NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTERS ENDED March 31, 2020 AND 2019
(unaudited)
Note 1. Organization and Basis of Preparation
United Health Products, Inc. ("United" or the "Company") is a product development and solutions company focusing its growth initiatives on the expanding wound-care industry and disposable medical supplies markets. The Company produces an innovative gauze product that absorbs exudate (fluids which have been discharged from blood vessels) by forming a gel-like substance upon contact.
The accompanying unaudited condensed financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the "SEC"), including the instructions to Form 10-Q and Regulation S-X. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"), have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, they do not include all the information and notes necessary for comprehensive financial statements and should be read in conjunction with our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on July 9, 2020.
In the opinion of management, all adjustments, which are of a normal recurring nature, considered necessary for the fair presentation of financial statements for the interim period, have been included.
Note 2. Significant Accounting Policies
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred recurring net losses, negative working capital and operations have not provided cash flows. Additionally, the Company does not currently have sufficient revenue producing operations to cover its operating expenses and meet its current obligations. In view of these matters, there is substantial doubt about the Company's ability to continue as a going concern. The Company intends on financing its future development activities and its working capital needs largely from the sale of public equity securities with some additional funding from other traditional financing sources, including term notes until such time that funds provided by operations are sufficient to fund working capital requirements. The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Chief Executive Officer has agreed to advance funds or make payments of the Company's obligations at his discretion. There is no written agreement to continue this support.
On March 11, 2020, the World Health Organization declared the outbreak of a coronavirus (COVID-19) as a pandemic. As a result, economic uncertainties have arisen which have the potential to negatively impact the Company’s ability to raise funding from the markets. Other financial impact could occur though such potential impact is unknown at this time.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported period. Changes in the economic environment, financial markets, as well as in the healthcare industry, and any other parameters used in determining these estimates, could cause actual results to differ.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the sale of its HemoStyp product by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied.
The Company receives orders for its HemoStyp products directly from its customers. Revenues are recognized based on the agreed upon sales or transaction price with the customer when control of the promised goods are transferred to the customer. The transfer of goods to the customer and satisfaction of the Company’s performance obligation will occur either at the time when products are shipped or when the products arrive and are received by the customer. No discounts were offered by the Company. The Company does not provide an estimate for returns as there is no anticipation for any returns in the normal course of business.
Trade Accounts Receivable and Concentration Risk
We record accounts receivable at the invoiced amount and we do not charge interest. We review the accounts receivable by amounts due from customers which are past due, to identify specific customers with known disputes or collectability issues. In determining the amount of the reserve, we make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. We will also maintain a sales allowance to reserve for potential credits issued to customers. We will determine the amount of the reserve based on historical credits issued.
There was no provision for doubtful accounts recorded at March 31, 2020 and December 31, 2019. The Company recorded $0 and $0 in bad debt expense for the three month periods ended March 31, 2020 and 2019, respectively.
Inventory
Inventory is valued at the lower of cost or market using the first-in, first-out (FIFO) method. Inventory on the balance sheet consists of raw materials purchased by the Company and finished goods.
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March 31,
2020
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December 31,
2019
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Raw materials
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$
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54,774
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|
|
$
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54,774
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|
Finished goods
|
|
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21,969
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|
|
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22,074
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$
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76,743
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$
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76,848
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|
During the three months ended March 31, 2020 and 2019, the Company determined $0 and $0, respectively, of inventory should be impaired and written-off to cost of goods sold.
Stock Based Compensation
The Company accounts for share-based compensation under the provisions of ASC 718, Compensation-Stock Compensation. Under the fair value recognition provisions, stock-based compensation expense is measured at the fair value of the consideration received, or the fair value of the equity instruments issued, or liabilities incurred, whichever is more reliably measured. Share-based compensation for all stock-based awards to employees and directors is recognized as an expense over the requisite service period, which is generally the vesting period.
The Company accounts for stock compensation arrangements with non-employees in accordance with Accounting Standard Update (ASU) 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which requires that such equity instruments are recorded at the value on the grant date.
Per Share Information
Basic earnings per share are calculated using the weighted average number of common shares outstanding for the period presented. Diluted earnings per share is computed using the weighted-average number of common shares and, if dilutive, potential common shares outstanding during the period. The dilutive effect of potential common shares is not reflected in diluted earnings per share because the Company incurred a net loss for the three months ended March 31, 2020 and 2019 and the effect of including these potential common shares in the net loss per share calculations would be anti-dilutive.
The total potential common shares as of March 31, 2020 includes 50,100,000 of restricted stock units, and 198,648 shares for convertible loans payable – related party. The total potential common shares as of March 31, 2019 included 50,100,000 of restricted stock units.
New Accounting Pronouncements
The Company considers all new pronouncements and management has determined that there have been no other recently adopted or issued accounting standards that had or will have a material impact on its financial statements.
Note 3. Related Party Transactions
Related party loans and related party convertible loans payables
As of March 31, 2020 and December 31, 2019, convertible loans payable – related party totaled $36,935 and $365,785, respectively. These amounts are owed to Doug Beplate, our Chief Executive Officer and convertible at $0.65 per share, in each case at the sole discretion of Mr. Beplate.
During the three months ended March 31, 2020, Mr. Beplate loaned the Company $10,400 which were convertible at $0.65 as mentioned above. These loans resulted in a beneficial conversion feature of $2,015 which was recorded to interest expense upon issuance. and the Company made repayments to Mr. Beplate totaling $339,250. These loans were for operating expenses of the Company, are due on demand and have no interest rate.
Accrued liabilities
As of March 31, 2020 and December 31, 2019, $137,130 and $77,130 was owed to Mr. Beplate, respectively, for accrued compensation. During the three months ended March 31, 2020 $60,000 of compensation was accrued and $0 was paid.
As of March 31, 2020 and December 31, 2019, $34,100 and $24,100 was owed to Nate Knight, the Chief Financial Officer, for accrued compensation, respectively. During the three months ended March 31, 2020 $10,000 of compensation was accrued and $5,000 was paid. As of March 31, 2020 and December 31, 2019, Mr. Knight was owed $7,456 for reimbursable expenses.
As of March 31, 2020 and December 31, 2019, $15,000 and $0 was owed to Louis Schiliro, the Chief Operating Officer, for accrued compensation, respectively. During the three months ended March 31, 2020 $15,000 of compensation was accrued and $30,000 was paid. As of March 31, 2020 and December 31, 2019, Mr. Schiliro was owed $18,243 and $0 for reimbursable expenses, respectively.
Note 4. Prepaid and Other Current Assets
The Company had a balance of $44,800 and $0 as of March 31, 2020 and December 31, 2019, respectively. During the three months ended March 31, 2020, the Company paid $34,800 as a down payment related to machinery and equipment and paid $10,000 as a security deposit on a lease for office and warehouse space.
Note 5. Issuances of Securities
Share issuances 2019
During the three months ended March 31, 2019, 150,000 shares of common stock were sold to non-affiliated investors in a private placement for total cash proceeds of $75,000, 200,000 shares of common stock were issued to securities counsel for services rendered with a fair value of $190,000 and 100,000 shares of common stock were issued to each of two directors for services rendered with a fair value of $190,000.
During the three months ended March 31, 2019, 2,150,000 shares that were held in escrow originally were to vest upon a change of control of the Company were modified by the Board of Directors and deemed vested. The modification resulted in recording $2,021,000 of stock-based compensation expense which was the fair value of the shares on the date of the modification.
Share issuances 2020
During the three months ended March 31, 2020, 1,417,500 shares of common stock were sold to non-affiliated investors in a private placement for total cash proceeds of $826,696, 50,000 shares of common stock were issued to a former medical advisor for services rendered with a fair value of $47,500 and 22,381 shares of common stock were cancelled.
Restricted stock units
The Board approved restricted stock unit agreements with its officers, directors and consultants covering an aggregate of 50,100,000 shares of common stock to be issued and delivered to such persons upon the earlier of (i) a change in control of the Company by a cash tender offer, merger, acquisition or otherwise or (ii) the Company achieving gross revenues of $20,000,000 in gross revenues on a go forward basis, or (iii) the commencement of an event by a third party without the Board’s approval to effect, or seek to effect, a change in control of the Company or the Company’s management.
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Weighted
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Average
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Grant
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Number of
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Date Fair
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Units
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Value
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Total awards outstanding at December 31, 2019
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50,100,000
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$
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0.94
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Units granted
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|
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-
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$
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-
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Units Exercised/Released
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-
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$
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-
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Units Cancelled/Forfeited
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|
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-
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$
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-
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Total awards outstanding at March 31, 2020
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50,100,000
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$
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0.94
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Management is unable to determine when a change of control will occur and as of March 31, 2020, there was $47,094,000 of unrecognized compensation cost related to unvested restricted stock unit awards.
Note 6. Litigation
A Complaint was filed with the United States District Court, Southern District of New York by Steven Safran as Plaintiff against the Company and Douglas Beplate, its CEO, as Defendant. This court case was transferred to the United States District Court in Las Vegas, Nevada. Mr. Safran is seeking damages and monies allegedly owed pursuant to an employment agreement of approximately $734,000 and allegedly unpaid loans of $245,824 provided to Defendants. The Company has denied Plaintiff’s allegations and intends to vigorously defend said lawsuit. The parties have held various depositions and the Company had a motion to dismiss which was denied. The Plaintiff filed a motion to amend his complaint and the Company has submitted opposition papers and are awaiting an order from the Court.
In July 2015, the Company entered into a consulting agreement retaining the services of Maxim Group LLC. An amended agreement was executed in January 2018. A total of 4 million shares of common stock were issued to Maxim in exchange for its obligation to perform certain advisory and other services. In the fourth quarter of 2018, the Company notified Maxim of its intent to file for arbitration pursuant to the consulting agreement. Maxim, without providing a similar notice to the Company, immediately filed a complaint with FINRA seeking release of a restrictive legend from a Company stock certificate in the amount of 500,000 shares. The Company filed an affirmative defense that the required notice of arbitration was not provided to the Company prior to filing. The Company also filed a counterclaim for breach of contract seeking restitution of the original 4 million shares issued to Maxim. This case was settled on December 13, 2019, with Maxim agreeing to make certain payments to the Company post sale of their 500,000 Company shares, in an amount equal to one-half of their sales proceeds. To date, the Company has received no money.
Philip Forman, who served in positions as Chairman, a director, Chief Executive Officer and Chief Medical Advisor at various time between 2011 and October 2015, filed a lawsuit against the Company and our Chief Executive Officer, Douglas Beplate, in the United States District Court of the District of Nevada. The claimant is claiming, among other things, that: the June 25, 2015 Amendment to his November 10, 2014 Employment Agreement with the Company, which terminated the Employment Agreement on October 1, 2015, is not valid because of lack of consideration; that a July 22, 2015 Stock Purchase Agreement pursuant to which the claimant sold Company shares issued to him under the Amendment to a third a party is unenforceable (despite the fact that all payment for the shares under the Stock Purchase Agreement was made); that the plaintiff’s 2014 Employment Agreement is enforceable and that he is entitled to cash and stock compensation under that Employment Agreement (without giving regard to the Amendment); that if the Amendment is enforceable, he is entitled to the shares issued under the Amendment (without mention that those shares were sold to a third party under the Stock Purchase Agreement described above); and that the Company and Mr. Beplate defrauded the plaintiff relating to the foregoing. The plaintiff is seeking declaratory judgment regarding the parties’ relative rights under the Employment Agreement, the Amendment and the Stock Purchase Agreement; money damages of no less than $2,795,000; and punitive damages of $8,280,000. The Company believes that it has meritorious defenses to the matters claimed as well as counterclaims against the claimant. A motion to dismiss the plaintiff’s claims was filed and on March 19, 2020 the motion to dismiss was denied. Discovery is now taking place.
FSR Inc. commenced a lawsuit in 2018 against Korsair Holdings A.G. in the U.S. District Court for the Southern District of New York, seeking among other claims for relief, rescission of the transfer of 3,050,000 shares of United Health Products that FSR sold to Korsair in 2011. Third-Party Plaintiff, JEC Consulting Associates, LLC as Liquidator of LeadDog Capital L.P., Intervenor (“Intervenor”) in the above matter, filed a third-party complaint against United Health Products, and Douglas Beplate alleging among other things that the Company and Mr. Beplate refused to have the Rule 144 restrictive legend removed from the Korsair certificate held by JEC, and concomitantly fraudulently deprive JEC as Liquidator of LeadDog of the ability to sell the Shares in the open market, knowingly, intentionally and directly causing economic harm to LeadDog Capital L.P. Intervenor as Third Party Plaintiff further alleges that the Company and Mr. Beplate as Third-Party Defendants are not only monetarily liable to Third-Party Plaintiff for compensatory damages of $2,500,000 but should be made to pay exemplary damages in an amount determined by the Court, but not less than an equal amount - $2,500,000. Third-Party Plaintiff demands judgment for the above referenced amounts and for the Court to also declare that the 3,050,000 shares are free trading; that Third-Party Plaintiff’s rights to 2.5 million of the Shares are superior to the claims of Plaintiff FSR; that Plaintiff FSR has no claim to 2.5 million of the 3,050,000 Shares reflected by the Korsair certificate; that the Company and Mr. Beplate are to instruct its current transfer agent to remove the restrictive legend on the Korsair certificate for the Shares; and an order directing the Company and Mr. Beplate to instruct the Company’s transfer agent to exchange the Korsair certificate for new free-trading, unrestricted certificates. The Company believes that it had legal right to decline to instruct the transfer agent to remove the restrictive legend from the Korsair Shares where the ownership of the aforementioned shares have been in dispute and the Korsair shares have not been submitted for transfer to its transfer agent in proper form under the uniform commercial code. Recently, the Court granted the motion for a default by FSR, Inc against Korsair Holdings, AG., but denied any claim for relief against UHP, Inc. The Court ruled that the SEC must review the claim before the matter can proceed in Court.
Due to uncertainties inherent in litigation, we cannot predict the outcome of the legal proceedings described herein
In October 2019 the Company filed a defamation, trade libel and unlawful and deceptive practices lawsuit against White Diamond Research LLC, Adam Gefvert, Streetsweeper.org, Sonya Colberg and others in response to a stock manipulation scheme to injure UHP for illegitimate personal gain. The complaint alleged that in August 2019 the above defendants published false and defamatory statements about UHP in “short and distort” schemes to artificially drive down the market price of UHP’s common stock while at the same time having a short position in UHP’s stock, so they could obtain illicit profits on their short sale positions. This lawsuit was settled in April 2020 on terms mutually agreed to by the Company and the defendant parties, without the exchange of monetary payment or other economic consideration.
On February 7, 2020, the Company filed the Original Petition for Fraud and Breach of Contract in the 215th Judicial District of Harris County. The demand for trial by jury was made. Defendants Patterson Companies Inc., and Patterson Management, L.P., were served on February 24, 2020. Defendants Patterson Veterinary, Inc. and Patterson Logistics Services, Inc. were served on February 25, 2020. Defendant Animal Health was served on February 27, 2020. On March 5, 2020, the Defendants removed to federal court. The defendants filed their answer in federal court on March 12, 2020. An “initial pretrial and schedule conference” is set before the Magistrate Judge on August 25, 2020. Discovery is ongoing.
Note 7. Subsequent Events
The Company has evaluated events from March 31, 2020, through the date whereupon the financial statements were issued and has determined that there are no other material events that need to be disclosed, except as follows:
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558,000 shares of common stock were sold for cash proceeds of $229,000 and issued to various non-affiliated investors at $0.50 per share.
125,000 shares of common stock were issued for services with a fair market value of $100,625 to a consultant.
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The Company received $119,830 from its Chief Executive Officer related to convertible demand loans. The loans are convertible at $0.50 per share and bear no interest.
The Company received $85,000 from its Chief Operating Officer related to unsecured convertible notes. The notes have a maturity date of December 31, 2020 are convertible into common stock at $0.50 per share and bear interest of 3%
The Company received $200,000 from a consultant related to unsecured convertible notes. The notes have a maturity date of March 31, 2021 are convertible into common stock at $0.50 per share and bear interest of 3%.
The Company has retained the law firm Gross & Rooney to review the prior auditor's work and explore the potential of a lawsuit.
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