UEEC United Health Products Inc (PK)

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE QUARTERS ENDED SEPTEMBER 30, 2022 AND 2021

(Unaudited)

Note 1. Organization and Basis of Preparation

United Health Products, Inc. (the “Company”) develops, manufactures, and markets a patented hemostatic gauze for the healthcare and wound care sectors. Our gauze product, HemoStyp®, is a neutralized, oxidized, regenerated cellulose (“NORC”) derived from cotton and designed to absorb exudate/drainage from superficial wounds and help control bleeding. We are in the process of seeking regulatory approval to sell our Hemostyp product line into the U.S. Class III and European Union CE Mark surgical markets.

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, 2021 filed with the SEC on April 1, 2022.

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 negative working capital and operations have provided minimal 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 to finance its future development activities and its working capital needs largely from the sale of 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.

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 and to pursue is business objectives. Other factors that carry financial implications for the Company could occur although the potential impacts are unknown at this time.

Cash and Cash Equivalents

The Company considers all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents.

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 are currently 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 that 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 credit issued.

There were no provisions for doubtful accounts recorded at September 30, 2022 and December 31, 2021. The Company recorded $0 in bad debt expense for the three and nine month periods ended September 30, 2022 and 2021.

During the three and nine months ended September 30, 2022 one customer accounted for 100% of the Company’s revenue.

During the three and nine months ended September 30, 2022 and 2021, the Company determined that $0  needed to be impaired and written-off.

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 net losses for the nine months ended September 30, 2022 and for the three and nine months ended September 30, 2021 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 September 30, 2022 included 46,915,000 of restricted stock units, 1,501,233 shares for convertible notes payable – related party and 799,863 shares for convertible notes payable. The total potential common shares as of September 30, 2021 includes 28,125,000 of restricted stock units.

The following represents a reconciliation of the numerators and denominators of the basic and diluted earnings per share computation for the three months ended September 30, 2022:

Patents

Patents are stated on the balance sheet at cost. Costs, such as filing fees with patent granting agencies and legal fees directly relating to those filings, incurred to file patent applications were capitalized when the Company believed that there was a high likelihood that the patent would be issued and there would be future economic benefit associated with the patent. These costs were amortized from the date of the patent application on a straight-line basis over the estimated useful life of 10 years. All costs associated with any abandoned patent applications are expensed.

Accumulated amortization as of September 30, 2022 and December 31, 2021 was $3,037 and $0, respectively. Amortization expense for the nine months ended September 30, 2022 and 2021 was $3,037 and $0, respectively.

Impairment of Long-lived Assets

The Company applies the provisions of ASC 360, Property, Plant and Equipment, where applicable to all long-lived assets. ASC 360 addresses accounting and reporting for impairment and disposal of long-lived assets. The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with ASC 360. ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal.

When long-lived assets are sold or retired, the related cost and accumulated depreciation or amortization are removed from the accounts and any gain or loss is included in the results of operations. During the nine months ended September 30, 2022 and 2021, the Company determined no impairment was required.

New and Recently Adopted Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity.

Under current GAAP, there are five accounting models for convertible debt instruments. ASU 2020-06 removes from U.S. GAAP the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, after adopting the ASU’s guidance, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (2) a convertible debt instrument was issued at a substantial premium. Additionally, for convertible debt instruments with substantial premiums accounted for as paid-in capital, the FASB decided to add disclosures about (1) the fair value amount and the level of fair value hierarchy of the entire instrument for public business entities and (2) the premium amount recorded as paid-in capital.

ASU 2020-06 will be effective for public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company has early adopted this pronouncement and applied it to the convertible notes issued during the period.

The Company considers all new pronouncements and management has determined that there have been no additional recently adopted or issued accounting standards that had or will have a material impact on its financial statements.

Note 3. Related Party Transactions

Loans payable - related parties

As of December 31, 2021, Brian Thom, Chief Executive Officer had a loan payable balance of $175,000.

During the nine months ended September 30, 2022, Mr. Thom loaned the Company $315,000 to pay for operating expenses. The loans have an interest rate of 10% and have a maturity date of December 31, 2022.

The Company repaid $118,000 in principal and $6,569 of accrued interest and $372,000 of principal was converted to a convertible note payable leaving a balance of $0 on the loan payable owed to Mr. Thom as of September 30, 2022.

As of December 31, 2021, Lou Schiliro, the former Chief Operating Officer, had a loan payable balance of $44,000.

During the nine months ended September 30, 2022, Mr. Schiliro, loaned the Company $64,275 to pay for operating expenses. The loans have an interest rate of 10% and have a maturity date of December 31, 2022. 

The Company repaid $108,275 in principal and $5,802 of accrued interest leaving a balance of $0 on the loan payable to Mr. Schiliro as of September 30, 2022.

During the nine months ended September 30, 2022, Kristofer Heaton, Principal Financial Officer, loaned the Company $4,000 to pay for operating expenses. As of September 30, 2022, $4,000 is owed to Mr. Heaton. The loan has an interest rate of 10% and have a maturity date of December 31, 2022.

Interest expense – related party on the above loans was $13,587 and $34,084 during the three and nine months ended September 30, 2022, respectively. Accrued interest – related party as of September 30, 2022 and December 31, 2021 was $24,021 and $2,308, respectively and has been recorded in accrued liabilities – related party on the balance sheet.

Convertible notes payable – related parties

During the nine months ended September 30, 2022, Mr. Thom, converted $372,000 of a loan payable balance to a convertible note payable.  The note has an interest rate of 10%, an original issue discount (“OID”) of 7% and has a maturity date of December 31, 2023. The note is convertible into common stock of the Company at $0.35 per share.  In the event the Company issues any shares of common stock before the maturity date at a price that is lower than $0.35 per share, the conversion price shall be reduced to equal such lower issue price per share.  The Company recorded $28,000 of a debt discount related to the OID. As of September 30, 2022, the remaining unamortized debt discount was $21,786.

During the nine months ended September 30, 2022, Robert Denser, Director of the Company, loaned the Company $93,000 through a convertible note.  The note has an interest rate of 10%, an OID of 7% and has a maturity date of December 31, 2023. The note is convertible into common stock of the Company at $0.35 per share.  In the event the Company issues any shares of common stock before the maturity date at a price that is lower than $0.35 per share, the conversion price shall be reduced to equal such lower issue price per share. The Company recorded $7,000 of a debt discount related to the OID. As of September 30, 2022, the remaining unamortized debt discount was $5,926.

Interest expense – related party on the above convertible notes payable was $8,822 (including $7,288 of debt discount amortization related to the OID) and $8,822 (including $7,288 of debt discount amortization related to the OID) during the three and nine months ended September 30, 2022, respectively. Accrued interest – related party as of September 30, 2022 and December 31, 2021 was $1,534 and $0, respectively and has been recorded in accrued liabilities – related party on the balance sheet. 

Accrued liabilities – related parties

As of March 31, 2022 and December 31, 2021, $45,000 and $899 was owed to Mr. Thom for accrued compensation and reimbursable expenses, respectively. During the three months ended June 30, 2022, the Company issued 150,000 shares of common stock to Mr. Thom to settle the accrued compensation and paid him $899 for reimbursable expenses. The common stock had a fair value of $72,000 and the Company recorded $27,000 as a loss on settlement of debt.

As of March 31, 2022 and December 31, 2021, $45,000 and $0 was owed to Mr. Schiliro for accrued compensation, respectively. During the three months ended June 30, 2022, the Company issued 150,000 shares of common stock to Mr. Schiliro for the accrued compensation. The common stock had a fair value of $72,000 and the Company recorded $27,000 as a loss on settlement of debt.

 As of March 31, 2022 and December 31, 2021, $37,500 and $0 was owed to Kristofer Heaton, the Principal Financial Officer, for accrued compensation, respectively. During the three months ended June 30, 2022, the Company issued 125,000 shares of common stock to Mr. Heaton for the accrued compensation. The common stock had a fair value of $60,000 and the Company recorded $22,500 as a loss on settlement of debt.

Equity transactions

Per the vesting schedules of certain of the Company’s amended RSU Agreements, on January 1, 2021, 6,760,000 shares of common stock were issued to Mr. Douglas Beplate, former Chairman of the Board, 2,000,000 shares of common stock were issued to Mr. Schiliro and 100,000 shares of common stock were issued to Mr. Heaton.

On January 6, 2021, the Board of Directors approved the second amendment to the RSU Agreement between the Company and Mr. Beplate in conjunction with Mr. Beplate’s retirement from his day-to-day management role with the Company. The amendment accelerated the vesting and immediately settled his remaining RSUs by issuing 21,970,000 shares of common stock. Further, as a bonus in recognition of Mr. Beplate’s service to the Company and in recruitment of new executive management, the Company issued to Mr. Beplate an additional 2,000,000 shares of common stock. The Company recorded $26,127,300 of stock-based compensation expense during the nine months ended September 30, 2021 related to the accelerated vesting of these RSU’s and issuance of common stock.

During the nine months ended September 30, 2022, the Board of Directors approved an amendment to Mr. Thom’s RSU Agreement dated November 24, 2020. The amendment increased the number of RSU’s granted from 11,500,000 to 13,225,000. The RSU’s are subject to certain conditions and shall vest upon the achievement of certain Company objectives and milestones. 

During the nine months ended September 30, 2022, the Board of Directors approved an RSU Agreement with Robert Denser, Director of the Board. The agreement grants Mr. Denser 1,000,000 RSU’s which are subject to certain conditions and shall vest upon the achievement of certain Company objectives and milestones.

During the nine months ended September 30, 2022, the Company acquired 2,228,115 shares of common stock from its former Chief Executive Officer as described in Note 6.

During the nine months ended September 30, 2022, the Company issued 300,000 shares of common stock each to Mr. Thom and Mr. Schiliro and 250,000 shares of common stock to Mr. Heaton for compensation in lieu of cash. The common stock had a total fair value of $344,250.

Note 4. Promissory Note Payable

During the nine months ended September 30, 2022, the Company reached a settlement agreement related to Patterson’s counterclaim (see Note 8). The Company agreed to pay $120,000 which had previously been accrued as of December 31, 2021.

The Company paid $20,000 of the settlement and entered into a $100,000 promissory note with its legal counsel to fund the payment of the remaining balance. The Company paid $63,465 of principal and $490 in interest expense leaving a principal balance of $36,535 and accrued interest of $0 as of September 30, 2022. The note accrues interest at 1% and requires monthly payments of $9,136 until the balance is paid in full.

The promissory note is secured by 200,000 shares of restricted common stock which would have demand registration rights and the Company would file a registration statement within 45 days of the request.

Note 5. Convertible Promissory Notes Payable

During the nine months ended September 30, 2022, the Company issued a $200,000 convertible promissory note.  The note has an interest rate of 10% and has a maturity date of November 30, 2022. The note is convertible into common stock of the Company at $0.40 per share. 

During the nine months ended September 30, 2022, the Company issued a $93,000 convertible note.  The note has an interest rate of 10%, an OID of 7% and has a maturity date of December 31, 2023. The note is convertible into common stock of the Company at $0.35 per share.  In the event the Company issues any shares of common stock before the maturity date at a price that is lower than $0.35 per share, the conversion price shall be reduced to equal such lower issue price per share. The Company recorded $7,000 of a debt discount related to the OID. As of September 30, 2022, the remaining unamortized debt discount was $5,984.

Interest expense on the above convertible notes payable was $6,468 (including $1,016 of debt discount amortization related to the OID) and $6,468 (including $1,016 of debt discount amortization related to the OID) during the three and nine months ended September 30, 2022, respectively. Accrued interest as of September 30, 2022 and December 31, 2021 was $5,452 and $0, respectively and has been recorded in accrued liabilities on the balance sheet. 

Note 6. Issuances of Securities

Share issuances 2021

During the nine months ended September 30, 2021, a total of 32,455,000 shares of common stock were issued to officers, directors and various consultants related to vesting of RSU’s with a total stock-based compensation cost of $24,441,170, 2,000,000 shares of common stock were issued to Mr. Beplate as a stock bonus with a stock-based compensation cost of $2,180,000, 125,000 shares of common stock were sold to an affiliated investor in a private placement for total cash proceeds of $100,000, 370,455 shares of common stock were sold to non-affiliated investors in a private placement for total cash proceeds of $326,000, 100,000 shares of common stock were issued for settlement of a business consulting agreement with a fair value of $111,000, 25,000 shares of commons stock were issued to settle $20,000 of related party advances, 152,835 shares of common stock were issued to settle accrued liabilities – related party worth $133,523, 1,085,135 shares of common stock were issued due to the conversion of convertible notes payable and accrued interest of $590,468, 1,353,111 shares of common stock were issued due to the conversion of convertible notes payable and accrued interest – related party of $676,555, 300,000 shares of common stock were issued for litigation settlement with a fair value of $312,000 and 117,647 shares of common stock were cancelled reducing common stock by $117 and increasing additional paid-in capital by the same.

On June 25, 2021, the Company entered into a common stock purchase agreement (the “Purchase Agreement”) with Triton Funds LP (“Triton”) to sell Triton up to $6,000,000 of common stock.  The Purchase Agreement expired on June 30, 2022.

Share issuances 2022

During the nine months ended September 30, 2022, 259,028 shares of common stock were sold to non-affiliated investors in a private placement for total cash proceeds of $87,148, 672,919 shares of common stock were issued to various consultants to settle $203,126 of accrued liabilities resulting in a loss on settlement of debt of $50,875, 300,000 shares of common stock with a fair value of $129,000 were issued to consultants for services, 425,000 shares of common stock were issued to settle $127,500 of accrued liabilities – related party (see Note 3) resulting in a loss of settlement of debt of $76,500, 850,000 shares of common stock with a fair value of $344,250 were issued to officers and a former officer of the Company for services (see Note 3), 20,000 shares of common stock with a fair value of $10,200 were issued for legal services, 757,756 shares of common stock with a fair value of $250,000 were issued as commitment shares, 250,000 shares of common stock were cancelled reducing common stock by $250 and increasing additional paid-in capital by the same.

On September 1, 2022, United Health Products, Inc. (the “Company”) entered into a common stock purchase agreement (the “CSPA”) with White Lion Capital, LLC (“White Lion”). Pursuant to the CSPA, the Company has the right, but not the obligation, to require White Lion to purchase up to $10,000,000 of the Company’s common stock, subject to certain limitations and conditions set forth in the CSPA. The Company is required to register the resale of the shares issuable to White Lion under the CSPA with the U.S. Securities and Exchange Commission, as a condition to requesting White Lion purchase shares.  On September 7, 2022, we filed a registration statement on Form S-3 covering the above shares. The Company’s S-3 registration statement was declared effective by the SEC on September 19, 2022.

The Company’s right to sell shares to White Lion commenced on the effective date of the resale registration statement and extends for a period of three years. During this term, the Company may exercise its right to sell shares to White Lion, subject to limitations on the amount of shares that are permitted to be sold with each exercise. The purchase price to be paid by White Lion for such shares will equal the lower of: (i) 93% of the volume-weighted average price of the Company’s common stock during a period of five consecutive trading days following the Company’s exercise of its right to sell shares, and (ii) the closing price of the common stock on the day the Company exercises its right to sell shares, subject to a minimum price of $0.30 per share.

In consideration for White Lion’s commitment to purchase shares under the CSPA when requested, the Company issued 757,576 shares to White Lion with a fair value of $250,000, as disclosed above.

The Company will have the right to terminate the CSPA at any time, at no cost or penalty, upon ten trading days’ prior written notice. Additionally, White Lion will have the right to terminate the CSPA in accordance with its terms for certain breaches of the CSPA by the Company, a Company bankruptcy filing, or the Company’s CEO, Principal Financial Officer or Director of Operations terminating their respective employment with the Company.

During the period, the Company sold 75,000 shares of common stock to White Lion and received net proceeds of $9,856 after legal and administrative fees related to the CSPA were deducted, which were included in the total shares issued for cash disclosed above.

Share repurchases 2022

                During the nine months ended September 30, 2022, the Company paid $50,000 to repurchase 142,857 shares of common stock and received 2,085,258 shares of common stock as settlement of a $808,781 disgorgement obligation with its former Chief Executive Officer (Note 9).  The aggregate amount of 2,228,115 shares of common stock were cancelled (Note 3).

Restricted stock units

During the year ended December 31, 2020 the Board of Directors approved amendments to its March 25, 2019 RSU Agreement for certain management and consultants to the Company.

The amendment resulted in 9,960,000 of the RSU’s vesting on January 1, 2021. The compensation expense was being amortized on a straight-line basis from the date of the amendment through January 1, 2021 which is the vesting date. Stock-based compensation of $43,121 was recognized as expense during the three months ended March 31, 2021.

On January 6, 2021, the Board of Directors approved the second amendment to the Restricted Stock Unit Agreement between the Company and Mr. Beplate, former Chief Executive Officer and former Chairman of the Board, in conjunction with Mr. Beplate’s retirement from his day-to-day management role with the Company. The amendment accelerated the vesting and immediately settled his remaining RSUs by issuing 21,970,000 shares of common stock.

Per ASC 718-20-35, the change in vesting conditions resulted in a modification of the stock-based compensation awards. The modification is considered a Type III modification as described in ASC 718-20-55 and resulted in recording $23,947,300 of stock-based compensation expense which was the fair value of the shares on the date of the modification.

As described above in Note 3, during the nine months ended September 30, 2022, the Board of Directors approved an RSU Agreement in which Robert Denser, Director was granted 1,000,000 RSU’s which are subject to certain conditions and shall vest upon the achievement of certain Company objectives and milestones. In addition, Mr. Thom’s original RSU Agreement was amended. The amendment increased the amount of RSU’s granted from 11,500,000 to 13,225,000. The RSU’s are subject to certain conditions and shall vest upon the achievement of certain Company objectives and milestones. 

During the nine months ended September 30, 2022, the Board of Directors approved RSU Agreements with four physicians as consideration to acquire their rights to the patent application and related intellectual property rights in the “Method of Forming and Using a Hemostatic Hydrocolloid”, U.S. Patent Office Serial No. 62/875,798, filed July 18, 2019, in which a total of 16,000,000 RSU’s were granted.  The RSU’s are subject to certain conditions and shall vest upon the achievement of certain Company objectives and milestones.

Activity related to our restricted stock units during the nine months ended September 30, 2022 was as follows:

All of the outstanding RSU’s, if not vested earlier, will vest upon the occurrence of a Covered Transaction or Triggering Event, as defined in the related RSU Agreements. Management is unable to predict if or when a Covered Transaction or Triggering Event will occur. As of September 30, 2022, there was $26,283,950 of unrecognized compensation cost related to unvested restricted stock unit awards.

Note 7. Accrued Litigation Settlement

On June 15, 2022, the Security and Exchange Commission’s (SEC) investigation of the Company, initially reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, was settled through the filing of a consent judgment without the Company admitting or denying the SEC’s allegations. As part of the settlement, the Company is required to pay a civil penalty of $450,000, payable in four installments as follows:

The Company made the initial schedule payment of $50,000 and the second scheduled payment of $100,000 towards the civil penalty and as of September 30, 2022 the accrued litigation balance is $300,000.

Note 8. Litigation

Philip Forman, who served as Chairman, a director, Chief Executive Officer and Chief Medical Advisor of the Company at various times between 2011 and October 2015, filed a lawsuit against the Company and our then-Chief Executive Officer, Douglas Beplate, in the United States District Court of the District of Nevada. The plaintiff has claimed, among other things: that the June 25, 2015 Amendment to his November 10, 2014 Employment Agreement with the Company, which terminated the Employment Agreement on October 1, 2015, is not enforceable due to lack of consideration; that a July 22, 2015 Stock Purchase Agreement pursuant to which the plaintiff sold Company shares issued to him under the Amendment to a third a party is unenforceable (despite the fact that all payment for the shares under the Stock Purchase Agreement was made); that the plaintiff’s 2014 Employment Agreement remains valid and that he is entitled to cash and stock compensation under that Employment Agreement (without giving regard to the Amendment); and that the Company and Mr. Beplate defrauded the plaintiff relating to the foregoing. The plaintiff is seeking declaratory judgment regarding the parties’ relative rights under the Employment Agreement, the Amendment and the Stock Purchase Agreement; money damages of no less than $2,795,000; and punitive damages of $8,280,000. The Company filed a motion to dismiss the plaintiff’s claims which was denied on March 19, 2020. On May 5, 2021, the plaintiff provided a deposition as instructed by the Court, subsequent to which the Company filed a motion for dismissal of this proceeding. On February 14, 2022, the Court issued an Order which declared the Amendment to be unenforceable and thus the terms of the original Employment Agreement to remain in effect. The Order also noted that the Company is not a party to the Stock Purchase Agreement, and the Employment Agreement does not constitute a prior agreement that could have been superseded by the Stock Purchase Agreement.

In July 2022, United Health Products filed a motion to reopen discovery for the purpose of developing additional issues it wished to raise at trial.  At the beginning of August 2022, the court denied United Health Products’ request to reopen discovery.  The court instructed counsel for both parties to meet and confer regarding a Joint Trial Order to be filed with the court.  The Joint Trial Order generally details the parties’ position on which issues are to be addressed at trial.  The parties are currently seeking to reach agreement on what issues should be addressed at trial.  Once the issues have been agreed upon, the Joint Trial Order will be filed with the court and the court will set a trial date.  Concurrently with the completion of the Joint Trial Order, the parties are engaged in various  settlement negotiations. 

In 2018 an action was commenced in the United States District Court Southern District of New York entitled JEC Consulting Associates, LLC. Liquidator of Lead Dog Capital LP against United Health Products t/k/a United EcoEnergy Corp and Douglas K. Beplate under Docket Number 18-cv-1139 (ER). The third-party action sought to remove a restrictive legend from a particular stock certificate for Three Million Fifty Thousand (3,050,000) shares and declare the shares to be free trading. The third-party plaintiff alleges that the Company and Mr. Beplate refused to have the restrictive legend on the stock certificate removed under Rule 144 and sought compensatory and punitive damages. The Federal court issued an order that the Securities Exchange Commission should review the claim before the District Court renders a final ruling. Discovery appears to be substantially complete and settlement discussions between the third-party plaintiff and the Company have been initiated. On April 22, 2022 the parties entered in a Settlement Agreement wherein the Company would agree to allow the removal of the restrictive legend as permitted under applicable securities laws and distribution of the shares to affiliates of the plaintiffs. Under the Settlement Agreement the Company will make no payments other than to pay expenses related to its own legal counsel.

As mentioned in Note 7 above, the Company settled the SEC’s investigation through the filing of a consent judgment on the terms described in the Company’s Form 8-K filed on April 29, 2022, without the Company admitting or denying the SEC’s allegations.

Due to uncertainties inherent in litigation, we cannot predict the outcome of the above pending legal proceedings.

The Company is or was also a party to the following legal proceedings:

On February 7, 2020, the Company filed the Original Petition for Fraud and Breach of Contract in the Texas District Court for the 215th Judicial District of Harris County against defendants Patterson Companies Inc., Patterson Management, L.P., Patterson Veterinary, Inc. and Patterson Logistics Services, Inc., and Animal Health International, Inc. On March 5, 2020, the defendants removed the case to U.S. District Court for Southern District of Texas. The defendants filed their answer in federal court on March 12, 2020. The original August 25, 2020 pretrial deadlines were extended. On January 18, 2022, the Company’s claims were dismissed, with prejudice, by the court. On February 9, 2022, the Company and Patterson reached an agreement on settlement of Patterson’s counterclaim. The Company agreed to pay $120,000 which was accrued as of December 31, 2021. The $120,000 settlement payment was paid in full in February 2022.

In August 2020, United Health Products filed suit against its former auditors, in Utah State Court, asserting claims related to professional negligence and breach of fiduciary duty. The Company and the defendant through mediation reached an agreement on settlement in which the defendant agreed to pay $392,000 and the entire amount was paid in September 2022 and recorded as other income in the statement of operations (Note 9).

Note 9. Other Income

The Company received payment of $304,273 from Maxim Group LLC, as full and final settlement of its previously disclosed arbitration between the Company and Maxim that was settled in December 2019. The $304,273 was recorded as other income in the Statement of Operations during the nine months ended September 30, 2021. 

During the nine months ended September 30, 2022, as discussed above the Company received $392,000 as a settlement payment from its former auditor (Note 8).  The Company received $202,200 in cash and 2,085,258 shares of its common stock to satisfy a remaining $808,781 disgorgement obligation from its former Chief Executive Officer (Note 6).     The total amount of $1,402,981 was recorded as other income in the Statement of Operations.