UEEC United Health Products Inc (PK)

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE QUARTERS ENDED MARCH 31, 2023 AND 2022

(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 derived from cotton and designed to absorb exudate/drainage from superficial wounds and help control bleeding. The Company 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, 2022 filed with the SEC on March 28, 2023.

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 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.

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.

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 March 31, 2023 and 2022. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments.

 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 March 31, 2023 and December 31, 2022. The Company recorded $0 in bad debt expense for the three month periods ended March 31, 2023 and 2022.

During the three months ended March 31, 2023 and 2022, the Company determined that $0 needed to be impaired and written-off.  During the three months ended March 31, 2023, the Company used $1,132 of inventory as samples for its FDA testing and recorded it to research and development on the Statement of Operations.

Stock Based Compensation

The Company accounts for stock-based compensation under the provisions of ASC 718, Compensation-Stock Compensation. Stock-based compensation expense for employees and non-employees is measured at the grant date fair value. Stock-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.

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 three months ended March 31, 2023 and 2022 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, 2023 included 47,665,000 of restricted stock units, 3,046,296 shares for convertible notes payable – related parties and 1,205,955 shares for convertible notes payable. The total potential common shares as of March 31, 2022 included 28,190,000 of restricted stock units.

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 March 31, 2023 and December 31, 2022 was $5,062 and $4,050, respectively. Amortization expense for the three months ended March 31, 2023 and 2022 was $1,012, 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 three months ended March 31, 2023 and 2022, the Company determined no impairment was required.

Deferred Offering Costs

Deferred offering costs represent specific incremental costs directly attributable to the offering of securities. The deferred offering costs are recorded as an offset to additional paid-in capital and charged against the proceeds received.

Advertising and Marketing Costs

Advertising and marketing costs are expensed as incurred. The Company incurred $30,368 and $23,500 in advertising and marketing costs during the three months ended March 31, 2023 and 2022, respectively.

Research and Development

The Company charges research and development costs to expense when incurred. The Company incurred $218,676 and $52,355 in research and development expenses during the three months ended March 31, 2023 and 2022, respectively.

Leases

The Company has elected not to recognize right-of-use assets and lease liabilities that arise from short-term leases for any class of assets.

New Accounting Pronouncements

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

Note 3. Related Party Transactions

Convertible notes payable - related parties

During the year ended December 31, 2022, Brian Thom, the Company’s Chief Executive Officer, converted $372,000 of a loan payable balance to a convertible note payable.  The unpaid accrued interest on the loan payable was transferred to the 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 March 31, 2023 and December 31, 2022, the remaining unamortized debt discount was $12,314 and $16,998, respectively.  Accrued interest associated with the note was $44,744 and $33,897 as of March 31, 2023 and December 31, 2022, respectively.

During the year ended December 31, 2022,  Robert Denser, a 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 March 31, 2023 and December 31, 2022, the remaining unamortized debt discount was $3,443 and $4,671, respectively. Accrued interest associated with the note was $6,635 and $4,034 as of March 31, 2023 and December 31, 2022, respectively.

Interest expense – related party on the above convertible notes payable was $19,360 (including $5,912 of debt discount amortization related to the OID) and $0 during the three months ended March 31, 2023 and 2022, respectively. Accrued interest – related party due to these convertible notes was $51,380 and $37,931, as of March 31, 2023 and December 31, 2022, respectively.

Loans payable – related parties

During the year ended December 31, 2022, Kristofer Heaton, the Principal Financial Officer, loaned the Company $4,000 to pay for operating expenses. As of March 31, 2023 and December 31, 2022, $4,000 in principal was owed on the loan payable. The loan has an interest rate of 10% and is due on demand.

Interest expense – related party on the above loans was $106 and $0 during the three months ended March 31, 2023 and 2022, respectively. Accrued interest – related party as of March 31, 2023 and December 31, 2022 was $330 and $224, respectively.

Accrued liabilities – related parties

As of March 31, 2023 and December 31, 2022, $107,250 and $127,500 of accrued compensation was due to the Company’s officers and management, respectively.

Equity transactions

During the three months ended March 31, 2023, the Company issued 637,500 shares of common stock with a fair value of $168,938 to its officers and management for the $127,500 of accrued compensation mentioned above (see Note 6).

Note 4. Promissory Note Payable

During the year ended December 31, 2022, the Company had entered into a $100,000 promissory note and had a principal balance of $9,136 and accrued interest of $0 as of December 31, 2022. The note accrued interest at 1% and requires monthly payments of $9,136 until the balance was paid in full.

During the three months ended March 31, 2023, the Company paid the remaining principal balance of $9,136.  As of March 31, 2023, the principal balance and accrued interest was $0.

During the three months ended March 31, 2023, $10,000 of accounts payable and accrued liabilities were paid on behalf of the Company.   The Company entered into a note payable for the $10,000 payment.  The note payable has an interest rate of 5% and has a maturity date of December 31, 2023.

Interest expense on the above loans was $140 and $0 during the three months ended March 31, 2023 and 2022, respectively. Accrued interest as of March 31, 2023 and December 31, 2022 was $125 and $0, respectively.

Note 5. Convertible Notes

During the year ended December 31, 2022, the Company issued a $93,000 convertible note and a $99,975 convertible note and received total proceeds of $192,975.  The notes have an interest rate of 10%, an OID of 7% and have a maturity date of December 31, 2023. The notes are 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 $14,525 of a debt discount related to the OID. As of March 31, 2023 and December 31, 2022, the remaining unamortized debt discount was $8,460 and $11,323, respectively.

Interest expense on the above convertible notes payable was $8,187 (including $2,863 of debt discount amortization related to the OID) and $0 during the three months ended March 31, 2023 and 2022, respectively.  Accrued interest as of March 31, 2023 and December 31, 2022 was $10,778 and $5,454, respectively, and has been recorded in accrued liabilities on the balance sheet. 

Note 6. Issuances of Securities

Share issuances 2022

During the three months ended March 31, 2022, the Company had the following common stock transactions:

Share issuances 2023

                During the three months ended March 31, 2023, the Company had the following common stock transactions:

Restricted stock units

As of March 31, 2023 and December, 31, 2022, the Company has granted a total of 47,665,000 restricted stock units (RSU).  The RSU’s are subject to certain conditions and shall vest upon the achievement of certain Company objectives and milestones. 

Management is unable to predict if or when a Covered Transaction or Triggering Event under the RSU Agreements governing the restricted stock units will occur and as of March 31, 2023, there was $25,313,630 of unrecognized compensation cost related to unvested restricted stock unit awards.  

Activity related to our restricted stock units during the three months ended March 31, 2023 was as follows:

 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 has made total payments of $250,000 towards the civil penalty through March 31, 2023.  As of March 31, 2023 and December 31, 2022, the remaining balance was $200,000 and $300,000, respectively.

Note 8. Litigation

Philip Forman (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.

The parties reached a settlement agreement, in which as full and complete consideration, the Company issued to Forman 1,850,000 shares of common stock of the Company with a fair value of $462,500.