UNITED HEALTH PRODUCTS, INC. - 10-Q -
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, 2021,filed with SEC on April 1, 2022.
Company Overview
UHP develops, manufactures, and markets a patented hemostatic gauze for the healthcare and wound care sectors. Our gauze product, HemoStyp, is a neutralized, oxidized, regenerated cellulose ("NORC") derived from cotton and designed to absorb exudate/drainage from superficial wounds and help control bleeding. We are in the process of seeking regulatory approval to sell our Hemostyp product line into the U.S. Class III and European CE Mark surgical markets.
Our HemoStyp Gauze Products
HemoStyp hemostatic gauze is a collagen-like natural substance created from chemically treated cellulose derived from cotton. It is an effective hemostatic agent registered with the FDA for superficial use under a 510k approval obtained in 2012 to help control bleeding from open wounds and body cavities. The HemoStyp hemostatic material contains no chemical additives, thrombin, collage nor animal-derived products, and is hypoallergenic. When the product comes in contact with blood it expands slightly and quickly converts to a translucent gel that subsequently breaks down into glucose and salts. Because of its benign impact on body tissue and the fact that it degrades to non-toxic end products, HemoStyp does not impede the healing of body tissue as do certain competing hemostatic products. Laboratory testing has shown HemoStyp to be 100% absorbable in the human body within 24 hours, compared to days or weeks with competing organic regenerated cellulose products. A human trial conducted in 2019 and 2020demonstrated the effectiveness of HemoStyp in vascular, thoracic and abdominal surgical procedures.
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HemoStyp hemostatic gauze is a flexible, silk-like material that is applied by placing the gauze onto the bleeding tissue. The supple material can be easily folded and manipulated as needed to fit the size of the wound or incision. In surface bleeding and surgical situations, the product quickly converts to a translucent gel that allows the physician or surgeon to monitor the coagulation process. The gel maintains a neutral pH level which avoids damaging the surrounding tissue. In superficial bleeding situations, HemoStyp can be bonded to an adhesive plastic bandage or integrated into a traditional gauze component to address a broad range of needs, including traumatic bleeding injuries and prolonged bleeding following hemodialysis.
Potential Target Markets
Our HemoStyp material is currently cut to several sizes and configuration and marketed as HemoStyp Gauze. While we have paused our commercial activities to focus on our Class III PMA application, our potential customer base includes, without limitation, the following:
Hospitals and Surgery Centers for all Internal Surgical usage (in the event we obtain FDA Class III approval) Hospitals, Clinics and Physicians for external trauma EMS, Fire Departments and other First Responders Military Medical Care Providers Hemodialysis centers Nursing Homes and Assisted Living Facilities Dental and Oral & Maxillofacial Surgery Offices Veterinary hospitals Primary Strategy
Our HemoStyp technology received an FDA 510k approval in 2012 for use in external or superficial bleeding situations and we believe there is an opportunity for HemoStyp products to address unmet needs in several medical applications that represent attractive commercial opportunities. However, the Class III surgical markets, both domestic and international, represent the most attractive market for our products due to the smaller number of competitors offering Class III approved hemostatic agents and the resulting premium pricing for products that can meet the demanding requirements of the human surgical environment. Our extensive laboratory testing and our completed human trial indicate that the HemoStyp technology can successfully compete against established Class III market participants and allow us to gain a significant market share. There can be no assurance that an FDA PMA will be granted.
In 2018, we made the decision to focus our efforts and resources on accessing these Class III markets to maximize the value potential of our HemoStyp. The Class III PMA process required a substantial investment of time and resources so we made the strategic determination to pause our sales and marketing to non-Class III markets in order to devote our full attention to the FDA process. In the fourth quarter of 2021, with our PMA application largely complete and under review by the FDA, we re-engaged with certain consumers and distributors of 510-k hemostatic products with the objective of developing a revenue channe lin this market going forward. Our primary market focus for this initiative includes the first aid, hemodialysis and emergency medicine sectors.
In anticipation of receiving a Class III PMA (which cannot be assured), we are evaluating paths to rapidly grow our revenue and profits in all potential market segments, with the objective of maximizing shareholder value. Options under consideration include (i) a sale or merger of the Company with an industry leader in the wound care and surgical device sectors, which may include a pre-sale collaboration on commercialization and distribution, (ii) one or more ommercial partnerships with established market participants, without any specific, associated sale or merger transaction, and (iii) a capital raising program to establish and grow our own marketing and distribution capabilities and drive revenue and profits organically.
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The Company has been contacted by several medical technology companies that are active in the surgical equipment and hemostatic products sectors, and who have expressed an interest in the Companys products and business strategy. In response to these inbound contacts, we continue to engage in discussions to evaluate the potential commercial partnerships in anticipation of an FDA decision on our Class III PMA application. There can be no assurances that any specific transaction will occur as a result of these discussions. No assurances can be given that the Company will identify any commercialization candidate(s)or complete a transaction.
Manufacturing and Packaging of our Products
The Companys NORC products are manufactured largely in the United States to our specifications and using our equipment through a contract manufacturing arrangement with an FDA certified contract manufacturer that maintains stringent quality control protocols to assure the uniformity and quality of all of our gauze products. Information on our equipment, the manufacturing process and our manufacturers facility has been submitted as part of our PMA submission, which includes the FDA inspection records of the facility. Certain of our adhesive bandage formats designed for the 510k market are manufactured by a separate contractor based in China.
Patents and Trademarks
Our NORC technology is protected through patents filed with the U.S. Patent and Trademark Office, which protection currently runs through 2029. In 2020 and2021, we filed additional U.S. and International patents that protect the use of our NORC technology in a gel or hydrocolloid formulation.
On January 21, 2021, the U.S. Patent Office provided notification of publication of the Companys patent application for the method of forming and using a hemostatic hydrocolloid. This publication does not imply any assurance of the receipt of the patent but establishes an obligation of any party that seeks to use the applicable method to pay royalties for the right to do so. The patent application for this process remains pending as of the date of this filing.
On February 11, 2021, the Company was notified that its application to establish global patent protection for the process of creating and deploying a hydrocolloid (or gel) format of its HemoStyp technology was accepted for publication under the procedures of the Patent Cooperation Treaty ("PCT"), an international patent law treaty which provides a unified procedure for filing a patent application in most foreign countries. We previously filed provisional patent applications for our HemoStyp hydrocolloid process in 2020. In January2022 the Company initiated steps to register its hydrocolloid patent in the European common market and in additional foreign countries where we intend to commercialize any future HemoStypo gel formats. We can give no assurance that foreign registration of our patents will be granted in any of these jurisdictions.
The Company has registered trademarks for the following product formats:
Boo Boo Strips The Ultimate Bandage Hemostrips Nik Fix17 Table Of Contents
Results of Operations for the three months ending March 31, 2022 and 2021
The following table sets forth a summary of certain key financial information for the three months ended March 31, 2022 and 2021
Three Months ended March 31, 2022 versus Three Months ended March 31, 2021
During the first quarter of 2022 and 2021, the Company had $0 and $59 of revenues, respectively. The minimal revenues are due to the continued focus of the Companys capital and resources towards obtaining a Class III PMA.
Total operating expenses for the first quarter of 2022 and 2021 were $954,501and $26,705,225, respectively.
The decrease in operating expenses is due primarily to a decrease in stock for services and compensation expense of $26,271,221. The Company recorded a total$10,200 of stock for services and compensation during the three months ended March 31, 2022 compared to $26,281,421 during the three months ended March 31,2021.
The decrease in stock for services compensation is due to the Company issuing20,000 shares of common stock for services with a fair value of $10,200 during the three months ended March 31, 2022. Stock for services and compensation during the three months ended March 31, 2021 was primarily due to the vesting and amortization of RSUs. During the three months ended March 31, 2021, the Company amended the RSU agreement with its former Chief Executive Officer and Chairman. The amendment resulted in the vesting of 21,970,000 RSUs along with the issuance of an additional 2,000,000 shares of restricted stock as a bonus. The change in vesting and issuance of the bonus shares of common stock resulted in the immediate recognition of $26,127,300 in stock-based compensation expense. The Company also recognized $43,121 of stock-based compensation due to the amortization of the RSUs that vested on January 1, 2021 and issued 100,000shares of common stock for settlement of a consulting agreement valued at$111,000.
Other income (expense) for the first quarter of 2022 and 2021 was $(9,763) and$(341,947), respectively. The decrease in other expense was due to a decrease in total interest expense of $602,142, a decrease in loss on settlement of debt$34,415 and a decrease in other income of $304,273. The decrease in interest expense is primarily due to the Company only having total interest expense of$8,880 during the first quarter of 2022 compared to the Company having total interest expense of $611,030 primarily due to recording amortization of beneficial conversion features on convertible notes payable and convertible notes payable - related party to interest expense during the first quarter 2021totaling $604,521. The decrease in the loss on debt settlement is due to the Company issuing common stock with a fair value of $4,001 for the settlement of$3,126 of accrued liabilities during the first quarter of 2022 compared to the Company issuing common stock with a fair value of $188,713 for the settlement of$153,523 of various debts and accrued liabilities - related party. The Company did not have Other income during 2022 compared to the Company receiving $304,273as full and final payment for settlement of its December 2019 arbitration with Maxim during the first quarter of 2021.
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Our net loss for the quarter ended March 31, 2022 was $964,264 as compared to net loss of $27,047,138 for the comparable period of the prior year. The decrease in the net loss is due to the Company having a decrease in operating expenses of $25,750,724 and a decrease in other expenses of $332,184, as explained above.
Financial Condition, Liquidity and Capital Resources
As of March 31, 2022, the Company had a negative working capital of $2,054,153.The Company has not yet attained a level of operations which will allow it to meet its current overhead expense obligations. If we are not successful in our commercialization strategy, we cannot assure that we will be able to fund a standalone marketing and sale strategy, and if we do, we are unable to assure we will attain profitable operations within the next year or at all. The report of our independent registered public accounting firm on our 2021 financia statements includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. While the Company has funded its operations with private placements, and secured 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.
Cash Flows
The Companys cash on hand at March 31, 2022 and December 31, 2021 was $32,955and $21,799, respectively.
The following table summarizes selected items from our statements of cash flows for the three months ended March 31, 2022 and 2021:
For the Three Months Ended March 31, 2022 2021
Net cash used in operating activities $ (195,716 ) $ (110,488 )Net cash used in investing activities (40,500 )
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Net cash provided by financing activities 247,372 235,000
Net increase in cash and cash equivalents $ 11,156 $ 124,512
Net Cash Provided by (Used in) Operating Activities
Net cash used in operating activities for the three months ended March 31, 2022was $195,716. The Company had net loss of $964,264 offset by stock for services and compensation of $10,200, amortization expense of $1,012, a loss on debt settlement of $875, an increase in accounts payable and accrued expenses of$191,052, an increase in accrued liabilities - related party of $135,409 and an increase in accrued litigation settlement of $430,000.
Net cash used in operating activities for the three months ended March 31, 2021was $110,488. The Company had net loss of $27,047,138 offset by stock-based compensation of $26,281,421, amortization of debt discount of $604,521 and a loss on settlement of debt of $35,190. The Company also had a decrease in inventory of $25, change in accounts payable and accrued expenses of $(46,312) and a change in accounts payable and accrued expenses related party of $116,805.The Company also had an increase in prepaid and other current assets of $5,000and an increase in subscription receivable of $50,000.
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Net Cash Used by Investing Activities
The Company paid $40,500 related to the patent application fees during the three months ended March 31, 2022.
The Company did not have any investing activities during the three months ended March 31, 2021.
Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities for the three months ended March 31,2022 was $247,372. This was due to the result of the Company receiving $77,292in proceeds from the sale of stock and receiving $185,000 from related party loans offset by making payments of $(14,920) on loan payable.
Net cash provided by financing activities for the three months ended March 31,2021 was $235,000. This was to the result of the Company receiving $20,000 in proceeds from a related party loan, $100,000 in proceeds from the sale of stock nd receiving $115,000 in proceeds from the issuance of convertible notes.
Off-Balance Sheet Arrangements
As of March 31, 2022, 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 o fassets 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 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 thecontract; (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 Companys performance obligation will occur either at the time when products are shipped or when the products arrive and are received by the customer. No discounts were offered by the Company. The Company does not provide an estimate for returns as there is no anticipation for any returns in the normal course of business.
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The Company accounts for share-based compensation under the provisions of ASC718, Compensation-Stock Compensation. Under the fair value recognition provisions, stock-based compensation expense is measured at the fair value of the consideration received, or the fair value of the equity instruments issued, or liabilities incurred, whichever is more reliably measured. Share-based compensation for all stock-based awards to employees and directors is recognized as an expense over the requisite service period, which is generally the vesting period.
The Company accounts for stock compensation arrangements with non-employees in accordance with Accounting Standard Update (ASU) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which requires that such equity instruments are recorded at the value on the grant date.
