an officer of the Company.  The agreement is for 12 months and renewable for 6 month periods.  Compensation is at $250 per hour or, at the Company’s discretion, in shares of the Company’s common stock. For the six months ended June 30, 2019 and 2018, the Company has incurred $0 and $30,000 of expense under the agreement, respectively. As of June 30, 2019 and December 31, 2018, the Company had $12,909 and $64,909, respectively, in accounts payable owed to Pavillion. On June 1, 2018, effective June 30, 2018, the Company terminated the agreement in accordance with its terms and no further compensation was derived by Pavillion.

Transactions with GACP

On March 3, 2017, the Company entered into an asset sale and lease agreement (sale/leaseback transaction, the “Asset Sale and Lease Agreement”) with GACP, whereby the Company sold certain lab, medical and other equipment relating to the cell banking business for $400,000 and leased back the sold equipment over a three year term (See “ Lab and Medical Equipment Capitalized Lease ” below). The Company determined that the transaction was a capitalized lease and accordingly recorded the leased assets and liability based on the estimated present value of the minimum lease payments (see Notes 4 and 6).

U.S. STEM CELL, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2019

(unaudited)

In connection with the asset sale and lease agreement, the Company is obligated to accrue 10% of banking revenue as for marketing, offset by any incurred costs of the Company.  At June 30, 2019 and December 31, 2018, the outstanding accrued marketing obligation is $4,180 and $179,353, respectively (see Note 6).

On March 3, 2017, the Company also entered into a customer purchase agreement with GACP, whereby the Company agreed to sell, for $50,000, the first 5,000 customers of the cell banking business after the effective date of the equipment sale/leaseback agreement with rights to purchase additional customers at a price of $20 per customer.  There is no reduction in the selling price should the new customers be fewer than 5,000.  The effective date of the sale is upon the expiry or early termination of the related equipment lease transaction.

On March 3, 2017, the Company also entered into an asset purchase agreement of intellectual property with GACP whereby the Company agreed to sell all of the Company’s worldwide rights, title or interest in certain intellectual and other property (as defined) associated with the cell banking business for $50,000. The effective date of the sale is upon the expiry or early termination of the related equipment lease transaction.

In connection with the March 3, 2017 asset purchase agreement, the CEO and CSO of U.S. Stem Cell, Inc. were also retained as CEO and CSO of American Stem Cell Centers of Excellence, which is owned by General American Capital Partners (GACP), to help with scientific and successful operational deployment of clinics. Subsequently, the CSO of U.S. Stem Cell, Inc. has vacated her position but retained her positions with U.S. Stem Cell, Inc. and subsidiaries.

On April 3, 2017, U.S. Stem Cell received a commitment to invest up to $5,000,000 from GACP with the intent for GACP to receive up to 63,873,275 shares of common stock.  To date, GACP has invested, pursuant to this commitment, $250,000 in return for 858,281 shares. Subsequent to this investment, GACP has informed the Company that they will make no further investments pursuant to this agreement and has entered into a new agreement to open their own clinics (branded American Stem Cell) using the US Stem Cell Inc. protocols, procedures, products and technologies. As of June 30, 2019 (effective May 9, 2018), pursuant to an Amendment to Asset Sale and Lease Agreement, dated June 18, 2018, GACP has suspended their obligation to open additional clinics (tolling such obligation to a mutually agreeable date in the future) and has suspended the monthly aggregate number of stem cell kits set forth for purchase in a given month arising from such clinics. All other terms and conditions of the agreements between U.S. Stem Cell, Inc. and GACP remain in full force and effect. As of June 30, 2019 and December 31, 2018, GACP owns 4,021,945 shares of the Company’s common stock.

NOTE 9 — STOCKHOLDERS’ EQUITY

During the six months ended June 30, 2019, the Company issued an aggregate of 12,117,844 shares of its common stock in settlement of outstanding accounts payable and accrued expenses. In connection with the issuance, the Company incurred a $10,035 net loss in settlement of debt.

During the six months ended June 30, 2019, the Company issued 3,500,000 shares of its common stock for services.

Stock Options

On April 1, 2013, the Board of Directors approved, subject to subsequently received shareholder approval, the establishment of the Bioheart 2013 Omnibus Equity Compensation Plan, or the “2013 Omnibus Plan” (replacing the 1999 Officers and Employees Stock Option Plan, or the Employee Plan, and the 1999 Directors and Consultants Stock Option Plan). The 2013 Omnibus Plan initially reserved up to fifty thousand (50,000) shares of common stock for issuance. On August 4, 2014, the Board of Directors approved to set the reserve to one hundred thousand (100,000) shares of common stock for issuance and to close the 1999 Officers and Employees Stock Option Plan. On February 2, 2015, at the annual meeting of shareholders, the majority of shareholders approved the 2013 Omnibus Equity Compensation Plan. On November 2, 2015, the Board of Directors approved the increase of the reserve under the 2013 Omnibus Plan to five hundred million (500,000,000) shares of common stock for issuance, effective September 16, 2016, approved an addition of twenty five million (25,000,000) shares of common stock to the reserve, effective April 21, 2017, approved an addition of twenty five million (25,000,000) shares of common stock to the reserve, effective August 7, 2017, approved an addition of thirty million (30,000,000) shares of common stock to the reserve and effective May 7, 2018, approved an addition of one hundred million (100,000,000) shares of common stock to reserve.

U.S. STEM CELL, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2019

(unaudited)

A summary of options at June 30, 2019 and activity during the three months then ended is presented below:

The following information applies to options outstanding and exercisable at June 30, 2019:

The aggregate intrinsic value of the issued and exercisable options of $87,480 and $43,740, respectively, represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s stock price of $0.0097 as of June 30, 2019, which would have been received by the option holders had those option holders exercised their options as of that date.

The fair value of all options vesting during the three and six months ended June 30, 2019 of $169,216 and $338,432, respectively, was charged to current period operations.

As of June 30, 2019, the Company had approximately $1,634,762 of total unrecognized compensation cost related to non-vested awards granted under the 2013 Omnibus Plan, which the Company expects to recognize over a weighted average period of 1.40 years.

U.S. STEM CELL, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2019

(unaudited)

The following information applies to common stock purchase warrants outstanding and exercisable at June 30, 2019:

The aggregate intrinsic value of the issued and exercisable warrants of $-0- represents the total pretax intrinsic value, based on warrants with an exercise price less than the Company’s stock price of $0.0097 as of June 30, 2019, which would have been received by the warrant holders had those warrants holders exercised their warrants as of that date.

NOTE 10 — COMMITMENTS AND CONTINGENCIES

Litigation

On December 12, 2017, a product liability lawsuit was filed in Broward County, specifically Jeannine Mallard v. U.S. Stem Cell, Inc., US Stem Cell Clinics LLC., Regenestem, LLC., Regenestem Network, LLC., and Kristin C. Comella. The Company will continue to defend it vigorously.

On September 17, 2015, a product liability lawsuit was filed in Broward County, specifically Patsy Bade v. Bioheart, Inc. US Stem Cell Clinics LLC, Alejandro Perez, ARNP, and Shareen Greenbaum, M.D., and on November 30, 2015, a product liability lawsuit was filed in Broward County, specifically Elizabeth Noble v. Bioheart, Inc. US Stem Cell Clinics LLC, Alejandro Perez, ARNP, and Shareen Greenbaum, M.D. During the year ended December 31, 2016, both matters settled by the Company’s insurance policy with no additional cost to the Company, excluding the Company payment of the $100,000 insurance company deductible of which $11,000 was paid in fiscal 2017. As a result of the final settlement and determination of insurance coverage, the Company recognized $100,000 of expense due to litigation for the year ended December 31, 2017, of which $89,000 is included in accrued expenses at June 30, 2019 and December 31, 2018.

U.S. STEM CELL, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2019

(unaudited)

The Company is subject at times to other legal proceedings and claims, which arise in the ordinary course of its business.  Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity.  There was no outstanding litigation as of June 30, 2019 other than that described above.

SEC Investigation

On or about March 1, 2018, the U.S. Securities and Exchange Commission (“Commission”), Miami Regional Office (“Commission Staff”), served a subpoena upon U.S. Stem Cell, Inc., which seeks the production of certain documents and communications. The Commission Staff is conducting a formal, non-public, fact-finding inquiry of U.S. Stem Cell, Inc. (“Investigation”).  The Investigation is neither an allegation of wrongdoing nor a finding that any violation of law has occurred.  The Company is cooperating with, and has provided information and documents to, the Commission Staff.  

As part of the Investigation, on or about May 14, 2018, the Commission Staff served subpoenas upon Kristin Comella and Mike Tomas, respectively, seeking the production of certain documents and communications. Ms. Comella and Mr. Tomas responded to the respective subpoenas and provided information and documents to the Commission Staff.

In a letter dated May 30, 2019, the Commission Staff advised U.S. Stem Cell, Inc. that the Investigation has been concluded and, as of this date, the Commission Staff does not intend to recommend to the Commission an enforcement action against the Company. The Commission’s Staff’s notice to the Company was provided under the guidelines set out in the final paragraph of Securities Act Release No. 5310.

Government Claim

On May 9, 2018, the U.S. Department of Justice filed an injunctive action, specifically United States of America v. U.S. Stem Clinic, LLC, U.S. Stem Cell, Inc., Kristin C. Comella, and Theodore Gradel. The Complaint alleges, among other matters that the defendants manufacture “stromal vascular fraction” (SVF) products from patient adipose (fat) tissue, which the companies then market as stem cell-based treatments, and which U.S. Stem Cell Clinic, LLC administers to patients, without first obtaining what the government alleges are necessary FDA approvals. Although Theodore Gradel was initially listed as a defendant, he subsequently entered into a consent agreement and is no longer party to this case.

The U.S. and the defendants filed cross motions for summary judgment, each asking for a ruling in its favor. On June 3, 2019, the Court entered an order granting Summary Judgment for the government and denying the defendants’ motion for summary judgment. The order focused on the defendants’ actions in providing and marketing SVF therapy. In an order dated June 4, 2019, the Court granted the defendants’ request to allow it the opportunity to work out the language of the form of injunction with the government, and if unsuccessful, to provide a status report to the Court by June 14, 2019, outlining areas of disagreement. The Court further ordered that the defendants (U.S. Stem Clinic, LLC, U.S. Stem Cell, Inc., and Kristin C. Comella) ‘not sell, provide or otherwise engage in any SVF therapy or any other activities to be regulated by the FDA as explained in the Court’s Order on the Parties’ Motions for Summary Judgment.” The Company is preparing to appeal this decision and, in the interim, has complied with the requirements of the Court Order. The Company is not able to predict the duration, scope, results, or consequences of the  summary judgment.  There can be no assurance that this matter will be resolved in a manner that is not adverse to the Company.

Since the Court’s issuance of the Order of Permanent Injunction, the Company has received demand letters for compensation from persons who store their SVF Product and/or other tissue product with the tissue bank (several of the persons have requested refunds of the monies paid to the tissue bank and one person has requested a full refund of monies paid to an altogether separate company due to her not receiving the full amount of treatments she requested; such requests for compensation, to date, have not been material) and requests that the Company preserve cells in the Company’s possession.

U.S. STEM CELL, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2019

(unaudited)

Settlement Agreement and General Release

The Company was one of the parties to a Settlement Agreement and General Release (the “Agreement”) dated June 3, 2019 related to certain medical procedures. Without admitting any liability, and as part of that Agreement, the Company agreed to provide a five year 5.25% Promissory Note, dated June 15, 2019, in the principal amount of Five Hundred Thousand Dollars ($500,000), payable in monthly increments of Five Thousand ($5,000) per month (see Note 7, Weider Promissory Note, above )

NOTE 11 — FAIR VALUE MEASUREMENT

The Company adopted the provisions of Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) on January 1, 2008. ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

All items required to be recorded or measured on a recurring basis are based upon level 3 inputs.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.

Upon adoption of ASC 825-10, there was no cumulative effect adjustment to beginning retained earnings and no impact on the financial statements.

The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings (including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity.

As of June 30, 2019 and December 31, 2018, the Company did not have any items that would be classified as level 1 or 2 disclosures.

As of June 30, 2019 and December 31, 2018, the Company did not have any derivative instruments that were designated as hedges.

There were no derivative and warrant liability as of June 30, 2019 and December 31, 2018.

NOTE 12 — SUBSEQUENT EVENTS

 

In July 2019, the Company issued an aggregate 4,049,140 shares of common stock for services rendered

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Unless otherwise indicated, references in this Quarterly Report on Form 10-Q to “we,” “us,” and “our” are to the Company, unless the context requires otherwise. The following discussion and analysis by our management of our financial condition and results of operations should be read in conjunction with our unaudited condensed interim financial statements and the accompanying related notes included in this quarterly report and our audited financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission.

 

Cautionary Statement Regarding Forward-Looking Statements

 

This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act, and we intend that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. Any such forward-looking statements would be contained principally in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities and the effects of regulation. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions.

 

This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act, and we intend that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. Any such forward-looking statements would be contained principally in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities and the effects of regulation. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions.

 

Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss many of these risks in greater detail in “Risk Factors.” Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits to the report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

 

Additional information concerning these and other risks and uncertainties is contained in our filings with the Securities and Exchange Commission, including the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Unless otherwise indicated or the context otherwise requires, all references in this Form 10-Q to “we,” “us,” “our,” “our company,” “U. S. Stem Cell, Inc.” or the “Company” refer to U.S. Stem Cell, Inc. and its subsidiaries.

 

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Our Ability to Continue as a Going Concern

 

Our independent registered public accounting firm has issued its report dated March 13, 2019, in connection with the audit of our annual financial statements as of December 31, 2018, that included an explanatory paragraph describing the existence of conditions that raise substantial doubt about our ability to continue as a going concern and Note 2 to the unaudited financial statements for the period ended June 30, 2019 also describes the existence of conditions that raise substantial doubt about our ability to continue as a going concern.

 

Overview

 

We are an enterprise in the regenerative medicine/cellular therapy industry. We are focused on the discovery, development, and commercialization of cell based therapeutics that prevent, treat or cure disease by repairing and replacing damaged or aged tissue, cells and organs, and restoring their normal function. Our business includes the development of proprietary cell therapy products as well as revenue generating physician and patient based regenerative medicine/cell therapy training services, revenues realized from an Asset Sale and Lease Agreement (See Notes 3 and  6 of the Financial Statements and description below) related to the segment of our company business involving collecting, growing and banking cell cultures treatment kits for humans and animals, and the operation of a cell therapy clinic.

 

US Stem Cell Training, Inc. (“SCT”), an operating division of our company, is a content developer of regenerative medicine/cell therapy informational and training materials for physicians and patients. SCT also provides in-person and online training courses which are delivered through in-person presentations at SCT’s state of the art facilities and globally at university, hospital and physician’s office locations as well as through online webinars. Additionally, SCT provides hands-on clinical application training for physicians and health care professionals interested in providing regenerative medicine / cell therapy procedures.

 

Vet biologics, (“VBI”), an operating division of our company, is a veterinary regenerative medicine company committed to providing veterinarians with the ability to deliver the highest quality regenerative medicine therapies to dogs, cats and horses. VBI provides veterinarians with extensive regenerative medicine capabilities including the ability to isolate regenerative stem cells from a patient’s own adipose (fat) tissue directly on-site within their own clinic or stall-side.

 

US Stem Cell Clinic, LLC, (“SCC”), Regenerative Wellness Clinic, LLC, and US Stem Cell Clinic of the Villages, LLC are partially owned investment of our company (in which we have a 49.9%, 49.9% and 49% respectively member interests), are physician run regenerative medicine/cell therapy clinics providing cellular treatments for patients afflicted with neurological, autoimmune, orthopedic and degenerative diseases. They are operating in compliance with the FDA 1271s which allow for same day medical procedures to be considered the practice of medicine. We isolate stem cells from bone marrow and adipose tissue and also utilize platelet rich plasma.

 

Our comprehensive map of products and services:

 

 

All living complex organisms start as a single cell that replicates, differentiates (matures) and perpetuates in an adult organism through its lifetime. Cellular therapy is the process that uses cells to prevent, treat or cure disease, or regenerate damaged or aged tissue. To date, the most common type of cell therapy has been the replacement of mature, functioning cells such as through blood and platelet transfusions. Since the 1970s, first bone marrow and then blood and umbilical cord-derived stem cells have been used to restore bone marrow, as well as blood and immune system cells damaged by the chemotherapy and radiation that are used to treat many cancers. These types of cell therapies are standard of practice world-wide and are typically reimbursed by insurance.

 

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Within the field of cell therapy, research and development using stem cells to treat a host of diseases and conditions has greatly expanded. Stem cells (in either embryonic or adult forms) are primitive and undifferentiated cells that have the unique ability to transform into or otherwise affect many different cells, such as white blood cells, nerve cells or heart muscle cells. Our cell therapy development efforts are focused on the use of adult stem cells; those cells which are found in the muscle, fat tissue and peripheral blood.

 

There are two general classes of cell therapies: Patient Specific Cell Therapies (“PSCTs”) and Off-the-Shelf Cell Therapies (“OSCTs”). In PSCTs, cells collected from a person (“donor”) are transplanted, with or without modification, to a patient (“recipient”). In cases where the donor and the recipient are the same individual, these procedures are referred to as “autologous”. In cases in which the donor and the recipient are not the same individual, these procedures are referred to as “allogeneic.” Autologous cells offer a low likelihood of rejection by the patient and we believe the long-term benefits of these PSCTs can best be achieved with an autologous product. In the case of OSCT, donor cells are expanded many fold in tissue culture, and large banks of cells are frozen in individual aliquots that may result in treatments for as many as 10,000 people from a single donor tissue. By definition, OSCTs are always allogeneic in nature.

 

Various adult stem cell therapies are in clinical development for an array of human diseases, including autoimmune, oncologic, neurologic and orthopedic, among other indications. While no assurances can be given regarding future medical developments, we believe that the field of cell therapy holds the promise to better the human experience and minimize or ameliorate the pain and suffering from many common diseases and/or from the process of aging.

 

According to the November 1, 2016 report, Scalar Market Research Stem Cell Therapy Analysis Global Revenue, Trends, Growth, Share, Size and Forecast to 2022, the stem cell therapy market is worth USD 11.99 billion in 2016 and is expected to reach USD 60.94 billion by 2022, growing at a CAGR (compound annual growth rate) of 31.1% from 2016 to 2022.

 

Specific to cellular therapy, we are focused on the discovery, development and commercialization of autologous cellular therapies for the treatment of chronic and acute heart damage as well as vascular and autoimmune diseases.

 

In our pipeline, we have multiple product candidates for the treatment of heart damage, including MyoCell and MyoCell SDF-1. MyoCell and MyoCell SDF-1 are autologous muscle-derived cellular therapies designed to populate regions of scar tissue within a patient’s heart with new living cells for the purpose of improving cardiac function in chronic heart failure patients.

 

MyoCell SDF-1 is intended to be an improvement to MyoCell. MyoCell SDF-1 is similar to MyoCell but the myoblast cells to be injected for use in MyoCell SDF-1 are modified prior to injection by an adenovirus vector or non-viral vector so that they will release extra quantities of the SDF-1 protein, which expresses angiogenic factors.

 

AdipoCell is a kit used to isolate a patient-derived cell therapy proposed for the treatment of a variety of degenerative diseases. We hope to demonstrate that these product candidates are safe and effective complements to existing therapies for a variety of diseases.

 

Our mission is to advance to market novel regenerative medicine and cellular therapy products that substantially benefit humankind. Our business strategy is, to the extent possible, finance our clinical development pipeline through revenue (cash in-flows) generated through the marketing and sales of unique educational and training services, animal health products and personalized cellular therapeutic treatments.

 

A fundamental shift in venture capital investment strategies where, management believes, financial sponsorship is now directed toward commercial or near commercial enterprises has required us to adapt our mission combining immediate revenue generating opportunities with longer-term development programs. Accordingly, we have developed a multifaceted portfolio of revenue generating products and services in our US Stem Cell Training, Vetbiologics, and US Stem Cell Clinic/Regenerative Wellness Clinic, operating divisions that will, if successful, financially support its clinical development programs. Our goal is to maximize shareholder value through the generation of short-term profits that increase cash in-flows and decrease the need for venture financings – a modern biotechnology company development strategy.

 

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Today, our company is a combination of opportunistic business enterprises. What we are establishing is a foundation of value in the products and services we are and plan to sell from US Stem Cell Training, Vetbiologics, and US Stem Cell clinics. Our strategy is to expand the revenues generated from each of these operating divisions and to reinvest the profits we generate into our clinical development pipeline.

 

On November 9, 2016, we executed a Commercial Agency Agreement with High Rising Group Company (General Trading and Construction) and subsequently, on February 10,  2017, we authorized High Rising Group Company as an independent contractor and Licensee for our company for the territories of Kuwait and the Middle East (expressly excluding prohibited countries pursuant to the Patriot Act and The Iran Threat Reduction and Syria Human Rights Act of 2012). The intent of the agreement is for High Rising Group Company to establish clinics specializing in regenerative medicine, stem cell treatment and therapy, including stem cell bank, training, and all related stem cell machines and equipment.  To date, the first clinic in Kuwait City has been completed but has not begun operations as High Rising Group has not yet been able to secure regulatory approvals to operate. With the ongoing construction of the The Sheikha Salwa Sabah Al-Ahmad Center for Stem Cell and Umbilical Cord, a public/private partnership with the government of Kuwait, (see http://news.kuwaittimes.net/website/stem-cell-center-epitomizes-ppp which is expressly not incorporated by reference to this filing), management hopes (but cannot guarantee) that private sector stem cell centers, as described above, will get regulatory approval.

 

On January 29, 2015 we announced an update and diversification of our clinical development pipeline. Our cardiovascular and vascular product candidates have been streamlined, putting, we believe, our best opportunities at the forefront of our efforts. The MYOCELL and MYOCELL SDF-1 candidates will, in our opinion, advance forward in the treatment of chronic heart failure (CHF). We are in active prospective partnering discussion for the MYOCELL SDF-1 program. Partnering, we contend, will enhance our capabilities, reduce our development cost through cost sharing and potentially accelerate our time to approval and commercialization. We will apply our ADIPOCELL to a variety of indications. We believe that updating and diversifying our clinical development programs increases the probability of our success, brings operational and fiscal clarity to our company, and will ultimately enhance shareholder value.

 

On March 3, 2017, we entered into an asset sale and lease agreement (sale/leaseback transaction; “Asset Sale and Lease Agreement”), with GACP (General American Capital Partners) Stem Cell Bank LLC, a Florida limited liability company (“GACP”) whereby we sold certain lab, medical and other equipment relating to the cell banking business for $400,000 and leased back the sold equipment over a three year term.  The lease includes a base monthly rental payment of $20,000, due the first day of each calendar month.  In addition, we are required to pay 2.3%, 22.5% and 31.6% of revenues collected on deposits arising from cell banking business for years 1, 2 and 3, respectively.  At the expiration of the lease, we are required to return all leased equipment and along with any maintenance records, logs, etc. in our possession to the lessor with no right of repurchase. In addition, GACP has contractually agreed to invest an additional Two and a half Million Dollars ($2,500,000) to open ten (10) stem cell clinics in the United States within 3 years--with a penalty provision to our benefit for shortfalls if less than 6 clinics are opened within 24 months.

 

As of June 30, 2019 (effective May 9, 2018), pursuant to an Amendment to Asset Sale and Lease Agreement, dated June 18, 2018, GACP has suspended their obligation to open additional clinics (tolling such obligation to a mutually agreeable date in the future) and has suspended the monthly aggregate number of stem cell kits set forth for purchase in a given month arising from such clinics. All other terms and conditions of the agreements between U.S. Stem Cell, Inc. and GACP remain in full force and effect.

 

Recently, the June 25, 2019 Order of Permanent Injunction arising from the action brought by the Department of Justice (see Note 11 of the Financial Statements and Part II, Item 1 herein), has resulting in management considering modifications to our business model in order to offset the loss of revenue resulting from the consequences of this Injunctive Order. As of the date herein, no specific undertakings have commenced. Since the Court’s issuance of the Order of Permanent Injunction, we have received demand letters for compensation from persons who store their SVF Product and/or other tissue product with the tissue bank (several of the persons have requested refunds of the monies paid to the tissue bank and one person has requested a full refund of monies paid to an altogether separate company due to her not receiving the full amount of treatments she requested; such requests for compensation, to date, have not been material) and requests that we preserve cells in our possession.

 

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We will continue to evaluate and act upon opportunities to increase our top line revenue position and that correspondingly increase cash in-flows. These opportunities include but are not limited to the development and marketing of new products and services, mergers and acquisitions, joint ventures, licensing deals and more.

 

Further, if the opportunity presents itself whereby we can raise additional capital at a reasonable fair market value, our management will do so. Accordingly, we plan to continue in our efforts to restructure, equitize or eliminate legacy balance sheet issues that are obstacles to market capitalization appreciation and capital fund raising.

 

Results of Operations Overview

 

We are a research and development company and our MyoCell product candidate has not received regulatory approval or generated any material revenues and is not expected generate revenues until commercialization  , if ever. We have generated substantial net losses and negative cash flow from operations since inception and anticipate incurring significant net losses and negative cash flows from operations for the foreseeable future as we continue clinical trials, undertake new clinical trials, apply for regulatory approvals, make capital expenditures, add information systems and personnel, make payments pursuant to our license agreements upon our achievement of certain milestones, continue development of additional product candidates using our technology, establish sales and marketing capabilities and incur the additional cost of operating as a public company.

 

Three Months Ended June 30, 2019 as compared to the Three Months Ended June 30, 2018

 

Revenues

 

We recognized revenues of $1,297,984 for the three months ended June 30, 2019. These revenues were generated from the sales of kits and equipment, services, MyoCath Catheters, AdipoCell, and laboratory services. We recognized revenues of $1,820,429 for the three months ended June 30, 2018 from the sale of MyoCath catheters, AdipoCell, physician training, patient studies and laboratory services.

 

Cost of Sales

 

Cost of sales consists of the costs associated with the production of MyoCath, laboratory supplies necessary for laboratory services, production of AdipoCell systems and materials, physician course materials, kits and clinic supplies required for patient studies.

 

Cost of sales were $505,994 and $567,195 in in the three month periods ended June 30, 2019 and 2018, respectively. Associated gross margins were $791,990 (61.1%) and $1,253,234 (68.8%) for the three months periods ended June 30, 2019 and 2018, respectively.

 

Research and Development

 

Our research and development expenses consist of costs incurred in identifying, developing, and testing, our products and services. Research and development expenses were $531 in the three month period ended June 30, 2019, a decrease of $2,060 from the research and development expenses of $2,591 in the three month period ended June 30, 2018. Current management focus is towards on sales in addition to research and development and its corresponding ongoing costs. The timing and amount of our planned research and development expenditures is dependent on our ability to obtain additional financing.

 

Marketing, General and Administrative

 

Our marketing, general and administrative costs were $1,136,574 for the three month period ended June 30, 2019 compared to $1,397,045 for the three month period ended June 30, 2018, a decrease of $260,471. The decrease in costs are primarily due to decreases in consulting and other professional fees, decrease in sales and other compensation, as compared to the prior year.

 

Our marketing, general and administrative expenses primarily consist of the costs associated with our general management and product and service marketing programs, including, but not limited to, salaries and related expenses for executive, administrative and marketing personnel, rent, insurance, legal and accounting fees, consulting fees, travel and entertainment expenses, conference costs and other clinical marketing and trade program expenses.

 

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(Gain) Loss on settlement of debt

 

During the three months ended June 30, 2019, we incurred a net gain of $1,649 primarily related to accounts payable and debt restructured during the current period as compared to a net aggregate loss of $20,128 for the same period last year.

 

Gain on sale of equipment

 

In March 2017, we entered a sale/leaseback transaction whereby we sold our lab and other medical equipment and re-leased the equipment back for 36 months.  In connection with the sale/leaseback, we realized a gain on sale of equipment of $386,536, which we will recognize to operations over the term of the lease (36 months). During the three months ended June 30, 2019 and 2018, we recognized $32,212 and $32,212 in current period operations.

 

Income from equity investment

 

Our investment of a 49.9% (33.3% in 2018) member interest ownership of U.S. Stem Cell Clinic, LLC and Regenerative Wellness Clinic as well as a 49% interest in U.S. Stem Cell Clinic of the Villages LLC are accounted for using the equity method of accounting.  As such, we report our pro rata share of its income or loss for the period.  For the three months ended June 30, 2019 and 2018, our pro rata share of its income was $26,312 and $7,764, respectively

 

Interest Expense

 

Interest expenses during the three months ended June 30, 2019 were $365,156 compared to $441,068 for the three months ended June 30, 2018. Interest expenses primarily consists of interest incurred on the principal amount of the Northstar loan, our former Bank of America loan, the Seaside National Bank loan, accrued fees and interest payable to the Guarantors, our capital lease and the amortization of debt discounts and non-cash interest incurred relating to our issued convertible notes payable. The debt discounts amortization and non-cash interest incurred during the three months ended June 30, 2019 and 2018 was $64,748 and $62,045, respectively.

 

Six Months Ended June 30, 2019 as compared to the Six Months Ended June 30, 2018

 

Revenues

 

We recognized revenues of $2,606,794 for the six months ended June 30, 2019. These revenues were generated from the sales of kits and equipment, services, MyoCath Catheters, AdipoCell, and laboratory services. We recognized revenues of $3,533,358 for the six months ended June 30, 2018 from the sale of MyoCath catheters, AdipoCell, physician training, patient studies and laboratory services.

 

Cost of Sales

 

Cost of sales consists of the costs associated with the production of MyoCath, laboratory supplies necessary for laboratory services, production of AdipoCell systems and materials, physician course materials, kits and clinic supplies required for patient studies.

 

Cost of sales were $1,028,093 and $1,071,033 in in the six month periods ended June 30, 2019 and 2018, respectively. Associated gross margins were $1,578,701 (60.6%) and $2,462,325 (69.7%) for the six months periods ended June 30, 2019 and 2018, respectively.

 

Research and Development

 

Our research and development expenses consist of costs incurred in identifying, developing, and testing, our products and services. Research and development expenses were $951 in the six month period ended June 30, 2019, a decrease of $2,977 from the research and development expenses of $3,928 in the six month period ended June 30, 2018. Current management focus is towards on sales in addition to research and development and its corresponding ongoing costs. The timing and amount of our planned research and development expenditures is dependent on our ability to obtain additional financing.

 

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Marketing, General and Administrative

 

Our marketing, general and administrative costs were $2,285,352 for the six month period ended June 30, 2019 compared to $2,395,068 for the six month period ended June 30, 2018, a decrease of $109,716. The decrease in costs are primarily due to decreases in consulting and other professional fees, decrease in sales and marketing expenses and stock based and other compensation, as compared to the prior year.

 

Our marketing, general and administrative expenses primarily consist of the costs associated with our general management and product and service marketing programs, including, but not limited to, salaries and related expenses for executive, administrative and marketing personnel, rent, insurance, legal and accounting fees, consulting fees, travel and entertainment expenses, conference costs and other clinical marketing and trade program expenses.

 

Loss on settlement of debt

 

During the six months ended June 30, 2019, we incurred a net loss of $11,311 primarily related to accounts payable and debt restructured during the current period as compared to a net aggregate loss of $35,187 for the same period last year.

 

Gain on sale of equipment

 

In March 2017, we entered a sale/leaseback transaction whereby we sold our lab and other medical equipment and re-leased the equipment back for 36 months.  In connection with the sale/leaseback, we realized a gain on sale of equipment of $386,536, which we will recognize to operations over the term of the lease (36 months). During the six months ended June 30, 2019 and 2018, we recognized $64,423 and $64,423 in current period operations.

 

Income from equity investment

 

Our investment of a 49.9% (33.3% in 2018) member interest ownership of U.S. Stem Cell Clinic, LLC and Regenerative Wellness Clinic as well as a 49% interest in U.S. Stem Cell Clinic of the Villages LLC are accounted for using the equity method of accounting.  As such, we report our pro rata share of its income or loss for the period.  For the six months ended June 30, 2019 and 2018, our pro rata share of its income was $127,256 and $103,106, respectively

 

Interest Expense

 

Interest expenses during the six months ended June 30, 2019 were $759,537 compared to $683,425 for the six months ended June 30, 2018. Interest expenses primarily consists of interest incurred on the principal amount of the Northstar loan, our former Bank of America loan, the Seaside National Bank loan, accrued fees and interest payable to the Guarantors, our capital lease and the amortization of debt discounts and non-cash interest incurred relating to our issued convertible notes payable. The debt discounts amortization and non-cash interest incurred during the six months ended June 30, 2019 and 2018 was $94,557 and $132,019, respectively.

 

Stock-Based Compensation

 

Stock-based compensation reflects our recognition as an expense of the value of stock options and other equity instruments issued to our employees and non-employees over the vesting period of the options and other equity instruments. We have granted to our employees options to purchase shares of common stock at exercise prices equal to the fair market value of the underlying shares of common stock at the time of each grant, as determined by our Board of Directors, with input from management.

 

We follow Accounting Standards Codification subtopic 718-10. Compensation (“ASC 718-10”) which requires that all share-based payments to both employee and non-employees be recognized in the income statement based on their fair values.

 

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In awarding our common stock, our Board of Directors considered a number of factors, including, but not limited to:

 

●	our financial position and historical financial performance;
●	arm’s length sales of our common stock;
●	the development status of our product candidates;
●	the business risks we face;
●	vesting restrictions imposed upon the equity awards; and
●	an evaluation and benchmark of our competitors; and
●	prospects of a liquidity event.

 

On April 1, 2013, the Board of Directors approved, subject to subsequently received shareholder approval, the establishment of the Bioheart 2013 Omnibus Equity Compensation Plan, or the “2013 Omnibus Plan”. The 2013 Omnibus Plan initially reserved up to fifty thousand (50,000) shares of common stock for issuance. On August 4, 2014, the Board of Directors approved to set the reserve to one hundred thousand (100,000) shares of common stock for issuance and to close the 1999 Officers and Employees Stock Option Plan. On February 2, 2015, at the annual meeting of shareholders, the majority of shareholders approved the 2013 Omnibus Equity Compensation Plan. On November 2, 2015, the Board of Directors approved the increase of the reserve under the 2013 Omnibus Plan to five hundred million (500,000,000) shares of common stock for issuance, effective September 16, 2016, approved an addition of twenty five million (25,000,000) shares of common stock to the reserve, effective April 21, 2017, approved an addition of twenty five million (25,000,000) shares of common stock to the reserve, effective August 7, 2017, approved an addition of thirty million (30,000,000) shares of common stock to the reserve and effective May 7, 2018, approved an addition of one hundred million (100,000,000) shares of common stock to reserve.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

 

Actual results may differ from these estimates under different assumptions or conditions. While our critical accounting policies are described in Note 1 to our financial statements appearing elsewhere in this report, we believe the following policies are important to understanding and evaluating our reported financial results:

 

Revenue Recognition

 

Effective January 1, 2018, the Company recognizes revenue in accordance with Accounting Standards Codification 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the Industry Topics of the Accounting Standards Codification. The updated guidance states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers.

 

At the time of each transaction, management assesses whether the fee associated with the transaction is fixed or determinable and whether or not collection is reasonably assured. The assessment of whether the fee is fixed or determinable is based upon the payment terms of the transaction. Collectability is assessed based on a number of factors, including past transaction history with the client and the creditworthiness of the client.

 

The Company’s primary sources of revenue are from the sale of test kits and equipment, training services, patient treatments, laboratory services and cell banking. 

 

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Revenues for kits and equipment sold are not recorded until kits and equipment are received by the customer. Revenues from in-person trainings are recognized when the training occurs and revenues from on demand online trainings are recognized when the customer purchases the rights to the training course. Any cash received as a deposit for trainings are recorded by the Company as a liability.

 

Patient treatments and laboratory services revenue are recognized when those services have been completed or satisfied.

 

Revenues for cell banking sales are accounted for as multiple performance obligations as described in ASC 606 and addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. Because the Company sells its services separately, on more than a limited basis and at a price within a narrow range, the Company was able to allocate revenue based on stand-alone pricing. The multiple performance obligations include stem cell banking, dose retrieval and yearly storage fees. Revenues for stem cell banking and dose retrieval is recognized at the point of service and revenues for the yearly storage fees is recognized over the term of the banking contract, which is typically one year with annual renewals.

 

Research and Development Activities

 

We account for research and development costs in accordance with Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10”). Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved as defined under the applicable agreement. Our company-sponsored research and development costs related to both present and future products are expensed in the period incurred.

 

Inflation

 

Our opinion is that inflation has not had, and is not expected to have, a material effect on our operations.

 

Climate Change

 

Our opinion is that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.

 

Concentrations of Credit Risk

 

As of June 30, 2019, three customers represented 29%, 20% and 14%, respectively, representing an aggregate of 63% of the Company’s accounts receivable. As of December 31, 2018, four customers represented 41%, 10%, 16% and 10% respectively, representing an aggregate of 77% of the Company’s accounts receivable.

 

For the three months ended June 30, 2019, the Company’s revenues earned from sale of products and services were $1,297,984, of which one customer, a related party (US Stem Cell Clinic LLC, a partly owned investment in which the Company holds a 49.9% interest) represented 13%.  For the three months ended June 30, 2018, the Company’s revenues earned from sale of products and services were $1,820,429, of which three customers represented 10%, 8% and 6%, respectively, one of which is a related party (US Stem Cell Clinic LLC, a partly owned investment in with the Company holds a 49.9% interest) represented 10% of Company’s revenue.

 

For the six months ended June 30, 2019, the Company’s revenues earned from sale of products and services were $2,606,794, of which one customer, a related party (US Stem Cell Clinic LLC, a partly owned investment in with the Company holds a 49.9% interest), represented 11%.  For the six months ended June 30, 2018, the Company’s revenues earned from sale of products and services were $3,533,358, of which two customers represented 10% and 7% respectively, of Company’s revenue, one of which is a related party (US Stem Cell Clinic LLC, a partly owned investment in with the Company holds a 49.9% interest) represented 10%.   

 

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Recent Accounting Policies 

 

There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on our  financial position, results of operations or cash flows.

 

Liquidity and Capital Resources

 

In the three months ended June 30, 2019, we incurred negative cash flow from operations of $535,807 and will continue to finance our considerable operational cash needs with cash generated from financing activities and revenues.

 

Net cash used in operating activities was $535,807 in the six month period ended June 30, 2019 as compared to $668,218 of cash provided in the six months ended June 30, 2018.

 

Our cash used in for operations in the six months ended June 30, 2019 reflected a net loss generated during the period of $1,512,344, adjusted for non-cash items such as stock-based compensation of $411,932, depreciation of $103,304, amortization of debt discounts and non-cash interest of $94,557, bad debts of $19,321 and loss on settlement of debt of $11,311 and promissory note issued in pre-trial settlement of $500,000, net with gain on sale of property and equipment of $64,423 and income from investments of $127,256. In addition we had a net decrease in operating assets of $36,062 and a decrease in accrued expenses of $72,748 and deferred revenue of $131,415, net with increase accounts payable of $195,902.

 

Investing Activities

 

Net cash provided by investing activities was $166,833 for the six months ended June 30, 2019 represented proceeds from our equity investment as compared to cash provided by investing activities of $109,000 from our equity investments for the same period last year.

 

Financing Activities

 

Net cash used in financing activities was an aggregate of $400,648 in the six month period ended June 30, 2019 as compared to cash used of $94,402 in the six month period ended in June 30, 2018. In the six month period ended June 30, 2019, we received $90,000 from advances from related party, net with repayments of notes payable of $232,396 and $258,252 related party notes.

 

Existing Capital Resources and Future Capital Requirements

 

Our MyoCell product candidate has not received regulatory approval or generated any material revenues. We do not expect to generate any material revenues or cash from sales of our MyoCell product candidate until commercialization of MyoCell, if ever. We have generated substantial net losses and negative cash flow from operations since inception and anticipate incurring significant net losses and negative cash flows from operations for the foreseeable future. Historically, we have relied on proceeds from the sale of our common stock and our incurrence of debt to provide the funds necessary to conduct our research and development activities and to meet our other cash needs.

 

At June 30, 2019, we had cash and cash equivalents totaling $587,524. However our working capital deficit as of such date was approximately $7.1 million.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

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