The financial statements required by Item 8 can be found beginning on Page F-2 of this report.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Note 1. Description of the Business
United Health Products, Inc. (the “Company”) is a medical product development and solutions company focusing on the wound-care industry. The Company produces an innovative hemostatic gauze product that absorbs exudate (fluids which have been discharged from blood vessels) by forming a gel-like substance upon contact which supports and accelerates the blood coagulation process.
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, has negative working capital and operations have not provided cash flows. Additionally, the Company does not currently have sufficient revenue producing operations to cover its operating expenses and meet its current obligations. In view of these matters, 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 through the sale of equity securities with some additional funding from other sources, including term notes until such time as 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. Other factors that carry financial implications for the Company could occur although the potential impacts are unknown at this time.
Basis of Presentation
The Company prepares its financial statements on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported period. Changes in the economic environment, financial markets, as well as in the healthcare industry, and any other parameters used in determining these estimates, could cause actual results to differ.
Reclassification
Certain account balances from prior periods have been reclassified in these financial statements to conform to current period classifications.
Cash and Cash Equivalents
The Company considers all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents.
Fair Value Measurements
Accounting principles generally accepted in the United States define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1. We value assets and liabilities included in this level using dealer and broker quotations, bid prices, quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2020 and 2019. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments.
Income Taxes
The Company accounts for income taxes using a method that requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases of the Company’s assets and liabilities which is commonly known as the asset and liability method. In assessing the ability to realize deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company evaluates its tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are ‘‘more-likely-than-not’’ of being sustained by the applicable tax authority. Tax positions not deemed to meet the “more-likely-than-not” threshold are recorded as an expense in the applicable year. The Company does not have a liability for any unrecognized tax benefits. Management’s evaluation of uncertain tax positions may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof, with due consideration given to the fact that tax periods are open to examination by tax authorities.
As of December 31, 2020 and 2019, the Company has approximately $17.8 and $15.6 million of net operating loss carry-forwards, respectively, available to affect future taxable income and has established a valuation allowance equal to the tax benefit of the net operating loss carry forwards and temporary differences as realization of the asset is not assured.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the sale of its HemoStyp product by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied.
The Company receives orders for its HemoStyp products directly from its customers. Revenues are recognized based on the agreed upon sales or transaction price with the customer when control of the promised goods are transferred to the customer. The transfer of goods to the customer and satisfaction of the Company’s performance obligation will occur either at the time when products are shipped or when the products arrive and are received by the customer. 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 December 31, 2020 and 2019. The Company recorded $0 in bad debt expense for the years ended December 31, 2020 and 2019.
For the year ended December 31, 2020 one customer accounted for 100% of the Company’s net revenue.
For the year ended December 31, 2019 one customer accounted for 100% of the Company’s net revenue.
Inventory
Inventory is valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Inventory on the balance sheet consists of raw materials purchased by the Company and finished goods.
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Raw materials
|
|
$
|
50,654
|
|
|
$
|
54,774
|
|
Finished goods
|
|
|
19,020
|
|
|
|
22,074
|
|
|
|
$
|
69,674
|
|
|
$
|
76,848
|
|
During the years ended December 31, 2020 and 2019, the Company determined that $6,979 and $0, needed to be impaired and written-off, respectively.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred. The Company incurred $206,572 and $214,810 in advertising and marketing costs during the years ended December 31, 2020 and 2019, respectively.
Shipping and Handling Costs
The Company includes shipping and handling cost as part of cost of goods sold.
Research and Development
The Company charges research and development costs to expense when incurred. The Company incurred $245,218 and $666,388 in research and development expenses during the years ended December 31, 2020 and 2019, respectively.
Stock Based Compensation
The Company accounts for share-based compensation under the provisions of ASC 718, Compensation-Stock Compensation. Under the fair value recognition provisions, stock-based compensation expense is measured at the fair value of the consideration received, or the fair value of the equity instruments issued, or liabilities incurred, whichever is more reliably measured. Share-based compensation for all stock-based awards to employees and directors is recognized as an expense over the requisite service period, which is generally the vesting period.
The Company accounts for stock compensation arrangements with non-employees in accordance with Accounting Standard Update (ASU) 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which requires that such equity instruments are recorded at the value on the grant date.
Per Share Information
Basic earnings per share are calculated using the weighted average number of common shares outstanding for the period presented. Diluted earnings per share is computed using the weighted-average number of common shares and, if dilutive, potential common shares outstanding during the period. The dilutive effect of potential common shares is not reflected in diluted earnings per share because the Company incurred a net loss for the years ended December 31, 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 December 31, 2020 include 59,330,000 of restricted stock units and 1,867,500 shares of common stock for convertible notes payable – related party. The total potential common shares as of December 31, 2019 include 50,350,000 of restricted stock units, and 579,556 shares for convertible notes payable – related party.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on the straight-line method. The depreciation and amortization methods are designed to amortize the cost of the assets over their estimated useful lives, in years, of the respective assets as follows:
Maintenance and repairs are charged to expense as incurred. Improvements of a major nature are capitalized. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any gains or losses are reflected in income.
New Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity.
Under current GAAP, there are five accounting models for convertible debt instruments. ASU 2020-06 removes from U.S. GAAP the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, after adopting the ASU’s guidance, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (2) a convertible debt instrument was issued at a substantial premium. Additionally, for convertible debt instruments with substantial premiums accounted for as paid-in capital, the FASB decided to add disclosures about (1) the fair value amount and the level of fair value hierarchy of the entire instrument for public business entities and (2) the premium amount recorded as paid-in capital.
ASU 2020-06 will be effective for public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating the potential impact of the adoption of this accounting pronouncement to its financial statements.
The Company considers all new pronouncements and management has determined that there have been no other recently adopted or issued accounting standards that had or will have a material impact on its financial statements.
Note 3. Related Party Transactions
Related party convertible notes payables
As of December 31, 2020 and 2019, convertible notes payable – related parties totaled $456,032 and $365,785, respectively. The amount of $365,785 as of December 31, 2019 was owed to Doug Beplate, the former Chief Executive Officer and current Chairman of the Board, and was convertible at $0.65 per share, at the sole discretion of Mr. Beplate.
During the year ended December 31, 2019, Mr. Beplate advanced the Company a total of $657,500 and the Company made repayments to Mr. Beplate totaling $161,135. These loans were for operating expenses of the Company, are due on demand and have no interest rate.
On April 22, 2019, the Company agreed to allow Mr. Beplate to convert all previous outstanding cash loans made to the Company. For any outstanding loans made on or before April 15, 2019, the loans are convertible at $0.50 per share and for all loans subsequent to April 15, 2019, the amounts are convertible at $0.65 per share, in each case at the sole discretion of Mr. Beplate. The Company’s stock price on April 22, 2019 was $0.90 which resulted in a beneficial conversion feature of $193,137 which was recorded to interest expense – related party.
During the year ended December 31, 2019, Mr. Beplate converted $205,000 of notes payable at a conversion price of $0.50 into 410,000 shares of common stock.
From the April 15, 2019 through December 31, 2019, Mr. Beplate loaned the Company $490,500 which was convertible at $0.65 as mentioned above. These loans resulted in a beneficial conversion feature of $315,046 which was recorded to interest expense upon issuance during the year ended December 31, 2019. The outstanding balance of these convertible notes payable – related party was $365,785 as of December 31, 2019 and the remaining unamortized debt discount was $0.
During the year ended December 31, 2020, Mr. Beplate loaned the Company $251,730 which was convertible at $0.65. These loans resulted in a beneficial conversion feature of $83,156 which was recorded to interest expense – related party upon issuance. The Company made repayments to Mr. Beplate totaling $505,765, $87,750 was assigned to the Company’s legal counsel and $24,000 was forgiven during the year ended December 31, 2020, leaving a balance of $0 owed to Mr. Beplate as of December 31, 2020. These loans were for operating expenses of the Company, due on demand and had no interest rate.
During the year ended December 31, 2020, Brian Thom, the Chief Executive Officer loaned the Company $450,000 and also converted $105,000 of accrued compensation into a convertible note. The note and loans are convertible at $0.50 per share at the discretion of the Mr. Thom, have a maturity date of March 31, 2021 and have an interest rate of 3%. The loans resulted in a beneficial conversion feature totaling $338,105 which was recorded as a debt discount. The debt discount is being amortized through the maturity dates and $138,792 was amortized to interest expense – related party during the year ended December 31, 2020. As of December 31, 2020, the total outstanding balance of the note and loans is $555,000 and the remaining unamortized debt discount is $199,313.
During the year ended December 31, 2020, Louis Schiliro, the Chief Operating Officer loaned the Company $130,000 and also converted $150,000 of accrued compensation into a convertible note. The note and loans are convertible at $0.50 per share at the discretion of Mr. Schiliro, have a maturity date of March 31, 2021 and have an interest rate of 3%. During the year ended December 31, 2020, $110,000 of the convertible note payable along with $1,028 of accrued interest was assigned to the Company’s legal counsel leaving a total outstanding balance of the note and loans of $170,000. The loans and note resulted in a beneficial conversion feature totaling $174,985 which was recorded as a debt discount. The debt discount is being amortized through the maturity dates and $105,331 was amortized to interest expense – related party during the year ended December 31, 2020. The remaining unamortized debt discount is $69,654.
During the year ended December 31, 2020, Kristofer Heaton, the Vice President of Finance, converted $3,750 of accrued compensation into a convertible loan. The loan is convertible at $0.50 per share at the discretion of Mr. Heaton, has a maturity date of March 31, 2021 and has an interest rate of 3%. This note resulted in a beneficial conversion feature totaling $3,750 which was recorded as a debt discount. The debt discount is being amortized through the maturity date and $0 was amortized to interest expense – related party during the year ended December 31, 2020. The remaining unamortized debt discount is $3,750.
Interest expense on the above convertible notes was $8,925 along with $327,278 of debt discount amortization for total interest expense – related party of $336,203 during the year ended December 31, 2020. Interest expense – related party was $0 during the year ended December 31, 2019. Total accrued interest – related party was $7,503 and $0 as of December 31, 2020 and 2019, respectively.
Accrued liabilities
As of December 31, 2020 and 2019, $0 and $77,130 was owed to Mr. Beplate, respectively, for accrued compensation. During the year ended December 31, 2020, $188,375 was paid to Mr. Beplate, $100,000 of accrued compensation was converted to a convertible note payable and then assigned to the Company’s legal counsel and $8,395 of accrued compensation was forgiven. The note was convertible at $0.50 per share at the discretion of the note holder, had a maturity date of March 31, 2021 and had an interest rate of 3%. The note resulted in a beneficial conversion feature totaling $100,000 which was recognized into interest expense.
As of December 31, 2020 and 2019, $66,600 and $24,100 was owed to Nate Knight, who was the Chief Financial Officer until November 2020, for accrued compensation, respectively. During the year ended December 31, 2020 $42,500 of compensation was accrued and $12,500 was paid. As of December 31, 2020 and 2019, Mr. Knight was also owed $7,456 for reimbursable expenses.
As of December 31, 2020 and 2019, $0 and $0 was owed to Brian Thom, the Chief Executive Officer, for accrued compensation, respectively. During the year ended December 31, 2020, $105,000 of compensation was converted into a convertible loan as mentioned above.
As of December 31, 2020 and 2019, $0 and $0 was owed to Louis Schiliro, the Chief Operating Officer, for accrued compensation, respectively. During the year ended December 31, 2020, $150,000 of compensation was converted into a convertible loan as mentioned above and $30,000 was paid. As of December 31, 2020 and 2019, Mr. Schiliro was also owed $59,467 and $0 for reimbursable expenses, respectively.
As of December 31, 2020 and 2019, $0 and $0 was owed to Kristofer Heaton, the Vice President of Finance, for accrued compensation, respectively. During the year ended December 31, 2020, $3,750 of compensation was converted into a convertible loan as mentioned above. As of December 31, 2020 and 2019, Mr. Heaton was also owed $52,625 and $0 for prior services provided to the Company, respectively.
As of December 31, 2020 and 2019, $45,000 and $60,000 was paid to the office administrator, who is a person affiliated with the Company’s former CEO, for compensation, respectively. As of December 31, 2020 and 2019, $0 and $10,330 was owed for reimbursable expenses, respectively.
Equity transactions
During the year ended December 31, 2019, 1,600,000 shares to Nate Knight who was the Chief Financial Officer of the Company until November 2020, 500,000 shares to the office administrator, who is a person affiliated with the Company’s former CEO and 50,000 shares to a Technical Product Supervisor, who is the son of the office administrator, all of which were held in escrow as of December 31, 2018 became vested as modified by the Board of Directors for services provided. 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 $2,021,000 of stock-based compensation expense which was the fair value of the shares on the date of the modification.
In March 2019, the Company granted Mr. Beplate and Louis Schiliro 33,000,000 and 8,000,000 Restricted Stock Units (RSU’s), respectively, which vest and are issuable upon the achievement of certain conditions described in Note 6. These RSU’s were included as part of the Company’s grant of an aggregate of 50,100,000 RSUs to various officers, directors and consultants which all vest on substantially the same terms. The RSUs granted to Mr. Beplate replaced an executive compensation stock bonus package that was granted to Mr. Beplate in December 2018 which had provided that upon the sale of all or substantially all of the assets of the Company or other change in control or merger transaction in which the Company is involved, or in the event that no such transaction occurred by December 31, 2019, Mr. Beplate would have been entitled to receive a number of shares equal to 15% post issuance of the then outstanding shares of the Company’s common stock on a fully diluted basis. The December 2018 executive compensation stock bonus package had, in turn, replaced a previously issued 5% stock bonus granted to Mr. Beplate that would have been issuable in the event of a sale of the Company’s assets or change in control or merger transaction, per his services agreement. The 8,000,000 RSU’s granted to Mr. Schiliro replaced 5,000,000 shares of common stock which were previously held in escrow and subsequently cancelled. See “Note 6” regarding the granting of the RSUs.
During the year ended December 31, 2019, the Company issued a total of 1,000,000 shares of common stock to directors and officers of the Company and 50,000 shares of common stock to the office administrator, who is a person affiliated with the Company’s former CEO and 50,000 shares to a Technical Product Supervisor, who is the son of the office administrator for services rendered. The shares had a fair market value of $1,063,000.
On July 21, 2020 the Board of Directors approved amendments to the RSU Agreement put in place on March 25, 2019. The approved amendments increased the amount of RSU’s granted to Mr. Beplate from 33,000,000 to 33,800,000, increased the amount of RSU’s granted to Mr. Schiliro from 8,000,000 to 10,000,000, increased the amount of RSU’s granted to Mr. Heaton from 50,000 to 500,000, increased the amount of RSU’s granted to the office administrator, who is a person affiliated with the Company’s CEO from 250,000 to 500,000 and increased the amount of RSU’s granted to the Technical Product Supervisor, who is the son of the office administrator from 250,000 to 500,000.
The July 21 amendment also changed the vesting terms so that 15% of RSUs vested on July 15, 2020, an additional 15% of RSU units upon FDA approval of a PMA Class III awarded to the Company, an additional 20% of RSU units on January 1, 2021 and the balance of all unvested RSU units on the earliest date that (a) the Company achieves $20 million in gross cumulative sales commencing as of January 1, 2020, (b) a Covered Transaction is consummated or (c) a Trigger Event occurs. Each Grantee has the option to delay the Vesting Date of all or part of his RSUs until no later than an event described in (b) or (c) above, by serving written notice to the Company prior to such Vesting Date.
The change in vesting terms resulted in a total of 6,795,000 of the RSU’s vesting on July 15, 2020 with 5,070,00 being issued to Mr. Beplate, 1,500,000 being issued to Mr. Schiliro, 75,000 being issued to Mr. Heaton, 75,000 being issued to the office administrator, who is a person affiliated with the Company’s CEO and 75,000 being issued to the Technical Product Supervisor, who is the son of the office administrator. The change in vesting terms also resulted in a total of 50,000 of the RSU’s vesting on July 20, 2020 with 50,000 being issued to the Marketing and Advertising Supervisor, who is the daughter of the office administrator. The vesting of the 6,845,000 RSU’s resulted in stock-based compensation expense of $4,859,950 which is the fair value of the stock on the vesting date.
The office administrator resigned during the year and forfeited 425,000 of the remaining unvested RSU’s with a value of $70,567.
In November 2020, the Company granted Mr. Thom 11,500,000 RSU’s which subject to certain conditions, shall vest upon the achievement of certain Company objectives and milestones.
In December 2020, the Company entered into a second restricted stock unit agreement with Mr. Heaton. The second agreement issued an additional 1,000,000 RSU’s, 500,000 of which were granted on the award date and 500,000 of which will be granted on May 15, 2021 provided his professional services agreement is in effect on that date. The RSUs, subject to certain conditions, shall vest upon the achievement of certain Company objectives and milestones.
During the year ended December 31, 2020, the Company issued a total of 125,000 shares of restricted common stock to Mr. Thom, prior to becoming Chief Executive Officer, for services rendered. The shares had a fair market value of $100,625.
Note 4. Convertible Notes
During the year ended December 31, 2020, certain service providers and a medical advisor converted $205,000 of accrued compensation into convertible notes. The notes are convertible at $0.50 per share at the discretion of the note holders, have a maturity date of March 31, 2021 and have an interest rate of 3%. As of December 31, 2020, the convertible loans have a principal balance of $205,000 and the balance on the loans net of the debt discount is $103,920
During the year ended December 31, 2020, the Company’s legal counsel was assigned $298,778 worth of loans after paying various outstanding balances on behalf of the Company. In addition, the Company’s legal counsel converted $45,000 of accrued fees into a convertible note payable. The note was convertible at $0.50 per share at the discretion of the note holder, had a maturity date of March 31, 2021 and had an interest rate of 3%. The note resulted in a beneficial conversion feature totaling $45,000 which was recorded as a debt discount, to be amortized through its maturity date. The Company’s legal counsel converted all of the convertible loans into 557,056 shares of common stock in accordance with the original conversion features of the notes, therefore no gain or loss on debt settlement was recognized and the total debt discount of $45,000 was recognized into interest expense. As of December 31, 2020, no amounts were owing to the Company’s legal counsel related to these transactions.
Interest expense was $1,537 and $0 during the years ended December 31, 2020 and 2019, respectively, and the entire amount has been accrued.
Note 5. Property and Equipment
As of December 31, 2020 and December 31, 2019, the balance of property and equipment represented consisted of the followings:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Equipment (not placed in service)
|
|
$
|
101,350
|
|
|
$
|
-
|
|
Accumulated depreciation
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
101,350
|
|
|
$
|
-
|
|
The equipment has not yet been placed in service and therefore depreciation expense for the year ended December 31, 2020 and 2019 was $0 and $0, respectively.
During the year ended December 31, 2020 and 2019, the Company acquired property and equipment of $101,350 and $0, respectively.
Note 6. Issuances of Securities
Share issuances 2019
During 2019, 1,622,199 shares of common stock were sold to non-affiliated investors in a private placement for total cash proceeds of $1,055,750: 400,000 shares of common stock were sold to securities counsel for total cash proceeds of $200,000: 350,000 shares of common stock were issued to securities counsel for services rendered with a fair value of $335,500: 1,100,000 shares of common stock were issued to officers and directors of the Company for services rendered with a fair value of $1,063,000: 50,000 shares of common stock to the office administrator, who is a person affiliated with the Company’s CEO, for services rendered with a fair value of $48,500: 425,000 shares of common stock were issued to various consultants and advisors for services rendered with a fair value of $412,250: and 410,000 shares of common stock were issued to the Company’s former CEO for conversion of notes payable totaling $205,000.
During the year ended December 31, 2019, the previously disclosed 2,150,000 shares that were awarded in 2018 (see Note 3 above) and reported as issued and outstanding with no related expense recognized as of December 31, 2018, 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 year ended December 31, 2020, 2,000,500 shares of common stock were sold to non-affiliated investors in a private placement for total cash proceeds of $1,130,696, 50,000 shares of common stock were issued to a former medical advisor for services rendered with a fair value of $47,500, 250,000 shares of common stock were issued to a consultant for services rendered with a fair value of $153,750, 125,000 shares of common stock were issued to Mr. Thom, prior to becoming Chief Executive Officer, for services rendered with a fair value of $100,625, 1,058,634 shares of common stock with a fair value of $866,482 were issued for debt which resulted in a loss on debt settlement of $316,915 and 22,381 shares of common stock were cancelled.
Restricted stock units
On March 25, 2019, the Board approved Restricted Stock Unit Agreements (“RSU Agreements”) with certain of its officers, directors and consultants representing an aggregate of 50,350,000 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 quarterly gross revenue that, when annualized, represents gross annual revenues of at least $20,000,000 by December 31, 2019, or (iii) the commencement of an action or event by a third party without the Board’s approval to effect, or seek to effect, a change in control of the Company or change in the Company’s management.
As discussed in Note 3, the Board of Directors approved amendments to these RSU agreements on March 25, 2019 for certain management and consultants to the Company. The amendments increased the total amount of RSU’s granted from 50,350,000 to 55,350,000. The amendments also changed the vesting conditions which resulted in 7,595,000 of the RSU’s vesting on July 15, 2020 and 50,000 of the RSU’s vesting on July 20, 2020. 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 $5,392,450 of stock-based compensation expense which was the fair value of the shares on the date of the modification.
In addition, the amendment resulted in 10,060,000 of the RSU’s vesting on January 1, 2021. As mentioned in Note 3, the office administrator subsequently resigned and 425,000 of unvested RSU’s were forfeited which left a total of 9,635,000 of RSU’s vesting on January 1, 2021. The fair value of the 9,635,000 RSU’s on the date of the amendment was $7,071,600. The compensation expense is 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 $7,028,480 was recognized as expense during the year ended December 31, 2020 leaving total unrecognized compensation cost of $43,120.
As discussed in Note 3, Mr. Thom was granted 11,500,000 RSU’s and Mr. Heaton was granted 500,000 RSU’s. The vesting conditions are contingent upon the achievement of certain Company objectives and milestones which the management is unable to determine when they will be achieved.
Management is unable to determine if and when FDA approval of a PMA Class III will be awarded to the Company or when a change of control will occur, if at all, and as of December 31, 2020, there was a total of $41,895,820 unrecognized compensation cost related to the restricted stock unit awards.
Activity related to our restricted stock units during the year ended December 31, 2019 was as follows:
|
|
Number of
Units
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
Total awards outstanding at December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
Units granted
|
|
|
50,350,000
|
|
|
$
|
0.94
|
|
Units Exercised/Released
|
|
|
-
|
|
|
$
|
-
|
|
Units Cancelled/Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
Total awards outstanding at December 31, 2019
|
|
|
50,350,000
|
|
|
$
|
0.94
|
|
Activity related to our restricted stock units during the year ended December 31, 2020 was as follows:
|
|
Number of
Units
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
Total awards outstanding at December 31, 2019
|
|
|
50,350,000
|
|
|
$
|
0.94
|
|
Units granted
|
|
|
62,350,000
|
|
|
$
|
0.80
|
|
Units Exercised/Released
|
|
|
(7,595,000
|
)
|
|
$
|
0.71
|
|
Units Cancelled/Forfeited
|
|
|
(45,775,000
|
)
|
|
$
|
0.94
|
|
Total awards outstanding at December 31, 2020
|
|
|
59,330,000
|
|
|
$
|
0.82
|
|
Note 7. Litigation
A Complaint was filed with the United States District Court, Southern District of New York by Steven Safran as Plaintiff against the Company and Douglas Beplate, its CEO, as Defendant. This case was transferred to the United States District Court in Las Vegas, Nevada. Mr. Safran 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 this lawsuit. The parties have held various depositions and the Company made a motion to dismiss which was denied. The Plaintiff filed a motion to amend his complaint and the Company has submitted opposition papers and we are awaiting an order from the Court.
In March 2021, the Company received payment of $304,273 from Maxim Group LLC, representing the full settlement payment in accordance with a Settlement Agreement in a previously disclosed arbitration between the Company and Maxim that was settled in December 2019.
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 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 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. The Company filed a motion to dismiss the plaintiff’s claims which was denied on March 19, 2020. 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. The Court granted the motion for a default by FSR, Inc against Korsair Holdings, AG., but denied any claim for relief against UHP. 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 above legal proceedings.
In 2020 the Company commenced the following legal proceeding:
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 and we expect the case to be trial ready by the end of 2021.
The defendants filed a Motion for Summary Judgment which was denied by the court on March 11, 2021.
In August 2020, United Health Products filed suit against its former auditors, Haynie & Company, in Utah State Court, asserting claims related to professional negligence and breach of fiduciary duty. Haynie & Company has denied the allegations. The parties are conducting discovery.
Note 8. Income Tax
The Company accounts for income taxes under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 740, Income Taxes (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company did not take any uncertain tax positions and had no adjustments to its income tax liabilities or benefits pursuant to the provisions of Section 740-10-25 for the years ended December 31, 2020 and 2019.The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. No such interest or penalties were recognized during the period presented. The Company had no accruals for interest and penalties at December 31, 2020 or 2019.
The Company’s federal income tax returns for the years ended December 31, 2017 through December 31, 2020 remain subject to examination by the Internal Revenue Service as of December 31, 2020.
During 2020 and 2019, the Company incurred net losses and, therefore, has no tax liability. The net deferred tax asset generated by the loss carry-forward has been fully reserved.
Net deferred tax assets consist of the following components as of December 31, 2020 and 2019
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryover
|
|
$
|
3,735,500
|
|
|
$
|
3,282,100
|
|
Accrued related party payroll
|
|
|
(6,200
|
)
|
|
|
21,700
|
|
Valuation allowance
|
|
|
(3,729,300
|
)
|
|
|
(3,303,800
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
Book income
|
|
$
|
(3,299,400
|
)
|
|
$
|
(1,386,500
|
)
|
Related party accrued payroll
|
|
|
(6,200
|
)
|
|
|
15,500
|
|
(Gain) Loss on debt settlement
|
|
|
66,500
|
|
|
|
-
|
|
Stock based compensation
|
|
|
2,671,800
|
|
|
|
814,900
|
|
Interest amortization
|
|
|
112,500
|
|
|
|
106,700
|
|
Inventory write-off
|
|
|
1,500
|
|
|
|
-
|
|
Valuation allowance
|
|
|
453,300
|
|
|
|
449,400
|
|
Income tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2020 and 2019, the Company has taxable net loss carryovers of approximately $17.8 and $15.6 million, respectively, that may be offset against future taxable income for the years 2021 through 2040.
Note 9. Subsequent Events
The Company has evaluated events from December 31, 2020, through the date whereupon the financial statements were issued and has determined that there are no material events that need to be disclosed, except as follows:
The Board of Directors approved the second amendment to the Restricted Stock Unit Agreement between the Company and its former Chief Executive Officer and current Chairman of the Board, Douglas 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 Restricted Stock Units (“RSUs”) in a total of 28,730,000 restricted shares. Further, as a bonus in recognition of Mr. Beplate’s service to the Company and in recruitment of new executive management, the Company agreed to issue to Mr. Beplate an additional 2,000,000 restricted shares of common stock.
The Company issued to various officers/director and other persons providing services to the Company, a total of 3,200,000 shares of common stock, in settlement of the scheduled vesting of RSU’s that were originally issued in March 2019 and vested on January 1, 2021. Of the 3,200,000 shares of common stock, 2,000,000 shares were issued to Louis Schiliro, Chief Operating Officer/director, and 100,000 shares were issued to Kristofer Heaton, our Principal Financial Officer.
The Company’s legal counsel was assigned a total amount of $175,000 which were all convertible notes – related party. The convertible note was convertible at $0.50 per share and the Company’s legal counsel converted the $175,000 into 350,000 shares of common stock.
Mr. Schiliro, the Chief Operating Officer, advanced the Company $20,000 to pay for operating expenses. The advance is due on demand and non-interest bearing.
The Company issued a total of $115,000 in convertible notes to two unaffiliated individuals. The notes are convertible at $0.85 per share have a maturity date of June 30, 2021 and has an interest rate of 3%. One note in the amount of $85,000 was converted into 100,000 shares of common stock.
One holder of a convertible note with a balance of $101,161, which included principal and accrued interest, converted the entire amount into 202,322 shares of common stock.
The Company issued 100,000 shares of common stock for settlement of a business consulting agreement. The shares had a fair market value of $111,000.
The Company cancelled 117,647 shares of common stock.
The Company issued 78,500 shares of common stock to Nate Knight, the former Chief Financial Officer, for amounts owed related to accrued compensation and reimbursable expenses.