United Health Products, Inc. - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2019

For the transition period from ____________ to ____________

Commission file number: 000-27781

(877) 358-3444

(Company's telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: Common stock, $.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by checkmark whether the registrant has submitted electronically on its corporate website, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the 12 preceding months (or such shorter period that the registrant was required to submit such file). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares issued of the Registrant's Common Stock, as of August 13, 2019 was 176,588,907 issued and outstanding.

UNITED HEALTH PRODUCTS, INC. 

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

UNITED HEALTH PRODUCTS, INC.

Condensed Balance Sheets

(Unaudited) 

See notes to unaudited condensed financial statements.

See notes to unaudited condensed financial statements.

UNITED HEALTH PRODUCTS, INC

Condensed Statement of Stockholders' Deficiency

Three and Six Months Ended June 30, 2018

(Unaudited)

UNITED HEALTH PRODUCTS, INC

Condensed Statement of Stockholders' Deficiency

Three and Six Months Ended June 30, 2019

(Unaudited)

See notes to unaudited condensed financial statements.

See notes to unaudited condensed financial statements.

UNITED HEALTH PRODUCTS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE QUARTERS ENDED June 30, 2019 AND 2018

(unaudited)

Note 1. Organization and Basis of Preparation

United Health Products, Inc. ("United" or the "Company") is a product development and solutions company focusing its growth initiatives on the expanding wound-care industry and disposable medical supplies markets. The Company produces an innovative gauze product that absorbs exudate (fluids which have been discharged from blood vessels) by forming a gel-like substance upon contact.

Interim financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 8 of Regulation S-X, as appropriate. 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.

These interim condensed financial statements should be read in conjunction with the Company's audited financial statements and notes for the period ended December 31, 2018 filed with the Securities and Exchange Commission on Form 10-K filed on April 1, 2019. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, as permitted by the SEC, although we believe the disclosures which are made are adequate to make the information presented not misleading.

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 and operations have not provided cash flows. Additionally, the Company does not currently have sufficient revenue producing operations to cover its operating expenses and meet its current obligations. In view of these matters, there is substantial doubt about the Company's ability to continue as a going concern. The Company intends on financing its future development activities and its working capital needs largely from the sale of public equity securities with some additional funding from other traditional financing sources, including term notes until such time that funds provided by operations are sufficient to fund working capital requirements. The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

The Chief Executive Officer has agreed to advance funds or make payments of the Company's obligations at his discretion. There is no written agreement to continue this support.

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.

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 June 30, 2019 and December 31, 2018. The Company recorded $0 and $0 in bad debt expense for the three and six month periods ended June 30, 2019 and 2018, respectively.

For the six months ended June 30, 2019, one customer made up 100% of the Company’s net revenue and three customers made up 94% of the Company’s outstanding accounts receivable balance.

For the six months ended June 30, 2018, two customers accounted for 62% and 24% of the Company’s net revenue, respectively. 

For the year ended December 31, 2018, three customers made up 98.9% of the Company’s outstanding accounts receivable balance.

Inventory

Inventory is valued at the lower of cost or market using the first-in, first-out (FIFO) method. Inventory on the balance sheet consists of raw materials purchased by the Company and finished goods.

During the six months ended June 30, 2019 and 2018, the Company determined $0 and $0, respectively, of inventory should be impaired and written-off to cost of goods sold.

Stock Based Compensation

The Company issues restricted stock to consultants and employees for various services. Cost for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of the common stock for non-employees is measured at the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached and expense is recognized during the term at which the counterparty's performance is earned or at the date the shares are considered non-forfeitable. The Company recognized consulting expenses and a corresponding increase to additional paid-in-capital related to stock issued for services. 

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. Potential common shares consist of the shares of common stock held in escrow. The dilutive effect of potential common shares is not reflected in diluted earnings per share because the Company incurred a net loss for the three and six months ended June 30, 2019 and 2018 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 June 30, 2019 and 2018, include 50,100,000 of restricted stock units and 14,150,000 of common stock held in escrow, respectively.

New Accounting Pronouncements, Recently Adopted Accounting Pronouncements

Leases

 In February 2016, the FASB issued Accounting Standards Update (ASU) No. ASU 2016-02, Leases, which amends existing lease accounting guidance, including the requirement to recognize most lease arrangements on the balance sheet. The adoption of this standard will result in the Company recognizing a right-of-use asset representing its rights to use the underlying asset for the lease term with an offsetting lease liability. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company has determined there is no impact to the financial statements as the Company does not have any lease agreements.

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

As of June 30, 2019 and December 31, 2018, notes payable to related parties totaled $0 and $8,121, respectively. These amounts are owed to Doug Beplate, our Chief Executive Officer. During the six months ended June 30, 2019, Mr. Beplate advanced the Company $192,000.

On April 22, 2019, the Company agreed to issue to Mr. Beplate convertible demand loans representing all outstanding cash loans made by Mr. Beplate 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 notes 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 $156,890 which was recorded to interest expense.

During the six months ended June 30, 2019, Mr. Beplate converted $205,000 of notes payable and accrued liabilities at a conversion price of $0.50 into 410,000 shares of common stock. There is $0 remaining as unamortized debt discount.

During the year ended December 31, 2018, Mr. Beplate gave a personal vehicle to an employee of the Company valued at $30,000 in lieu of the Company paying travel expenses and consulting expenses. During 2018, the Company repaid a net amount of $305,207 of the outstanding notes payable balance from proceeds of private placements. These loans were for operating expenses of the Company, are due on demand and have no interest rate.

Per Mr. Beplate’s services agreement, he receives monthly compensation of $15,000 per month. During the year ended December 31, 2018, he received his entire salary of $180,000 and $61,500 of previously accrued compensation was paid, leaving a balance of $25,000. During the six months ended June 30, 2019, $35,000 of compensation was accrued and $4,879 was converted into stock as mentioned above, leaving a balance of $55,121.

 The Company, by board resolution, approved an executive compensation stock bonus package for Mr. Beplate such 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 occurs by December 31, 2019, Mr. Beplate shall receive an amount equal to 15% post issuance of the then outstanding shares of the Company's common stock on a fully diluted basis. It was intended that the board approved stock bonus package will be in lieu of the 5% stock bonus that Mr. Beplate is already entitled to in the event of a sale of the Company’s assets or change in control or merger transaction per his services agreement. See “Note 4” regarding the granting of Restricted Stock Unit Agreements (“RSU’s”) to various officers, directors and consultants covering an aggregate of 50,100,000 shares of common stock to be issued upon the satisfaction of certain conditions described in Note 4. Included in the RSU’s are 33,000,000 to Douglas Beplate in lieu of the compensation stock bonus package described above.

During the six months ended June 30, 2019, the Company issued 100,000 shares of common stock to each of two directors for services rendered. The shares had a fair market value of $190,000.

Note 4. Issuances of Securities

Share issuances 2018

During the six months ended June 30, 2018, the Company issued an aggregate of 19,838,931 shares of common stock. The Company issued 850,000 shares of common stock with a total fair market value of $674,500 for services, 1,276,481 shares of common stock were sold for total proceeds of $850,200, $5,000 of proceeds were received for 7,246 shares of common stock not yet issued and recorded as liability for unissued shares, 62,500 shares of common stock were issued related to $5,000 of previously recorded liability for unissued shares and 14,150,000 shares of common stock with a fair market value of $15,423,500 were issued and placed in escrow. The shares will be released from escrow upon the change of control of the Company. Management is unable to determine when a change of control will occur and $0 has been expensed as of June 30, 2018. The Company also issued 3,500,000 shares of common stock to convert $172,500 of notes payable and $10,000 of accrued interest. The shares were valued at their fair market value of $1.09 which resulted in a loss on debt settlement of $3,632,500.

Share issuances 2019  

During the six months ended June 30, 2019, 1,435,769 shares of common stock were sold to non-affiliated investors in a private placement for total cash proceeds of $910,750, 400,000 shares of common stock were sold to securities counsel for total cash proceeds of $200,000, 200,000 shares of common stock were issued to securities counsel for services rendered with a fair value of $190,000, 100,000 shares of common stock were issued to each of two directors for services rendered with a fair value of $190,000 and 410,000 shares of common stock were issued to the Company’s CEO for conversion of notes payable and accrued liabilities totaling $205,000.   During the six months ended June 30, 2019, the following events occurred with respect to the aforementioned 14,150,000 shares held in escrow: 

During the period ended June 30, 2019, the Company issued (i)1,600,000 shares to Nate Knight who is the Chief Financial Officer of the Company, 500,000 shares to the office administrator, who is a person affiliated with the Company’s CEO and 50,000 shares to a Technical Product Supervisor, who is the son of the office administrator which had been held in escrow and became vested by the Board of Directors for services provided. These shares had a fair market value of $1.09 per share at the date of issuance and $2,343,500 has been expensed during the six month period ended June 30, 2019.

The Company canceled 12,000,000 shares of the aforementioned 14,150,000 shares issued (which were not considered outstanding) in the first quarter of 2019 to various officers, directors and consultants.

Restricted stock units

The Board approved restricted stock unit agreements with its officers, directors and consultants covering an aggregate of 50,100,000 shares of common stock to be issued and delivered to such persons upon the earlier of (i) a change in control of the Company by a cash tender offer, merger, acquisition or otherwise or (ii) the Company achieving gross revenues of $20,000,000 in gross revenues on a go forward basis, or (iii) the commencement of an event by a third party without the Board’s approval to effect, or seek to effect, a change in control of the Company or the Company’s management. Restricted Stock Units for 12,000,000 shares were issued in replacement of the 12,000,000 shares that were canceled as described above.

Management is unable to determine when a change of control will occur and as of June 30, 2019, there was $47,094,000 of unrecognized compensation cost related to unvested restricted stock unit awards.

Note 5. Litigation

There are no legal proceedings pending or threatened against us, except as follows:

During 2017, a Complaint was filed with the United States District Court, Southern District of New York by Steven Safran as Plaintiff against the Company and Douglas Beplate, its CEO, as Defendant. This court case was transferred to the United States District Court in Las Vegas, Nevada. Mr. Safran is seeking damages and monies allegedly owed pursuant to an employment agreement and allegedly unpaid loans of $245,824 provided to Defendants. The Company has denied Plaintiff’s allegations and intends to vigorously defend said lawsuit. The parties have held various depositions and the Company has a motion to dismiss which is pending with the court. No accrual has been recorded related to this litigation.

In July 2015, the Company entered into a consulting agreement retaining the services of Maxim Group LLC. An amended agreement was executed in January 2018. A total of 4 million shares of common stock were issued to Maxim in exchange for its obligation to perform certain advisory and other services. In the fourth quarter of 2018, the Company notified Maxim of its intent to file for arbitration pursuant to the consulting agreement. Maxim, without providing a similar notice to the Company, immediately filed a complaint with FINRA seeking release of a restrictive legend from a Company stock certificate in the amount of 500,000 shares. The Company filed an affirmative defense that the required notice of arbitration was not provided to the Company prior to filing. The Company also filed a counterclaim for breach of contract seeking restitution of the original 4 million shares issued to Maxim and the Company filed several counterclaims alleging material misrepresentations by Maxim to various entities. The Company intends to vigorously defend Maxim’s complaint and to pursue to its counterclaims. Currently, the Company and Maxim have a scheduled arbitration with FINRA which will be held in September 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, has filed a lawsuit against the Company and our Chief Executive Officer, Douglas Beplate, in the United States District Court of the District of Nevada. The claimant is claiming, among other things, that: the June 25, 2015 Amendment to his November 10, 2014 Employment Agreement with the Company, which terminated the Employment Agreement on October 1, 2015, is not valid because of lack of consideration; that a July 22, 2015 Stock Purchase Agreement pursuant to which the claimant sold Company shares issued to him under the Amendment to a third a party is unenforceable (despite the fact that all payment for the shares under the Stock Purchase Agreement was made); that the plaintiff’s 2014 Employment Agreement is enforceable and that he is entitled to cash and stock compensation under that Employment Agreement (without giving regard to the Amendment); that if the Amendment is enforceable, he is entitled to the shares issued under the Amendment (without mention that those shares were sold to a third party under the Stock Purchase Agreement described above); and that the Company and Mr. Beplate defrauded the plaintiff relating to the foregoing. The plaintiff is seeking declaratory judgment regarding the parties’ relative rights under the Employment Agreement, the Amendment and the Stock Purchase Agreement; money damages of no less than $2,795,000; and punitive damages of $8,280,000. The Company believes that it has meritorious defenses to the matters claimed as well as counterclaims against the claimant. We plan to vigorously respond to the claims and pursue our remedies. We cannot predict the outcome with certainty.

In the Southern District of New York, FSR Inc. commenced a lawsuit in 2018 against Korsair Holdings A.G. 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 K. Beplate (“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.

Note 6. Liability for Unissued Shares

The Company has recognized a "Liability for unissued shares" for shares granted to employees and consultants along with shares purchased by investors, but unissued as of the balance sheet date. The granted shares are recorded at the fair market value of the shares to be issued at the grant date and a corresponding current liability is recorded for these unissued shares. The activity in this account and balances, classified as Liabilities for unissued shares, as of June 30, 2019 and December 31, 2018 was as follows:

The total number of shares granted but unissued were 2,414,059 and 2,414,059, as of June 30, 2019 and December 31, 2018, respectively.

 Note 7. Subsequent Events

The Company has evaluated events subsequent to June 30, 2019, through the date whereupon the financial statements were issued and has determined that there are no material events that need to be disclosed.

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

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed financial statements and related notes appearing elsewhere in this quarterly report on Form 10-Q. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under 'Risk Factors' in our annual report on Form 10-K for the fiscal year ended December 31, 2018, filed with SEC on April 1, 2019.

Recent Developments

The following developments in the Company’s business have occurred since the beginning of 2018:

Our HemoStyp Gauze Products

HemoStyp Hemostatic Gauze is a collagen-like natural substance created from chemically treated cellulose. It is an effective hemostatic agent registered with the FDA to help control bleeding from open wounds and body cavities. The HemoStyp hemostatic material contains no chemical additives, thrombin or collagen, and is hypoallergenic. When the product comes in contact with blood it expands slightly and converts to an adhesive gel that subsequently dissolves into glucose and saline. Because of its purity and the fact that it simply degrades to non-toxic end products, HemoStyp does not cause significant delay in healing as do certain other hemostatic materials. Additional testing has shown HemoStyp to be 100% absorbable in 24 hours or less. Tests have also been conducted to demonstrate the effectiveness of HemoStyp in thoracic and abdominal procedures. The Company continues to test for the effectiveness and the IFU (Instructions for Use) for abdominal and thoracic procedures.

HemoStyp Hemostatic Gauze is a flexible cloth-like material that is applied by folding the gauze as needed to fit the size of the wound or incision, and then placing the gauze onto the bleeding tissue. In surgical situations, the product converts to a transparent gel with a neutral pH level that allows the surgeon to monitor the coagulation process and also avoids damage to the surrounding tissue. In first responder or other non-surgical situations, putting a bandage on top of the gauze is optional and, in many cases, unnecessary. Since EMS (Emergency Medical Services) work is pre-hospital, rinsing the gauze out with saline or water is not necessary, as a wound will be debrided and possibly reopened prior to suturing at the hospital.

Our hemostatic gauze product line includes various configurations which have been developed to address the specific needs of our market segments and our existing customers, including the U.S. military. Our HemoStyp gauze products are sold in different sizes for use in superficial trauma cases, as a dental gauze and as a nasal dressing, and in a range of formats for veterinary applications, among others uses. The Company's hemostatic gauze product line now includes the following products:

Existing and Potential Target Markets

Our technology is marketed as HemoStyp Gauze but is also available to customers with customized private labeling. We are customer driven. We distribute both nationally and internationally. We are servicing (or intend to service) our customers through distributors, sales representatives, industry-specialized telephone support, and the Internet. Our current and potential customer base for our HemoStyp includes, without limitation:

 Plan of Operation

We believe that the Class III surgical markets, both domestic and international, represent the most attractive market for our products due to the limited competition from other Class III approved ORC (Oxidized Regenerated Cellulose) products and the resulting premium pricing for hemostatic agents that can meet the demanding requirements of the human surgical environment. In addition, our preliminary tests lead us to believe that the HemoStyp technology can compete successfully against established market participants and allow us to gain market share. Given this assessment, we have devoted considerable resources in 2018 and 2019 and currently completing the FDA process to gain access to this market in the U.S.

In February 2018, the Company completed and submitted to the FDA all materials relevant for the pre-market approval (“PMA”) for HemoStyp as a Class III application for internal surgical procedures. The 2017 U.S. market for hemostatic products used in internal surgery procedures is estimated at in excess of US$7 billion, of which the market for ORC or similar mechanical hemostatic products is estimated to be US$3.38 billion. This market is expected to grow at 6.2% annually to reach $4.57 billion by 2023 (source: October 2018 Market Data Forecast).

In August 2019, the Company announced that it has successfully completed the surgeries for its Human Trial study Efficacy and Safety of HemoStyp as an Adjunct for Management of Secondary Hemostasis in the Operative Setting which finalizes human trial enrollment. The Company is compiling and presenting all study data and human surgical results to an independent firm that will certify all data and finalize the Company s PMA submission for class III FDA approval.

In anticipation of receiving Class III approval, our strategy is to devote resources and seek partnerships that allow us to penetrate this market along with the other markets to which the Company already has access. We are evaluating the best paths to rapidly grow our revenue and profits, which could include commercial partnerships and licensing agreement with established market participants, in addition or as an alternative to raising the necessary capital to establish and grow our own marketing and distribution capabilities. We will carefully evaluate the returns on investment in each addressable market to ensure the judicious deployment of our capital to create shareholder value.

We believe that refocusing the Company to become a stronger, medical technology corporation with a patented technology will enhance the Company’s value and overall market strength and allows for revenue generation via organic growth. Nevertheless, we have engaged Société Générale as described under “Recent Developments” to advise the Company on potential strategic alternatives including the possible sale of the Company and/or its intellectual assets. In the event that a transaction is not completed on terms satisfactory to the Company, if at all, the Company would require substantial additional financing to execute an organic business development strategy addressing all of its intended markets.

Results of Operations

Three Months ended June 30, 2019 versus Three Months ended June 30, 2018

During the three months ended June 30, 2019 and 2018, the Company had $25,009 and $1,851 of revenues, respectively. The increase in revenues is due to the Company having one customer order product during the current year compared to minimal revenues in the comparable quarter of the prior year. The Company has changed its focus and a pivot of all the Company’s energy in making our technology and product more commercially viable, by attempting to obtain FDA class III approval for internal surgical purposes. This process requires 100% of the Company’s resources and energy so the focus was removed from sales and marketing and full attention was focused on the FDA process. The reason for this change is that the Company believes the greatest value to its shareholders would come from this FDA class III approval for general surgical use. The completion of the human trials is expected to allow the Company to foster interest from potential merger and acquisition candidates. Also, with the Company’s focus on an acquisition partner, the Company did not want to engage new distribution partners that may create conflicts with the new prospective acquisition companies and tie their hands from a revenue or branding perspective. However, we expect that if a merger and acquisition candidate is identified, current vendor and future relationships and all pending purchase orders will be handed to the acquiring company for its facilitation. No assurances can be given that the Company will complete a transaction with a merger candidate on terms satisfactory to us, if at all.

Total operating expenses for the three months ended June 30, 2019 and 2018 were $571,232 and $918,491, respectively. The decrease in operating expenses is due primarily to a decrease in consulting/professional fees offset by an increase in research and development expenses of $214,863. The decrease in consulting/professional fees is due to the Company issuing 800,000 shares of common stock for services valued at $620,000 to various medical advisors during the three months ended June 30, 2018 and during the three months ended June 30, 2019 the Company did not issue any stock for services. The increase in research and development expenses is due to the Company going through the process to obtain FDA class III approval during the current period and not having these expenses in the prior year.

Our net loss for the three months ended June 30, 2019 and 2018 was $713,000 and $914,545, respectively. The decrease in the net loss is due to the Company not issuing shares for services during the period compared to shares issued for services of $620,000 as mentioned above, offset by an increase in research and development expense of $214,863 and interest expense of $156,890 related to amortization of debt discount related to beneficial conversion feature on notes payable – related party.

Six Months ended June 30, 2019 versus Six Months ended June 30, 2018

During the six months ended June 30, 2019 and 2018, the Company had $25,009 and $31,778 of revenues, respectively. The decrease in revenues is due to the Company changing its focus and pivot all the Company’s energy in making our technology and product more commercially viable, by attempting to obtain FDA class III approval for internal surgical purposes. This process requires 100% of the Company’s resources and energy so the focus was removed from sales and marketing and full attention was focused on the FDA process. The reason for this change is that the Company believes the greatest value to its shareholders would come from this FDA class III approval for general surgical use. The completion of the human trials is expected to allow the Company to foster interest from potential merger and acquisition candidates. Also, with the Company’s focus on an acquisition partner, the Company did not want to engage new distribution partners that may create conflicts with the new prospective acquisition companies and tie their hands from a revenue or branding perspective. However, we expect that if a merger and acquisition candidate is identified, current vendor and future relationships and all pending purchase orders will be handed to the acquiring company for its facilitation. No assurances can be given that the Company will complete a transaction with a merger candidate on terms satisfactory to us, if at all.

Total operating expenses for the six months ended June 30, 2019 and 2018 were $3,557,129 and $1,297,083, respectively. The increase in operating expenses is due primarily to an increase in consulting/professional fees and an increase in research and development expenses. The increase in consulting/professional fees is due to the Company issuing 400,000 shares of common stock for services valued at $380,000 and 2,150,000 shares of common stock valued at $2,343,500 vested during the six months ended June 30, 2019 compared to the Company issuing 850,000 shares of common stock valued at $674,500 to various medical advisors during the six month period ended June 30, 2018. The increase in research and development of $242,268 is due to the Company going through the process to obtain FDA class III approval during the current period and not having these expenses in the prior year.

Our net loss for the six months ended June 30, 2019 was $3,698,897 as compared to net loss of $4,904,586 for the comparable period of the prior year. The decrease in the net loss is due to the Company having an increase in operating expenses of $2,260,046 as explained above, an increase of $242,268 in research and development expenses along with an increase of $156,890 of interest expense related to amortization of debt discount related to beneficial conversion feature on notes payable – related party offset by a decrease of $3,632,500 in loss on settlement of debt.

Financial Condition, Liquidity and Capital Resources

As of June 30, 2019, the Company had working capital of $144,543 and stockholders' equity of $144,543. The Company has not as yet attained a level of operations which allows it to meet its current overhead and may not attain profitable operations within the next few business operating cycles, nor is there any assurance that such an operating level can ever be achieved. The report of our independent registered public accounting firm on our 2018 financial statements includes a reference to going concern which indicated substantial doubt about our ability to continue as a going concern. While the Company has in the past funded its initial operations with private placements, and loans from related parties, there can be no assurance that adequate financing will continue to be available to the Company and, if available, on terms that are favorable to the Company. Our ability to continue as a going concern is also dependent on many events outside of our direct control, including, among other things, our ability to achieve our business goals and objectives, as well as improvement in the economic climate.

Cash Flows

The Company's cash on hand at June 30, 2019 and December 31, 2018 was $500,895 and $31,273, respectively.

Net cash used in operating activities for the six months ended June 30, 2019 was $833,128. The Company had net loss of $3,698,897 offset by stock issued for services of $2,723,500 and amortization of debt discount of $156,890. The Company also had an increase in accounts receivable of $25,009, an increase in inventory of $16,113, a decrease in accounts payable and accrued expenses of $8,499 and an increase in accrued liabilities – related party of $35,000. Net cash provided by financing activities was $1,302,750. This was due to the Company receiving $1,110,750 in proceeds from the sale of stock and receiving $192,000 from related party advances.

Net cash used in operating activities for the six months ended June 30, 2018 was $627,389. The Company had net loss of $4,904,586 offset by stock issued for services of $674,500 and loss on settlement of debt of $3,632,500. The Company also had an increase in accounts receivable of $5,641, a decrease in inventory of $6,216, a decrease in prepaids and other current assets of $12,114 and a decrease in accounts payable and accrued expenses of $42,492. Net cash provided by financing activities was $766,701. This was due to the Company receiving $855,201 in proceeds from the sale of stock and repaying $78,500 in related party advances and $10,000 in notes payable.

Off-Balance Sheet Arrangements

As of June 30, 2019, we have no off-balance sheet arrangements.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following items as critical accounting policies.

Revenue Recognition

The Company recognizes revenues 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.

Stock Based Compensation

The Company issues restricted stock to consultants and employees for various services. Cost for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of the common stock for non-employees is measured at the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached and expense is recognized during the term at which the counterparty's performance is earned or at the date the shares are considered non-forfeitable. The Company recognized consulting expenses and a corresponding increase to additional paid-in-capital related to stock issued for services.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company is in the process of implementing disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the ''Exchange Act''), that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports are recorded, processed, summarized, and reported within the time periods specified in rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our Chief Executive Officer to allow timely decisions regarding required disclosure.

As of June 30, 2019, the Chief Executive Officer and Chief Financial Officer carried out an assessment of the effectiveness of the design and operation of our disclosure controls and procedure and concluded that the Company's disclosure controls and procedures were not effective as of June 30, 2019, because of the material weakness described below.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness identified during management's assessment was the lack of sufficient resources with SEC, generally accepted accounting principles (GAAP) and tax accounting expertise. This control deficiency did not result in adjustments to the Company's interim financial statements. However, this control deficiency could result in a material misstatement of significant accounts or disclosures that would result in a material misstatement to the Company's interim or annual financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.

The Chief Executive Officer and Chief Financial Officer performed additional accounting and financial analyses and other post-closing procedures including detailed validation work with regard to balance sheet account balances, additional analysis on income statement amounts and managerial review of all significant account balances and disclosures in the Quarterly Report on Form 10-Q, to ensure that the Company's Quarterly Report and the financial statements forming part thereof are in accordance with accounting principles generally accepted in the United States of America. Accordingly, management believes that the financial statements included in this Quarterly Report fairly present, in all material respects, the Company's financial condition, results of operations, and cash flows for the periods presented.

Changes in Internal Control over Financial Reporting

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

See “Note 5” in the Notes to Condensed Financial Statements.

Item 1A. Risk Factors

Not required for smaller reporting companies.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) From January 1, 2019 through June 30, 2019, we had no sales or issuances of unregistered common stock, except we made sales or issuances of unregistered securities listed in the table below:

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

The following exhibits are filed with this report, or incorporated by reference as noted:

___________ 

* Filed herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized on August 14, 2019.