US Stem Cell Inc (USRM)

[Dragon Lady]

10-Q released on Friday, at market close- it's what I was expecting. Put out, just in time, (IMO) to catch the SEC filing, required closing time for the filing to be accepted, and right at market close on a Friday. Exactly as I expected.

A common technique when the news is not good or is "weak", and a company wants the "news" to fade away, hopefully by the next week. I'd not be surprised to see a "PR" about "something" released early next week- to try and obscure the real story, IMO, that is told in the latest 10-Q.
http://www.slate.com/articles/business/moneybox/2004/09/friday_night_blights.html
http://www.investopedia.com/articles/stocks/08/earnings-tricks.asp

"Good" or "strong" reports are typically released on a Monday or Tuesday, prior to market open.

The "story" in the 10-Q IMO, tells a lot. Highlights IMO (it's un-audited):
1) Massive on-going share dilution, and the pace appears to be accelerating perhaps (certainly no sign IMO, it's slowing or declining that I can tell?). (explaining, IMO, the 2 billion share allocation increase per the recent proxy filing).
2) MIRROR, the word did not appear anywhere in the document. Not a word. Marvel and Angel got "passing mentions". I think then, IMHO, BHRT, being a "phase III", FDA "trial" type company- my opinion, and just my opinion, I think those days, are for the most part, over.
3) Did some revenue come in? Yes. But their costs exploded- and I mean big time, IMO. The SG&A expenses, at least doubled for the most part- and it's hard to tell what that money would have even been spent on, with such an enormous increase, IMO?
4) R&D budget/spending evaporated to almost nothing. About $10K in 3 months. $3K a month on "R&D", for what is supposedly a "medical research" company seeking to run FDA type "trials" and seeking FDA approval of a product? $10K R&D spent in the 1st qtr? It's stunning IMO. Again, to me- the phase II/III "trials" are just dead. No way IMO, that $3K a month, can even move the needle on a FDA style, phase III trial- not even a micro down payment on one, IMO. The collapse of that R&D number, contrasted by the massive rise in SG&A (salaries, "general" expenses (think travel, entertainment, etc) is one of the most "telling" lines in that whole 10-Q, IMO
10-Q, PAGE 10:
" The Company incurred research and development expenses of $9,857 and $163,974 for the three months ended March 31, 2014 and 2013, respectively;"
So, RESEARCH and DEVELOPMENT (kinda their whole point when they started as a company, IMHO, remember "trial" spending falls under this expense line) - R&D spending just fell off a cliff, reduced by a factor of $163K/$10K = 16.3 times reduction. WOW, IMO?

5) A operational loss was reported, that actually exceeded the same period last yr, despite the "revenue increase"- and it was caused by the massive increase in expenses. A "net income" was reported as a positive number- but it's nothing but a bookkeeping, accounting entry, one-time event, caused by the write down/write off of the Beaumont hospital debt, they "negotiated" away. That "expense" was moved to the other side of the ledger and booked as "income" essentially- thus creating a one-time illusion that there was a "net income", despite cash use being a loss, and relying heavily still on "financing" (massive share dilution), "toxic" financing on-going.
6) They finished the qtr, pretty typical IMO, with about 1 months, maybe 1.5 months cash on hand- pretty much their "norm", nothing's really changed IMO.
7) They lost a key, financing "line" they'd tapped several times in the past- the Greystone line, as it expired, and was apparently not renewed.
8) There short term "notes due", aka "financing" debt they owe, actually increased in the 3 month period, despite the reported revenues. Primarily from additional "toxic" convertible deals with Asher and a couple of other firms. So, their "going concern" situation didn't improve one iota, IMO. They are as cash poor, and debt riddled as 3 or more months ago, nothing changed that I can see (discharged the Beaumont hospital debt, but they were never paying anything on it anyway, so it has zero effect on their cash burn/use that I can see?) Shares are being poured out like water to keep um afloat, the biggest "key trial" doesn't even appear to exist anymore, and "fully diluted" shares (that's outstanding, plus all they would need to cover all these options and warrants and what not being handed out everywhere, that number is now at half a BILLION shares: "Fully diluted shares outstanding were 498,696,292" (page 10, 10-Q). Again, IMO, totally explaining the 2 billion share, recent proxy filing. I'd expect they could be hitting that 950 million share limit by years end, IMO (if they still exist as a "going concern".
That's just "some" of the highlights I picked out- will elaborate on each one, with proper page references and verbiage.

Firstly though, the stock touched .022, twice in the past 10 days or so- once on April 30th and again on May 5th. The stock is making lower highs and lower lows, the down days being on the higher volume. It has not come even close to making a re-test of the 50 DMA, at .038 now, and is in a solid down trend, and volume is evaporating.
http://stockcharts.com/h-sc/ui?s=bhrt

The volume has dried up sharply. Friday, it traded about 505K shares at about .027 each = $13,500 total dollars. Noise level money, IMO. That's about 12 or 13, $1K trades in an entire trading day. It will drop like a rock, IMO, on any sale of "size" or a big boy dumping or a new big boy going short (think ASHER for example).

No, revenues did not increase 7,600%. For end of yr 2013 (see 10-K, balance sheet entry), the company reported revenues of $96K w/ a cost of sales of $30K = gross of $66K.
This latest 10-Q shows revenues (for the qtr: I personally don't think they will continue at this rate, they are coming from things like charging for "trials" among other things. A person on here gave a personal testimony of the fee he was quoted to be a "trial" participant- an ethics question/debate in many circles. Most, if not all "credible trials" never charge the "patient", but the opposite, they reimburse the patient for expenses and even pay them a basic fee to participate- but that's neither here nor there. BHRT has had periods of revenue in the past, and they were not stable, did not grow long term, etc IMO. This "revenue" IMO, will fluctuate widely IMO, and the 10-Q says so in effect, will elaborate more, later, below)
Back to the 7,600% increase that is not the case. So, even if the revenue were to continue at the present rate, it would result in an end of yr revenue of about $322K x 4 = $1,288,000 - $400K cost of sales = $888K gross.
$888K 2014 - $66K 2013 = $822,000/66,000 = 12.45 = approx 1200% increase. (of course, that assumes this q-1 sales rate remains constant, IMO it will fluctuate widely, mgt made the same statement in the 10-Q, page 27, "Our revenue may vary substantially from quarter to quarter and from year to year. ")

Back to the 10-Q:
1) Dilution is massive. (as stated- total outstanding shares "diluted"- meaning if they were needed to cover all the "goodies" handed out like boatloads of warrants, options, etc,)-brings the total shares now to 498,696,292 This, IMO, explains the increase to 2 billion allocated. They may hit the 950 million limit sooner than thought, IMO. They pour out shares like water, IMO. The common shareholder is/will be crushed lower than even now, if that's even possible at sub 3 pennies, IMO.
They appear to "pay for" nearly every common need/expense via handing out shares, in the millions or 10s of millions of chunks at a time. Prime examples, 10-Q, pages 23/24:
In April 2014, the Company issued an aggregate of 3,839,832 shares of its common stock for services rendered valued at $43,250.

In April 2014, the Company issued 5,263,315 shares of its common stock in settlement of related party advances of $100,000.

In April, 2014, the Company issued 1,002,808 shares of its common stock in settlement of common stock subscriptions of $50,000

In April 2014, the Company issued 274,681 shares of its common stock as settlement of six months accrued interest on the Northstar note obligation.

In April 2014, the Company issued 18,383,774 shares of its common stock for service rendered valued at $180,511.

In April 2014, the Company issued an aggregate of 4,793,268 shares of its common stock in settlement of $67,500 convertible notes payable and $2,700 accrued interest.

In April 2014, the Company issued 11,918,181 shares of its common stock in connection with the exercise of warrants. Proceeds received was $136,000, of which $6,000 during the three months ended March 31, 2014.

10-Q, PAGE 46:
"Future issuances of shares for various considerations including working capital and operating expenses will increase the number of shares outstanding which will dilute existing investors and may have a depressive effect on the company's stock price."

Yeah, probably, IMHO too.

The pace of dilution is staggering IMO:
Had 379,787,745 as of 10-K, yr ended 2013, page F-3.
As of 3/24/14 about 421 million shares outstanding
As of the form 14C filing 4/28/14: about 463 million
As of this 10-Q, May 6, 2014, there were 466,396,016

That means that the rate of dilution is about 13 to 40 million shares in a 1 month period (avg, depending on which of those "month snap shots" one looks at), so, say a realistic "avg" is 20 million a month or on track to dilute about 250 MILLION shares this yr, but then one has to "add in" the "fully diluted" (warrants, options, etc) which would, IMO bring it to perhaps as much as 300 MILLION or so? (last yr was an approx., staggering 200 MILLION diluted). Just in one week from 4/28 to 5/6, 3 million more shares were diluted. Again, the "fully diluted" number has now hit, for the most part, half a BILLION shares (this 10-Q, page 10). Amazing, IMO. As their cash position is as poor as ever IMO, no major trials have advanced (MIRROR not even mentioned)etc.

2) MIRROR, the word, or any reference to the phase III "trial" does not appear anywhere in the document that I can find? It's dead, for all intents and purposes IMO. I mean, how can you put out one of your most important, SEC filed documents, and not mention, what's supposedly your biggest, "material" undertaking, previously announced in "PR"- what would be your most "modern" and current, Phase III trial for your "flagship" product?HOW, would it be possible for that to just "slip by" even being discussed in your quarterly report? (was a barely mention in the last 10-K annual report too?) HOW, is that possible? Not even mentioned. Further, the R&D spending, will mention it in a second, was a blip IMO, not even remotely close to be "funding" a phase III level trial, even outside the U.S. IMO.

3) As listed above, the R&D budget just evaporated IMO. 10-Q, page 10:
" The Company incurred research and development expenses of $9,857 and $163,974 for the three months ended March 31, 2014 and 2013, respectively; "
It dropped to about $10K for a 3 month period? Huh? It's a blip, IMHO. Pocket change money- what phase II/III "trial", or ANY actual medical "research" could actually be taking place on $3K a month, IMO? That line speaks volumes, IMO. Says pretty much it all, IMO

4) As the R&D budget/spending shrunk to essentially nothing, the SG&A expense line exploded. Here is how mgt describes (SG&A), 10-Q, PAGE 28:
"Marketing, General and Administrative

Our marketing, general and administrative expenses primarily consist of the costs associated with our general management and clinical marketing and trade programs, including, but not limited to, salaries and related expenses for executive, administrative and marketing personnel, rent, insurance, legal and accounting fees, consulting fees, travel and entertainment expenses, conference costs and other clinical marketing and trade program expenses."
$838,229 3 months ended this 10-Q and was $370,533 same period last yr. From the last 10-K, the SG&A line for the ENTIRE YEAR, balance sheet entry was $2,267,831. So they are on track to increase that to 4 X $838,229 = $3,352,916. An increase in "general" cost and expense of over $1 million annually, for a cash poor company, that can't advance its key "trials" because of "lack of funding"? Wow, IMO. Oh, they apparently hired one full time and one part time. But that IMO, would no way explain a $1 million annual cost/expense increase? The huge salary increases, for 2 "key" people, of course explains at least a chunk of it,IMO. Last 10-K listed "3 full time employees and no part time", the 10-Q, page 11, "The Company has 4 full-time employees and 1 part-time employee."
Strange, as last time, they put out a "PR" about "adding to the team", then it seemed that vanished or never happened, now they appear to have added "someone"- but in what position or doing what, they don't say? Oh well, main point, is SG&A to R&D spending is staggeringly out of ratio, IMO. Like all money is going to "expenses" (for what, who knows?), while a "research and development" medical company, just took its R&D budget/spending to pretty much zero it appears?

5) The operational loss for this period, compared to same period last yr, was actually larger, despite "revenue" coming in. From balance sheet entry, 10-Q, PAGE "Statement of Operation"
Net loss from Operations, Q-1, 2014 (620,923)
Net loss from Operations, Q-1, 2013 (531,084)
That is due primarily to that big increase in spending, the 838,329 entry.
They booked a "net income" as a positive number (maybe first time, in years, if ever?)- but it's just a bookkeeping entry, due to the ability to discharge the bad debt to Beaumont hospital. That moved it from one side of the ledger as an "expense" to a "gain on settlement of debt"- a one time deal, and only a "paper" entry, it didn't result in any real "net income" materializing. If that one time, 2,093,632 entry were backed out, they'd probably have had a bigger net loss this period, than same period last yr, IMO.

6) They finished up, typical IMO, with about 1 months, maybe 2 months tops, "cash on hand"- meaning if they don't do "financing", on-going, month to month, they're essentially insolvent, IMO. They finished Q-1, with about $218K reported on hand. Just that SG&A spending of 838,229/3= $279K needed PER MONTH. Which says they will spend that $218K, before one month or so is out, IMO.
10-Q, PAGES 11/12, mgt's own words- reaffirms the "going concern" warning, and cash poor situation they're in:
"NOTE 2 – GOING CONCERN MATTERS
The accompanying unaudited condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying unaudited condensed financial statements, during three months ended March 31, 2014, the Company incurred an operating loss of $620,923 and used $257,762 in cash for operating activities. As of March 31, 2014, the Company had a working capital deficit (current liabilities in excess of current assets) of approximately $11.1 million. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.
The Company’s existence is dependent upon management’s ability to develop profitable operations and to obtain additional funding sources. There can be no assurance that the Company’s financing efforts will result in profitable operations or the resolution of the Company’s liquidity problems. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern."

7) They lost a key financing line, that from the 2013 10-K, they'd "tapped" many times (dilutive), that will have to be made up somewhere, IMO. As it's gone now, as a source of cash when needed. 10-Q, PAGE 13:
On November 2, 2011, the Company and Greystone Capital Partners (“Greystone”) had entered into a Standby Equity Distribution Agreement (the “Agreement”). Pursuant to the Agreement, Greystone had agreed to provide the Company with up to $1.0 million of funding for the 24-month period following the date a registration statement of the Company’s common stock is declared effective by the SEC (the “Equity Line”). The registration statement went effective on February 10, 2012. The Agreement automatically terminated on the first of April, 2014 (the first day of the month next following the second (2nd) anniversary of the Effective Date).

8) Notes due (aka short term debt) actually increased in Q-1, despite "revenue" and they tapped, "toxic" type "ASHER" financing several more times. (w/o it, that $218K cash, would have been much closer to zero, IMO)
10-Q, PAGE 13 "Notes Payable"
Q-1 2014 is now: $1,966,946
Q-1 2013 was: $1,930,841
Two of the increased were from ASHER notes, and a new "note" (toxic style convertible) from a firm called Daniel James (similar to an ASHER).

9) They tapped some "ASHER" deals with highly dilutive terms IMO, and real steep share discounts given, meaning IMO, the terms to "finance" are getting worse, more desperate it appears to me, IMO.
Example: 10-Q, PAGE 14/15:
"Asher Notes (During this year)

During the three months ended March 31, 2014, the Company entered into a Securities Purchase Agreements with Asher Enterprises, Inc. (“Asher”) or affiliates, for the sale of 8% convertible notes in aggregate principal amount of $97,500 (the “Asher Notes”).

The Asher Notes bear interest at the rate of 8% per annum. As of the quarter ended March 31, 2014 all interest and principal must be repaid nine months from the issuance date, the last note due December 26, 2014. The Notes are convertible into common stock, at Asher’s option, at a 45% discount to the average of the three lowest closing bid prices of the common stock during the 10 trading day period prior to conversion. The Company has identified the embedded derivatives related to the Asher Notes.
These embedded derivatives included certain conversion features and reset provision(that's known as TOXIC). The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of Asher Notes and to fair value as of each subsequent reporting date which at March 31, 2014 was $153,564. At the inception of the Asher Notes, the Company determined the aggregate fair value of $214,346 of the embedded derivatives."

10) They still appear dependent on all sorts of inside "loans" and "advances" and "stuff"- indicating they can't even survive to pay the bills, w/o all this "internal loaning/shuffling" around, apparently? It's very confusing- cause later then, these appear to be settled in more shares handed out, perhaps warrants, etc. 10-Q, PAGE 15:
"NOTE 7 — RELATED PARTY TRANSACTIONS
Advances
As of March 31, 2014 and December 31, 2013, the Company officers and directors have provided advances in the aggregate of $403,957 and $416,198 respectively, for working capital purposes. The advances are unsecured, due on demand and non-interest bearing."
10-Q, PAGE 16: Even lists one of these "Director notes as in DEFAULT"? Very interesting IMHO:
"Officer and Director Notes

At March 31, 2014 and December 31, 2013, the Company has outstanding notes payable to officers and directors with interest at 8% per annum due at maturity. The three subordinated notes, $125,000, $100,000 and $140,000 were previously due on October 22, 2012, November 30, 2012 and June 4, 2011 respectively, and are unsecured. The Company is not obligated to make payment until Northstar loan is paid off.

On October 9, 2012, the Company issued an aggregate of $1,278,324 of promissory notes due October 9, 2013 to officers and directors in settlement of outstanding advances and accrued compensation (currently in default). The promissory notes bear interest of 5% per annum and due at maturity."

11) They appear to have issued more "in the money" warrants ( I guess these are in addition to the previously listed 50 MILLION, in the last 10-K) - that a boat load of shares hanging out there IMO. (remember, "fully diluted" went to about half a BILLION shares- and this is a big part of it, IMO).
10-Q, PAGE 33:
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended March 31, 2014, the Company sold an aggregate of 24,292,783 shares of the Company’s common stock and common stock purchase warrants to purchase 23,289,975 shares of the Company’s common stock for aggregate gross cash proceeds of $371,000. The warrants are (i) exercisable solely for cash at an exercise price of $0.011 to $0.0214 per share, (ii) non-transferable for six months following issuance and (iii) exercisable, in whole or in part, at any time during the period commencing on the date that is six months and one day following the date of issuance and ending on the tenth year anniversary of the date of issuance."
So, if the "big boy" who got all these piles of warrants (in the money at today's prices), decides to "flip um", yes, BHRT will get some "income" from it, but IMO, the sell pressure on the stock, or desire to possibly manipulate the stock, IMO would/could be huge. The downward pressure as all these shares went up for sale, I believe would just bury the share price even further, along with all these other "convertible shares" out there and all the rest.

That's as far as I got so far. To me, IMO, nothing new here at all. Except for the fascinating, IMHO, MIRROR just vanishing. Like it was "scrubbed" from all documents and is never heard of again? It appears just gone. You put out your most up to date SEC filing, and something as major as your "flagship product" and what would be a Phase III "trial", supposedly going after FDA approval of your most "key product" and it's not even mentioned, not ONCE in the entire document? That, IMO is troubling, more than all the "financial weakness" type "stuff" and all the rest.

BHRT, in my 2 cent opinion- and that's all it is, MY OPINION, for my thoughts only, has "morphed", from a serious med/heart "research product development" company, seeking an FDA approved product; into some sort of "medical tourism" in the 2nd/3rd world, to selling "seminars" and selling "trials for cash" type of deal. I, IMO, honestly can't see them anymore as being some sort of "FDA TRIAL, FDA APPROVAL" inside the U.S. type of company- just can't "see it" anymore IMO. Their last, real meaningful phase II/III trials are 4 plus yrs old or so now. MIRROR just vanished. What's the "end game"? The ED and COPD and now "EYE" and all the rest- seem to be some type of "charge the patient a fee" to "participate in a trial" type of deal IMO.

Read 10-Q, PAGE 21:
"Joint Venture Agreement

On March 10, 2014, the Company entered a joint-venture or profits sharing agreement (the Agreement) with Global Stem Cells, Group, LLC and its subsidiaries whereby both parties will participate in marketing for obtaining patients and provide physician training for stem cell treatments under the names of “Regenestem” and “Stem Cell Training”, respectively. In addition, each party will be responsible for selling equipment and kit to existing and previous customers. Profits are divided on a fifty/fifty basis with distribution within 10 days of the accounting for patients and physician training and 30 day with sales of equipment and kits.

In consideration of Global Stem Cell Group, LLC’s participation, the Company issued an aggregate of 8,000,000 warrants to purchase the Company’s common stock for four years at $0.0217 per share with 2,000,000 warrants vesting 90 days from the effective date, 2,000,000 vesting on each anniversary date for three years. During the three months ended March 31, 2014, the Company charged $22,546 to current period operations for the vesting portion."

THAT, is that "group" who appear to be some "web site" and "booking' deal for off-shore "trials" and/or "treatments". Notice, any revenue brought in via these "deals", BHRT is going to split 50/50 with them. So who knows on this recently reported "revenue", how much is in this 50/50 split category? I've searched to try and even figure out who, and who put together this "global stem cell group"- and there's little to nothing to be found, IMO. Doesn't pass a good "smell test" IMHO, to be going from a serious, heart R&D, FDA type "trials" company, to now this kind of "off shore", "charge the patient for trials" types of deals. Just doesn't seem like their original business plan or company mission IMO.

That's my 2 cents so far. Will read the document in more detail, maybe pick out other "highlights" if I find them. I don't see any real material change in their poor financial condition, the trials seem to be going nowhere, I can't figure out anymore what kind of company they are supposed to be, or what their long term "end game" and goals are? NONE of it, in my humble opinion makes any sense anymore. Oh, and the expense/cost structure exploding, while R&D goes to practically zero- is "interesting" to me, IMO, to say the least.

Good luck and happy trading of course.