NOTE 2 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS
The accompanying 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 financial statements during three months ended March 31, 2017, the Company incurred net losses of $2,472,107 and has a working capital deficit (current liabilities in excess of current assets) of $5,895,202. 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 primary source of operating funds in 2016 and 2017 has been from revenue generated from sales with additional cash proceeds from the sale of common stock and the issuance of convertible and other debt. The Company has experienced net losses and negative cash flows from operations since inception, but expects these conditions to improve in 2017 and beyond as it develops its business model. The Company has stockholders’ deficiencies at March 31, 2017 and requires additional financing to fund future operations.
The Company’s existence is dependent upon management’s ability to develop profitable operations
,
to obtain additional funding sources
and realize revenues from the
Asset Sale and Lease Agreement described herein
. There can be no assurance that the Company’s financing efforts
or revenues realized from the
Asset Sale and Lease Agreement
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.
NOTE 3 — INVESTMENTS
The investment recorded is comprised of a 33% ownership of U.S. Stem Cell Clinic, LLC, accounted for using the equity method of accounting. The investments in 2014 and 2015 of cash and expenses paid on U.S. Stem Cell Clinic, LLC’s behalf were in aggregate of $59,714. The Company’s 33% income earned by U.S. Stem Cell Clinic, LLC was $59,367 and $15,859 for the three months ended March 31, 2017 and 2016, respectively, (inception to date income of $242,197) was recorded as other income/expense in the Company’s Statement of Operations in the appropriate periods. In addition, during the three months ended March 31, 2017, the Company received distributions totaling $80,000 from U.S. Stem Cell Clinic, LLC (inception to date of $255,000). The carrying value of the investment at March 31, 2017 and December 31, 2016 was $46,911 and $67,544, respectively.
At March 31, 2017 and December 31, 2016, accounts receivable for sales of test kits to U.S. Stem Cell Clinic, LLC was $38,997 and $12,713 respectively; revenues earned from sales to U.S. Stem Clinic, LLC for the three month ended March 31, 2017 and 2016 were $148,132 and $83,518, respectively.
NOTE 4 — PROPERTY AND EQUIPMENT
Property and equipment are recorded on the basis of cost. For financial statement purposes, property, plant and equipment are depreciated using the straight-line method over their estimated useful lives.
Expenditures for repair and maintenance which do not materially extend the useful lives of property and equipment are charged to operations. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts with the resulting gain or loss reflected in operations. Management periodically reviews the carrying value of its property and equipment for impairment in accordance with the guidance for impairment of long lived assets.
U.S. STEM CELL, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2017
(unaudited)
Property and equipment as of March 31, 2017 and December 31, 2016 is summarized as follows:
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
Laboratory and medical equipment
|
|
$
|
5,590
|
|
|
$
|
342,218
|
|
|
Furniture, fixtures and equipment
|
|
|
130,410
|
|
|
|
130,410
|
|
|
Computer equipment
|
|
|
48,788
|
|
|
|
48,788
|
|
|
Leased equipment
|
|
|
619,825
|
|
|
|
-
|
|
|
Leasehold improvements
|
|
|
362,046
|
|
|
|
362,046
|
|
|
|
|
|
1,166,659
|
|
|
|
883,462
|
|
|
Less accumulated depreciation and amortization
|
|
|
(558,164
|
)
|
|
|
(862,493
|
)
|
|
|
|
$
|
608,495
|
|
|
$
|
20,969
|
|
On March 3, 2017, the Company entered into an asset sale and lease agreement (sale/leaseback transaction
, the “
Asset Sale and Lease Agreement”)
, whereby the Company sold certain lab, medical and other equipment relating to the cell banking business for $400,000 and leased back the sold equipment over a three year term.
The Company determined that the transaction was a capitalized lease and accordingly recorded the leased assets and liability based on the estimated present value of the minimum lease payments.
In connection with the sale of the lab, medical and other equipment, the Company realized a gain on sale of equipment of $386,536. The gain is recognized ratably over the term of the lease to operations. During the three months ended March 31, 2017, the Company recognized $10,737 gain on sale of equipment. As of March 31, 2017, deferred gain on sale of equipment was $375,799.
NOTE 5 — ACCRUED EXPENSES
Accrued expenses consisted of the following as of March 31, 2017 and December 31, 2016:
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
Amounts payable to the Guarantors of the Company’s loan agreement with Bank of America and Seaside Bank, including fees and interest
|
|
$
|
176,841
|
|
|
$
|
154,296
|
|
|
Interest payable on notes payable
|
|
|
605,493
|
|
|
|
599,510
|
|
|
Vendor accruals and other
|
|
|
147,363
|
|
|
|
146,429
|
|
|
Litigation settlement
|
|
|
28,800
|
|
|
|
-
|
|
|
Employee commissions, compensation, etc.
|
|
|
28,806
|
|
|
|
4,537
|
|
|
|
|
$
|
987,303
|
|
|
$
|
904,772
|
|
During the three months ended March 31, 2017, the Company issued an aggregate of 4,581,430 shares of its common stock in settlement of outstanding accounts payable and accrued expenses. In connection with the issuance, the Company incurred $84,009 net loss in settlement of debt.
U.S. STEM CELL, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2017
(unaudited)
NOTE 6 — NOTES AND CAPITAL LEASE PAYABLE
Notes and capital lease payable were comprised of the following as of March 31, 2017 and December 31, 2016:
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
Seaside Bank note payable.
|
|
$
|
980,000
|
|
|
$
|
980,000
|
|
|
Hunton & Williams notes payable
|
|
|
384,972
|
|
|
|
384,972
|
|
|
Daniel James Management notes payable
|
|
|
-
|
|
|
|
7,940
|
|
|
Fourth Man, LLC notes payable
|
|
|
-
|
|
|
|
100,000
|
|
|
Magna Group notes payable
|
|
|
-
|
|
|
|
130,455
|
|
|
Power Up Lending Group notes payable
|
|
|
188,198
|
|
|
|
159,300
|
|
|
Lab and medical equipment capitalized lease
|
|
|
619,825
|
|
|
|
-
|
|
|
Office equipment finance lease
|
|
|
3,449
|
|
|
|
3,727
|
|
|
Total notes payable
|
|
|
2,176,444
|
|
|
|
1,766,394
|
|
|
Less unamortized debt discount
|
|
|
(52,548
|
)
|
|
|
(103,479
|
)
|
|
Total notes payable net of unamortized debt discount
|
|
|
2,123,896
|
|
|
|
1,662,915
|
|
|
Less current portion
|
|
|
(1,501,793
|
)
|
|
|
(680,336
|
)
|
|
Long term portion
|
|
$
|
622,103
|
|
|
$
|
982,579
|
|
Seaside Bank
On October 25, 2010, the Company entered into a Loan Agreement with Seaside National Bank and Trust for a $980,000 loan at 4.25% per annum interest that was used to refinance the Company’s loan with Bank of America. The obligation is guaranteed by certain shareholders of the Company. The Company renewed the loan with Seaside National Bank and Trust during the first quarter of 2016 to extend the maturity date to January 11, 2018.
Hunton & Williams Notes
At March 31, 2017 and December 31, 2016, the Company has two outstanding notes payable with interest at 8% per annum due at maturity. The two notes, $61,150 and $323,822, are payable in one balloon payment upon the date the Noteholder provides written demand, however the Company is not obligated to make payments until the Northstar (or successor) Loan is paid off.
Daniel James Management, Fourth Man LLC, and Magna Group
During the three months ended March 31, 2017, the Company paid off $25,000 of the outstanding notes and issued common stock for the conversion of $242,427 of outstanding notes payable and accrued interest (See Note 9).
PowerUp Lending Group, Ltd (during this period)
On February 22, 2017, the Company entered into a revenue based factoring agreement and received an aggregate of $165,000 (less origination fees of $3,300) in exchange for $221,100 of future receipts relating to monies collected from customers or other third party payors. Under the terms of the agreement, the Company is required to make daily payments equal to $1,316 for 168 business days. The Company received net proceeds of $51,700 along with cancellation of the previous revenue based factoring agreement issued in 2016. In connection with the cancellation of the August 2016 revenue based factoring agreement, the Company incurred a loss in settlement of debt of $41,516.
U.S. STEM CELL, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2017
(unaudited)
The remaining principle balance of the PowerUp Lending Group promissory note payable at March 31, 2017 is $135,650, net of unamortized discount of $52,548.
Lab and Medical Equipment Capitalized Lease
On March 3, 2017, the Company entered into an asset sale and lease agreement (sale/leaseback transaction
; “
Asset Sale and Lease Agreement”
), whereby the Company sold certain lab, medical and other equipment relating to the cell banking business for $400,000 and leased back the sold equipment over a three year term. The Company recorded the equipment and the capitalized lease liability at the estimated present value of the minimum lease payments of $619,825.
The lease includes a base monthly rental payment of $20,000, due the first day of each calendar month. In addition, the Company is required to pay 2.3%, 22.5% and 31.6% of revenues collected on deposits arising from cell banking business for years 1, 2 and 3, respectively. At the expiration of the lease, the Company is required to return all leased equipment and along with any maintenance records, logs, etc. in the Company’s possession to the lessor with no right of repurchase.
The Company determined that the present value of the minimum lease payments exceeded 90% of the estimated fair value of the equipment and therefore classified the equipment sale/lease as a capitalized lease. The effective interest rate of the capitalized lease is estimated at 74.73% based on expected revenue estimations.
Minimum lease obligations under the lab and medical lease are as follows:
|
Period ending December 31,
|
|
|
|
|
2017
|
|
|
180,000
|
|
|
2018
|
|
|
240,000
|
|
|
2019
|
|
|
240,000
|
|
|
2020
|
|
|
60,000
|
|
|
Total
|
|
$
|
720,000
|
|
Promissory Note
The Company has a promissory note with an outstanding balance of $1,472,762 at March 31, 2017 and December 31, 2016, respectively.
The note is unsecured and non-interest bearing with four semi-annual payments of $75,000 beginning on December 31, 2015 with the remaining balance due June 1, 2020.
The Company imputed an interest rate of 5% and discounted the promissory note accordingly. The imputed debt discount of $368,615 is amortized to interest expense using the effective interest method. For the three months ended March 31, 2017 and 2016, the Company amortized $18,157 and $20,229 of debt discounts to current period operations as interest expense, respectively. The unamortized debt discount at March 31, 2017 is $222,364.
NOTE 7 — RELATED PARTY TRANSACTIONS
Advances
As of March 31, 2017 and December 31, 2016, the Company’s officers and directors have provided advances in the aggregate of $104,901 for working capital purposes. The advances are unsecured, due on demand and non-interest bearing.
U.S. STEM CELL, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2017
(unaudited)
Notes payable-related party
Northstar Biotechnology Group, LLC
On February 29, 2012, a promissory note issued to BlueCrest Master Fund Limited was assigned to Northstar Biotechnology Group, LLC (“Northstar”), owned partly by certain directors and existing shareholders of the Company, including Dr. William P. Murphy Jr., Dr. Samuel Ahn and Charles Hart. At the date of the assignment, the principal amount of the BlueCrest note was $544,267 the (“Note”).
On March 30, 2012, the Company and Northstar agreed to extend until May 1, 2012 the initial payment date for any and all required monthly under the Note, such that the first of the four monthly payments required under the Note will be due and payable on May, 2012 and all subsequent payments will be due on a monthly basis thereafter commencing on June 1, 2012, and to waive any and all defaults and/or events of default under the Note with respect to such payments. The Company did not make the required payment, and as a result, was in default of the revised agreement The Company renegotiated the terms of the Note and Northstar agreed to suspend the requirement of principal payments by the Company and allow payment of interest-only in common stock.
On September 21, 2012, the Company issued 5,000 common stock purchase warrants to Northstar that was treated as additional interest expense upon issuance.
On October 1, 2012, the Company and Northstar entered into a limited waiver and forbearance agreement providing a recapitalized new note balance comprised of all sums due Northstar with a maturity date extended perpetually. The Company agreed to issue 5,000,000 shares of Series A Convertible Preferred Stock and 10,000 of common stock in exchange for $210,000 as payment towards outstanding debt, default interest, penalties, professional fees outstanding and due Northstar. In addition, the Company executed a security agreement granting Northstar a lien on all patents, patent applications, trademarks, service marks, copyrights and intellectual property rights of any nature, as well as the results of all clinical trials, know-how for preparing Myoblasts, old and new clinical data, existing approved trials, all right and title to Myoblasts, clinical trial protocols and other property rights.
In addition, the Company granted Northstar a perpetual license on products as described for resale, relicensing and commercialization outside the United States. In connection with the granted license, Northstar shall pay the Company a royalty of up to 8% on revenues generated.
Effective October 1, 2012, the effective interest rate was 12.85% per annum. The parties agreed, as of February 28, 2013, to reduce the interest rate to 7% per annum.
In connection with the consideration paid, Northstar waived, from the effective date through the earlier of termination or expiration of the agreement, satisfaction of the obligations as described in the forbearance agreement.
In 2012, 5,000,000 shares of Series A Convertible Preferred Stock were approved to be issued, which was subsequently increased to 20,000,000 shares of preferred stock as Series A Convertible Preferred Stock. In addition, the Company
wa
s obligated to issue additional preferred stock equal in lieu of payment of cash of accrued and unpaid interest on each six month anniversary of the effective date (October 1, 2012). In lieu of the initial two payments in preferred stock, the parties agreed to modify the voting rights of the
subsequently cancelled
Series A Convertible Preferred Stock from 20 votes per share on matters to be voted on by the common stock holders to 25 votes per share on matters to be voted on by the common stock holders and all prior and subsequent payments of interest will be in common stock. The Company is required to issue additional shares of its common stock (as amended), in lieu of cash, each six month anniversary of the effective date for any accrued and unpaid interest.
U.S. STEM CELL, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2017
(unaudited)
On March 1, 2017, Northstar and the Company entered into a settlement agreement (“Settlement Agreement “) related to pending litigation (See Note 11). Pursuant to the terms and conditions of the Settlement Agreement, Northstar converted its outstanding Series A Convertible preferred stock, into twenty million (20,000,000) shares of common stock. In addition, and separate and apart from the conversion, Northstar received Eleven Million (11,000,000) shares of the Company’s common stock. NorthStar will receive ten percent (10%) of all Company international sales (based on a gross sales basis). Furthermore, a NorthStar designee, Greg Knutson, was appointed to the Board of Directors of the Company and two Company directors, Michael Tomas and Kristin Comella, will each exercise their prior NorthStar options to each receive a Five percent (5%) Member Interest in NorthStar. The parties agreed to a mutual release and NorthStar agreed to terminate any UCC lien on the Company assets previously filed for the benefit of NorthStar. On March 9, 2017 and April 1, 2017, the Company issued 30,000,000 and 1,000,000 shares of its common stock, as described above. In connection with the settlement, the Company recorded a loss on litigation settlement of $316,800.
On September 30, 2013, the Company issued 8,772 shares of its common stock as payment of $100,000 towards cash advances.
On December 24, 2013, the Company issued 3,916 shares of its common stock as payment of accrued interest through June 30, 2013 of $85,447.
On April 2, 2014, the Company issued 275 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $12,635 due April 1, 2014 per the forbearance agreement.
On September 17, 2014, limited waiver and forbearance agreement entered into on October 1, 2012 to provide that the perpetual license on products as described for resale, relicensing and commercialization outside the United States was amended as such to condition upon NorthStar providing certain financing, which financing the Company, in its sole discretion, could decline and retain the license.
On October 3, 2014, the Company issued 515 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $12,705 due October 1, 2014 per the forbearance agreement.
On April 3, 2015, the Company issued 1,363 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $12,635 due April 1, 2015 per the forbearance agreement.
On October 2, 2015, the Company issued 4,156 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $12,705 due October 1, 2015 per the forbearance agreement.
On October 7, 2015, the Company issued 34,522 shares of its common stock in settlement of $100,000 principal payment towards the outstanding debt.
On April 7, 2016, the Company issued 57,778 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $12,705 due April 1, 2016 per the forbearance agreement.
On October 6, 2016, the Company issued 848,490 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $12,705 due October 1, 2016 per the forbearance agreement.
As of March 31, 2017 and December 31, 2016, the principal of this note was $262,000.
U.S. STEM CELL, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2017
(unaudited)
Officer and Director Notes
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
Note payable, Beverly Murphy
|
|
$
|
-
|
|
|
$
|
50,000
|
|
|
Note payable, Mr. Tomas
|
|
|
-
|
|
|
|
81,420
|
|
|
Note payable, Mr. Tomas
|
|
|
143,416
|
|
|
|
375,000
|
|
|
Note payable, Mr. Tomas
|
|
|
500,000
|
|
|
|
500,000
|
|
|
Note payable, Mr. Tomas
|
|
|
500,000
|
|
|
|
500,000
|
|
|
Note payable, Ms. Comella
|
|
|
76,876
|
|
|
|
221,865
|
|
|
Note payable, Ms. Comella
|
|
|
300,000
|
|
|
|
300,000
|
|
|
Total
|
|
$
|
1,520,292
|
|
|
$
|
2,028,285
|
|
Note payable, Ms. Murphy
On March 29, 2017, the Company issued 1,748,947 shares of common stock in settlement of $50,000 of outstanding notes payable and accrued interest to Ms. Murphy.
Notes payable, Mr. Tomas
In 2013, the Company issued a promissory note payable for previous advances and accrued compensation. The promissory note bears interest of 5% per annum and due on demand. During the three months ended March 31, 2017, the Company paid off remaining outstanding balance of $81,420.
On August 1, 2013, the Company issued a $375,000 promissory note due on demand in settlement of accrued compensation. The promissory note bears interest of 5% per annum and is due on demand. During the three months ended March 31, 2017, the Company paid off $231,584 of the outstanding promissory note. The principal outstanding balance of this note as of March 31, 2017 is $143,416.
On July 1, 2014, the Company issued a $500,000 promissory note in settlement of accrued compensation. The promissory note bears interest of 5% per annum and was due on January 1, 2015. The principal outstanding balance of this note as of March 31, 2017 is $500,000.
On September 6, 2016, the Company issued a $500,000 promissory note in settlement of accrued compensation. The promissory note bears interest of 5% per annum and is due upon demand. The principal outstanding balance of this note as of March 31, 2017 is $500,000.
Notes payable, Ms. Comella
On July 1, 2014, the Company issued a $300,000 promissory note in settlement of accrued compensation. The promissory note bears interest of 5% per annum and due on January 1, 2015. During the three months ended March 31, 2017, the Company paid off $144,989 of the outstanding promissory note. The principal outstanding balance of this promissory note as of March 31, 2017 is $76,876.
On September 6, 2016, the Company issued a $300,000 promissory note in settlement of accrued compensation. The promissory note bears interest of 5% per annum and was due upon demand. The principal outstanding balance of this note as of March 31, 2017 is $300,000.
U.S. STEM CELL, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2017
(unaudited)
NOTE 8 — DERIVATIVE LIABILITIES
In fiscal 2016, the Company issued convertible promissory notes.
These promissory notes were convertible into common stock, at holders’ option, at a discount to the market price of the Company’s common stock. The Company has identified the embedded derivatives related to these promissory notes relating to certain anti-dilutive (reset) provisions. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of these notes and to fair value as of each subsequent reporting date.
During the three months ended March 31, 2017, the remaining promissory notes were converted or paid off in full settlement.
The fair value of the embedded derivative at note payoff, in the amount of $185,505, was determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 247.25%, (3) weighted average risk-free interest rate of 0.87%, (4) expected live of 0.54 years, and (5) estimated fair value of the Company’s common stock of $0.0271 per share. The Company reclassified the determined fair value from liability to equity at the time of the payoff.
The Company recorded a loss on change in derivative liabilities of $1,891,205 during the three months ended March 31, 2017. The remaining outstanding derivative liability at March 31, 2017 is $-0-
Based upon ASC 840-15-25 (EITF Issue 00-19, paragraph 11) the Company had adopted a sequencing approach regarding the application of ASC 815-40 to its outstanding convertible promissory notes. Pursuant to the sequencing approach, the Company evaluates its contracts based upon earliest issuance date.
NOTE 9 — STOCKHOLDERS’ EQUITY
Preferred stock
On March 6, 2017, the Company issued 20,000,000 shares of its common stock upon conversion of the outstanding 20,000,000 Series A Convertible Preferred stock.
Common stock
During the three months ended March 31, 2017, the Company issued an aggregate of 164,270,878 shares of its common stock for the conversion of $242,427 of promissory notes payable and related accrued interest. Upon conversion of the
promissory
notes, the Company recorded an adjustment to the derivative liability in the amount of $2,002,857 (see Note 6).
NOTE 10 — STOCK OPTIONS AND WARRANTS
Stock Options
In December 1999, the Board of Directors and shareholders adopted the 1999 Officers and Employees Stock Option Plan, or the Employee Plan, and the 1999 Directors and Consultants Stock Option Plan, or the Director Plan. The Employee Plan and the Director Plan are collectively referred to herein as the Plans. The Plans are administered by the Board of Directors and the Compensation Committee.
U.S. STEM CELL, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2017
(unaudited)
The objectives of the Plans include attracting and retaining key personnel by encouraging stock ownership in the Company by such persons. In February 2010, the Directors & Consultants Plan was amended to extend the termination date of the Plan to December 1, 2011.
On April 1, 2013, the Board of Directors approved, subject to shareholder approval, the establishment of the Bioheart 2013 Omnibus Equity Compensation Plan, or the “2013 Omnibus Plan”. The 2013 Omnibus Plan reserves up to fifty thousand shares of common stock for issuance. On August 4, 2014, the Board of Directors approved to set the reserve to one hundred thousand shares of common stock for issuance and to close the 1999 Officers and Employees Stock Option Plan. On February 2, 2015, at the annual meeting of shareholders, the majority of shareholders approved the 2013 Omnibus Equity Compensation Plan. On November 2, 2015, the Board of Directors approved the increase of the reserve under the 2013 Omnibus Plan to five hundred million shares of common stock for issuance
,
effective September 16, 2016, approved an addition of twenty five million shares of common stock to the reserve
, and effective
April
21, 2017
, approved an addition of twenty five million shares of common stock to the reserve
A summary of options at March 31, 2017 and activity during the three months then ended is presented below:
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2016
|
|
|
23,555,777
|
|
|
$
|
0.03
|
|
|
|
9.7
|
|
|
Granted
|
|
|
16,200,000
|
|
|
$
|
0.0043
|
|
|
|
10.0
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Expired
|
|
|
(7
|
)
|
|
$
|
0.15
|
|
|
|
|
|
|
Options outstanding at March 31, 2017
|
|
|
39,755,770
|
|
|
$
|
0.02
|
|
|
|
9.6
|
|
|
Options exercisable at March 31, 2017
|
|
|
8,380,496
|
|
|
$
|
0.06
|
|
|
|
9.4
|
|
|
Available for grant at March 31, 2017
|
|
|
-
|
|
|
|
|
|
|
|
|
|
The following information applies to options outstanding and exercisable at March 31, 2017:
|
Exercise
Price
|
|
|
Number
Outstanding
|
|
|
Option Outstanding Options Average Remaining Contractual Life (years)
|
|
|
Weighted Average
Exercise price
|
|
|
Number
Exercisable
|
|
|
Options Exercisable Weighted Average
Exercise price
|
|
|
$
|
0.0043
|
|
|
|
16,200,000
|
|
|
|
9.86
|
|
|
$
|
0.0043
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
0.0196
|
|
|
|
22,850,000
|
|
|
|
9.48
|
|
|
|
0.0196
|
|
|
|
7,850,000
|
|
|
|
0.0196
|
|
|
|
0.15402
|
|
|
|
705,405
|
|
|
|
8.50
|
|
|
|
0.15402
|
|
|
|
530,206
|
|
|
|
0.15402
|
|
|
|
19.32
|
|
|
|
150
|
|
|
|
7.60
|
|
|
|
19.32
|
|
|
|
75
|
|
|
|
19.32
|
|
|
|
70.00
|
|
|
|
100
|
|
|
|
4.42
|
|
|
|
70.00
|
|
|
|
100
|
|
|
|
70.00
|
|
|
|
210.00
|
|
|
|
40
|
|
|
|
4.37
|
|
|
|
210.00
|
|
|
|
40
|
|
|
|
210.00
|
|
|
|
680.00
|
|
|
|
40
|
|
|
|
2.87
|
|
|
|
680.00
|
|
|
|
40
|
|
|
|
680.00
|
|
|
|
5,250.00
|
|
|
|
35
|
|
|
|
1.05
|
|
|
|
5,250.00
|
|
|
|
35
|
|
|
|
5,250.00
|
|
|
Total
|
|
|
|
39,775,770
|
|
|
|
9.45
|
|
|
$
|
0.022
|
|
|
|
8,380,496
|
|
|
$
|
0.05529
|
|
U.S. STEM CELL, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2017
(unaudited)
The aggregate intrinsic value of the issued and exercisable options of $4,047,425 and $763,805, respectively, represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s stock price of $0.1169 as of March 31, 2017, which would have been received by the option holders had those option holders exercised their options as of that date.
On February 6, 2017, the Company granted an aggregate 16,200,000 options to purchase the Company’s common stock at $0.0043 per share to key employees, vesting over 4 years, at grant date anniversary and exercisable over 10 years. The aggregate fair value of $53,271, determined using the Black Scholes option pricing model with the following assumptions: Dividend yield: 0%; Volatility: 235.22% and Risk free rate: 1.86%.
The fair value of all options vesting during the three months ended March 31, 2017 and 2016 of $82,791 and $71,092, respectively, was charged to period operations.
As of March 31, 2017, the Company had approximately $408,953 of total unrecognized compensation cost related to non-vested awards granted under the Plan, which the Company expects to recognize over a weighted average period of 1.41 years.
Warrants
A summary of common stock purchase warrants at March 31, 2017 and activity during the three months ended March 31, 2017 is presented below:
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
|
Outstanding at December 31, 2016
|
|
|
139,145
|
|
|
$
|
173.03
|
|
|
|
5.5
|
|
|
Issued
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(5
|
)
|
|
$
|
5,665.45
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
139,140
|
|
|
$
|
173.03
|
|
|
|
5.2
|
|
|
Exercisable at March 31, 2017
|
|
|
136,595
|
|
|
$
|
88.72
|
|
|
|
5.2
|
|
The following information applies to common stock purchase warrants outstanding and exercisable at March 31, 2017:
|
|
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
|
|
|
Shares
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
$
|
0.01 – $20.00
|
|
|
|
94,108
|
|
|
|
5.7
|
|
|
$
|
15.54
|
|
|
|
94,108
|
|
|
$
|
15.54
|
|
|
$
|
20.01 – $30.00
|
|
|
|
29,743
|
|
|
|
4.8
|
|
|
$
|
24.52
|
|
|
|
29,743
|
|
|
$
|
24.62
|
|
|
$
|
30.01 – $40.00
|
|
|
|
628
|
|
|
|
0.4
|
|
|
$
|
40.00
|
|
|
|
628
|
|
|
$
|
40.00
|
|
|
$
|
40.01 - $50.00
|
|
|
|
6,253
|
|
|
|
2.6
|
|
|
$
|
48.36
|
|
|
|
5,253
|
|
|
$
|
48.41
|
|
|
$
|
50.01 – $60.00
|
|
|
|
543
|
|
|
|
4.3
|
|
|
$
|
60.00
|
|
|
|
543
|
|
|
$
|
60.00
|
|
|
$
|
>$60.00
|
|
|
|
7,865
|
|
|
|
3.0
|
|
|
$
|
2,733.16
|
|
|
|
6,320
|
|
|
$
|
1,521.39
|
|
|
|
|
|
|
|
139,140
|
|
|
|
5.2
|
|
|
$
|
172.83
|
|
|
|
136,595
|
|
|
$
|
88.72
|
|
U.S. STEM CELL, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2017
(unaudited)
The aggregate intrinsic value of the issued and exercisable warrants of $-0- represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s stock price of $0.1169 as of March 31, 2017, which would have been received by the warrant holders had those warrants holders exercised their options as of that date.
NOTE 11 — COMMITMENTS AND CONTINGENCIES
Litigation
On August 30, 2016
,
Northstar Biotech Group, LLC filed suit against the Company seeking a declaratory judgment as to whether its 20,000,000 Series A Preferred Shares were the subject of the Company’s reverse stock split effective November 4, 2015. On March 1, 2017, Northstar and the Company entered into a settlement agreement related to this dispute (the “Settlement Agreement”). Pursuant to the terms and conditions of the Settlement Agreement, Northstar, previously a holder of Company preferred stock, has converted such preferred stock to twenty million (20,000,000) shares of common stock. In addition, and separate and apart from the conversion, Northstar receive
d
Eleven Million (11,000,000) shares of common stock. NorthStar will receive ten percent (10%) of all Company international sales (based on a gross sales basis). Furthermore, a NorthStar designee, Greg Knutson, was appointed to the Board of Directors of the Company and two Company directors, Michael Tomas and Kristin Comella, will each exercise their prior NorthStar options to each receive a Five percent (5%) Member Interest in NorthStar. The parties agreed to a mutual release and NorthStar agreed to terminate any UCC lien on the Company assets previously filed for the benefit of NorthStar.
The Company is subject at times to other legal proceedings and claims, which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity. There was no outstanding litigation as of March 31, 2017 other then described above.
NOTE 12 — FAIR VALUE MEASUREMENT
The Company adopted the provisions of Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) on January 1, 2008. ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
All items required to be recorded or measured on a recurring basis are based upon level 3 inputs.
U.S. STEM CELL, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2017
(unaudited)
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
Upon adoption of ASC 825-10, there was no cumulative effect adjustment to beginning retained earnings and no impact on the financial statements.
The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings (including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity.
As of March 31, 2017 or December 31, 2016, the Company did not have any items that would be classified as level 1 or 2 disclosures.
The Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed in note 8. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed in Notes 6 and 8 are that of volatility and market price of the underlying common stock of the Company.
As of March 31, 2017 and December 31, 2016, the Company did not have any derivative instruments that were designated as hedges.
The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of March 31, 2017:
|
|
|
Derivative
Liability
|
|
|
Balance, December 31, 2016
|
|
|
297,156
|
|
|
Total (gains) losses
|
|
|
|
|
|
Transfers out of Level 3 upon conversion or payoff of notes payable
|
|
|
(2,188,361
|
)
|
|
Mark-to-market at March 31, 2017:
|
|
|
1,891,205
|
|
|
Balance, March 31, 2017
|
|
$
|
-
|
|
|
Net loss for the period included in earnings relating to the liabilities held at March 31, 2017
|
|
$
|
(1,891,205
|
)
|
Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. The Company’s stock increased approximately 942% from December 31, 2016 to March 8, 2017 (final conversion of convertible notes). As the stock price increases for each of the related derivative instruments, the value to the holder of the instrument generally increases. Stock price is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments.
The estimated fair value of these liabilities is sensitive to changes in the Company’s expected volatility. Increases in expected volatility would generally result in a higher fair value measurement.
U.S. STEM CELL, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2017
(unaudited)
NOTE 13 — SUBSEQUENT EVENTS
In April 2017, the Company issued an aggregate of
3,335,685
shares of common stock for services rendered.
In April 2017, the Company sold 3,193,664 shares of its common stock for net proceeds of $250,000 ($0.078 per share).
In April 2017, the Company issued 286,315 shares of common stock as payment of $12,704 Northstar interest.
In April 2017, the Company issued 1,000,000 shares of its common stock in final settlement with Northstar.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated, references in this Quarterly Report on Form 10-Q to “we,” “us,” and “our” are to the Company, unless the context requires otherwise. The following discussion and analysis by our management of our financial condition and results of operations should be read in conjunction with our unaudited condensed interim financial statements and the accompanying related notes included in this quarterly report and our audited financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission.
Cautionary Statement Regarding Forward-Looking Statements
This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act, and we intend that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. Any such forward-looking statements would be contained principally in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities and the effects of regulation. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions.
This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act, and we intend that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. Any such forward-looking statements would be contained principally in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities and the effects of regulation. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions.
Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss many of these risks in greater detail in “Risk Factors.” Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits to the report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
Additional information concerning these and other risks and uncertainties is contained in our filings with the Securities and Exchange Commission, including the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.
Unless otherwise indicated or the context otherwise requires, all references in this Form 10-Q to “we,” “us,” “our,” “our company,” “U. S. Stem Cell, Inc.” or the “Company” refer to U.S. Stem Cell, Inc. and its subsidiaries.
Our Ability to Continue as a Going Concern
Our independent registered public accounting firm has issued its report dated March 15, 2017, in connection with the audit of our annual financial statements as of December 31, 2016, that included an explanatory paragraph describing the existence of conditions that raise substantial doubt about our ability to continue as a going concern and Note 2 to the unaudited financial statements for the period ended March 31, 2017 also describes the existence of conditions that raise substantial doubt about our ability to continue as a going concern.
Overview
We are an enterprise in the regenerative medicine/cellular therapy industry. We are focused on the discovery, development and commercialization of cell based therapeutics that prevent, treat or cure disease by repairing and replacing damaged or aged tissue, cells and organs and restoring their normal function. Our business includes the development of proprietary cell therapy products as well as revenue generating physician and patient based regenerative medicine/cell therapy training services,
revenues realized from an
Asset Sale and Lease Agreement related to the segment of our company business involving collecting, growing and banking cell cultures
treatment kits for humans and animals, and the operation of a cell therapy clinic.
US Stem Cell Training, Inc. (“SCT”), an operating division of our company, is a content developer of regenerative medicine/cell therapy informational and training materials for physicians and patients. SCT also provides in-person and online training courses which are delivered through in-person presentations at SCT’s state of the art facilities and globally at university, hospital and physician’s office locations as well as through online webinars. Additionally, SCT provides hands-on clinical application training for physicians and health care professionals interested in providing regenerative medicine / cell therapy procedures.
Vetbiologics, (“VBI”), an operating division of our company, is a veterinary regenerative medicine company committed to providing veterinarians with the ability to deliver the highest quality regenerative medicine therapies to dogs, cats and horses. VBI provides veterinarians with extensive regenerative medicine capabilities including the ability to isolate regenerative stem cells from a patient’s own adipose (fat) tissue directly on-site within their own clinic or stall-side.
US Stem Cell Clinic, LLC, (“SCC”), a partially owned investment of our company, is a physician run regenerative medicine/cell therapy clinic providing cellular treatments for patients afflicted with neurological, autoimmune, orthopedic and degenerative diseases. SCC is operating in compliance with the FDA 1271s which allow for same day medical procedures to be considered the practice of medicine. We isolate stem cells from bone marrow and adipose tissue and also utilize platelet rich plasma.
U.S. Stem Cell, Inc.’s comprehensive map of products and services:
All living complex organisms start as a single cell that replicates, differentiates (matures) and perpetuates in an adult organism through its lifetime. Cellular therapy is the process that uses cells to prevent, treat or cure disease, or regenerate damaged or aged tissue. To date, the most common type of cell therapy has been the replacement of mature, functioning cells such as through blood and platelet transfusions. Since the 1970s, first bone marrow and then blood and umbilical cord-derived stem cells have been used to restore bone marrow, as well as blood and immune system cells damaged by the chemotherapy and radiation that are used to treat many cancers. These types of cell therapies are standard of practice world-wide and are typically reimbursed by insurance.
Within the field of cell therapy, research and development using stem cells to treat a host of diseases and conditions has greatly expanded. Stem cells (in either embryonic or adult forms) are primitive and undifferentiated cells that have the unique ability to transform into or otherwise affect many different cells, such as white blood cells, nerve cells or heart muscle cells. Our cell therapy development efforts are focused on the use of adult stem cells; those cells which are found in the muscle, fat tissue and peripheral blood.
There are two general classes of cell therapies: Patient Specific Cell Therapies (“PSCTs”) and Off-the-Shelf Cell Therapies (“OSCTs”). In PSCTs, cells collected from a person (“donor”) are transplanted, with or without modification, to a patient (“recipient”). In cases where the donor and the recipient are the same individual, these procedures are referred to as “autologous”. In cases in which the donor and the recipient are not the same individual, these procedures are referred to as “allogeneic.” Autologous cells offer a low likelihood of rejection by the patient and we believe the long-term benefits of these PSCTs can best be achieved with an autologous product. In the case of OSCT, donor cells are expanded many fold in tissue culture, and large banks of cells are frozen in individual aliquots that may result in treatments for as many as 10,000 people from a single donor tissue. By definition, OSCTs are always allogeneic in nature.
Various adult stem cell therapies are in clinical development for an array of human diseases, including autoimmune, oncologic, neurologic and orthopedic, among other indications. While no assurances can be given regarding future medical developments, we believe that the field of cell therapy holds the promise to better the human experience and minimize or ameliorate the pain and suffering from many common diseases and/or from the process of aging.
According to Robin R. Young’s Stem Cell Summit Executive Summary-Analysis and Market Forecasts 2014-2024, the United States stem cell therapy market is estimated to grow from an estimated $237 million in 2013 to more than $5.7 billion in 2020.
Specific to cellular therapy, we are focused on the discovery, development and commercialization of autologous cellular therapies for the treatment of chronic and acute heart damage as well as vascular and autoimmune diseases.
In our pipeline, we have multiple product candidates for the treatment of heart damage, including MyoCell and Myocell SDF-1. MyoCell and MyoCell SDF-1 are autologous muscle-derived cellular therapies designed to populate regions of scar tissue within a patient’s heart with new living cells for the purpose of improving cardiac function in chronic heart failure patients.
MyoCell SDF-1 is intended to be an improvement to MyoCell. MyoCell SDF-1 is similar to MyoCell but the myoblast cells to be injected for use in MyoCell SDF-1 are modified prior to injection by an adenovirus vector or non-viral vector so that they will release extra quantities of the SDF-1 protein, which expresses angiogenic factors.
AdipoCell is a patient-derived cell therapy proposed for the treatment of a variety of degenerative diseases. We hope to demonstrate that these product candidates are safe and effective complements to existing therapies for chronic and acute heart damage.
Our mission is to advance to market novel regenerative medicine and cellular therapy products that substantially benefit humankind. Our business strategy is, to the extent possible, finance our clinical development pipeline through revenue (cash in-flows) generated through the marketing and sales of unique educational and training services, animal health products and personalized cellular therapeutic treatments.
A fundamental shift in venture capital investment strategies where, management believes, financial sponsorship is now directed toward commercial or near commercial enterprises has required us to adapt our mission combining immediate revenue generating opportunities with longer-term development programs. Accordingly, we have developed a multifaceted portfolio of revenue generating products and services in our US Stem Cell Training, Vetbiologics, and US Stem Cell Clinic, operating divisions that will, if successful, financially support its clinical development programs. Our goal is to maximize shareholder value through the generation of short-term profits that increase cash in-flows and decrease the need for venture financings – a modern biotechnology company development strategy.
Today, our company is a combination of opportunistic business enterprises. We estimate that the products and services we offer through US Stem Cell Training, Vetbiologics, and US Stem Cell Clinics has the potential, although we cannot provide assurances as to if and when it will be accomplished, to drive up to $100 million dollars in cumulative peak annual revenues. What we are establishing is a foundation of value in the products and services we are and plan to sell from US Stem Cell Training, Vetbiologics, and US Stem Cell clinics. Our strategy is to expand the revenues generated from each of these operating divisions and to reinvest the profits we generate into our clinical development pipeline.
On January 29th, 2015 we announced an update and diversification of our clinical development pipeline. Our cardiovascular and vascular product candidates have been streamlined, putting, we believe, our best opportunities at the forefront of our efforts. The MYOCELL and MYOCELL SDF-1 candidates will, in our opinion, advance forward in the treatment of chronic heart failure (CHF). We are in active prospective partnering discussion for the MYOCELL SDF-1 program. Partnering, we contend, will enhance our capabilities, reduce our development cost through cost sharing and potentially accelerate our time to approval and commercialization. We will apply our ADIPOCELL to a variety of indications. We believe that updating and diversifying our clinical development programs increases the probability of our success, brings operational and fiscal clarity to our company, and will ultimately enhance shareholder value.
On March 3, 2017, we entered into an asset sale and lease agreement (sale/leaseback transaction; “
Asset Sale and Lease Agreement”
), with
GACP (General American Capital Partners) Stem Cell Bank LLC, a Florida limited liability company (“GACP)
whereby we sold certain lab, medical and other equipment relating to the cell banking business for $400,000 and leased back the sold equipment over a three year term. The lease includes a base monthly rental payment of $20,000, due the first day of each calendar month. In addition, the Company is required to pay 2.3%, 22.5% and 31.6% of revenues collected on deposits arising from cell banking business for years 1, 2 and 3, respectively. At the expiration of the lease, the Company is required to return all leased equipment and along with any maintenance records, logs, etc. in the Company’s possession to the lessor with no right of repurchase. In addition, GACP has contractually agreed to invest an additional Two and a half Million Dollars ($2,500,000) to open ten (10) stem cell clinics in the United States within 3 years--with a penalty provision to our benefit for shortfalls if less than 6 clinics are opened within 24 months
.
We will continue to evaluate and act upon opportunities to increase our top line revenue position and that correspondingly increase cash in-flows. These opportunities include but are not limited to the development and marketing of new products and services, mergers and acquisitions, joint ventures, licensing deals and more.
Further, if the opportunity presents itself whereby we can raise additional capital at a reasonable fair market value, our management will do so. Accordingly, we plan to continue in our efforts to restructure, equitize or eliminate legacy balance sheet issues that are obstacles to market capitalization appreciation and capital fund raising.
Results of Operations Overview
We are a research and development company and our MyoCell product candidate has not received regulatory approval or generated any material revenues and is not expected generate revenues until the later quarters of 2017, if ever. We have generated substantial net losses and negative cash flow from operations since inception and anticipate incurring significant net losses and negative cash flows from operations for the foreseeable future as we continue clinical trials, undertake new clinical trials, apply for regulatory approvals, make capital expenditures, add information systems and personnel, make payments pursuant to our license agreements upon our achievement of certain milestones, continue development of additional product candidates using our technology, establish sales and marketing capabilities and incur the additional cost of operating as a public company.
Three Months Ended March 31, 2017 as compared to the Three Months Ended March 31, 2016
Revenues
We recognized revenues of $1,154,986 for the three months ended March 31, 2017. These revenues were generated from the sales of kits and equipment, services, MyoCath Catheters, AdipoCell, and laboratory services. We recognized revenues of $710,946 for the three months ended March 31, 2016 from the sale of MyoCath catheters, AdipoCell, physician training, patient studies and laboratory services. The differential in revenue reflected an increase based on the products and services provided.
Cost of Sales
Cost of sales consists of the costs associated with the production of MyoCath, laboratory supplies necessary for laboratory services, production of AdipoCell systems and materials, physician course materials, kits and clinic supplies required for patient studies.
Cost of sales was $344,556 and $154,382 in the three month periods ended March 31, 2017 and 2016, respectively. Associated gross margins were $810,430 (70.17%) and $556,564 (78.3%) for the three months periods ended March 31, 2017 and 2016, respectively.
Research and Development
Our research and development expenses consist of costs incurred in identifying, developing and testing our products and services. Research and development expenses were $1,081in the three month period ended March 31, 2017, a decrease of $2,414 from the research and development expenses of $3,495 in the three month period ended March 31, 2016. Current management focus is towards on sales in addition to research and development and its corresponding ongoing costs. The timing and amount of our planned research and development expenditures is dependent on our ability to obtain additional financing.
Marketing, General and Administrative
Our marketing, general and administrative costs were $832,463 for the three month period ended March 31, 2017 compared to $565,806 for the three month period ended March 31, 2016, an increase of $266,657. The increase in costs are primarily due to increases in consulting and other professional fees along with increase in sales and marketing expenses, as compared to prior year.
Our marketing, general and administrative expenses primarily consist of the costs associated with our general management and product and service marketing 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.
Loss on settlement of debt
During the three months ended March 31, 2017, we incurred a net loss of $125,525 primarily related to the settlement of accounts payable and debt restructured during the current period as compared to a net aggregate loss of $
21,293
for the same period last year.
Gain on sale of equipment
In March 2017, we entered a sale/leaseback transaction whereby we sold our lab and other medical equipment and re-leased the equipment back for 36 months. In connection with the sale/leaseback, we realized a gain on sale of equipment of $386,536 which we will recognize to operations over the term of the lease (36 months). During the three months ended March 31, 2017, we recognized $10,737 in current period operations. For the three months ended March 31, 2016, we realized a gain of $500 for the sale of old equipment.
(Loss) gain on change in fair value of derivative liabilities
During 2016, we issued convertible promissory notes with an embedded derivative, requiring us to fair value the derivatives each reporting period and mark to market as a non-cash adjustment to our current period operations. This resulted in a (loss) gain of $(1,891,205) and $14,506 on change in fair value of derivative liabilities for the three months ended March 31, 2017 and 2016, respectively.
Income from equity investment
Our investment of a 33% ownership of U.S. Stem Cell Clinic, LLC, accounted for using the equity method of accounting. As such, we report our pro rata share of its income of loss for the period. For the three months ended March 31, 2017 and 2016, our pro rata share of its income was $59,367 and $15,859, respectively
Loss on litigation settlement
On March 1, 2017, we settled outstanding litigation with Northstar Biotech Group, LLC whereby we issued 10,000,000 and will issue 1,000,000 (an aggregate of 11,000,000) shares of our common stock at a fair value of $316,800. Accordingly, we recorded in operations a loss on litigation settlement of $316,800 for the three months ended March 31, 2017.
Interest Expense
Interest expense during the three months ended March 31, 2017 was $166,733 compared to $361,402 for the three months ended March 31, 2016. Interest expense primarily consists of interest incurred on the principal amount of the Northstar loan, our former Bank of America loan, the Seaside National Bank loan, accrued fees and interest payable to the Guarantors, and the amortization of debt discounts and non-cash interest incurred relating to our issued convertible notes payable. The debt discounts amortization and non-cash interest incurred during the three months ended March 31, 2017 and 2016 was $73,143 and $285,072, respectively.
Stock-Based Compensation
Stock-based compensation reflects our recognition as an expense of the value of stock options and other equity instruments issued to our employees and non-employees over the vesting period of the options and other equity instruments. We have granted to our employees options to purchase shares of common stock at exercise prices equal to the fair market value of the underlying shares of common stock at the time of each grant, as determined by our Board of Directors, with input from management.
We follow Accounting Standards Codification subtopic 718-10. Compensation (“ASC 718-10”) which requires that all share-based payments to both employee and non-employees be recognized in the income statement based on their fair values.
In awarding our common stock, our Board of Directors considered a number of factors, including, but not limited to:
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our financial position and historical financial performance;
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arm’s length sales of our common stock;
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the development status of our product candidates;
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the business risks we face;
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vesting restrictions imposed upon the equity awards; and
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an evaluation and benchmark of our competitors; and
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prospects of a liquidity event.
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On April 1, 2013, the Board of Directors approved, subject to shareholder approval, the establishment of the Bioheart 2013 Omnibus Equity Compensation Plan, or the “2013 Omnibus Plan”. The 2013 Omnibus Plan reserves up to fifty thousand shares of common stock for issuance. On August 4, 2014, the Board of Directors approved to set the reserve to one hundred thousand shares of common stock for issuance and to close the 1999 Officers and Employees Stock Option Plan. On February 2, 2015, at the annual meeting of shareholders, the majority of shareholders approved the 2013 Omnibus Equity Compensation Plan. On November 2, 2015, the Board of Directors approved the increase of the reserve under the 2013 Omnibus Plan to five hundred million shares of common stock for issuance
,
effective September 16, 2016, approved an addition of twenty five million shares of common stock to the reserve
and effective
April
21, 2017
, approved an addition of twenty five million shares of common stock to the reserve.
. We currently have 9,383,070 available for future issuances.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our critical accounting policies are described in Note 1 to our financial statements appearing elsewhere in this report, we believe the following policies are important to understanding and evaluating our reported financial results:
Revenue Recognition
We recognize revenue in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition (“ASC 605-10”) which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.
At the time of each transaction, management assesses whether the fee associated with the transaction is fixed or determinable and whether or not collection is reasonably assured. The assessment of whether the fee is fixed or determinable is based upon the payment terms of the transaction. Collectability is assessed based on a number of factors, including past transaction history with the client and the creditworthiness of the client.
Our primary sources of revenue are from the sale of test kits and equipment, training services, patient treatments and laboratory services, and cell banking.
Revenues for kits and equipment sold are not recorded until kits and equipment are received by the customer. Revenues from trainings are recognized when the training occurs. Any cash received as a deposit for trainings are recorded by the company as a liability.
Patient treatments and laboratory services revenue are recognized when those services have been completed or satisfied.
Revenues for cell banking sales are accounted for as Multiple-Element Arrangements under ASC 605-10 which incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arrangements (“ASC 605-25”). ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. Because the Company sells its services separately, on more than a limited basis and at a price within a narrow range, the Company was able to allocate revenue based on vendor-specific objective evidence of fair value (VSOE). The multiple elements include stem cell banking, dose retrieval and yearly storage fees.
Research and Development Activities
We account for research and development costs in accordance with Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10”). Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved as defined under the applicable agreement. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred.
Derivative financial instruments
Accounting Standards Codification subtopic 815-40, Derivatives and Hedging, Contracts in Entity’s own Equity (“ASC 815-40”) became effective for the Company on October 1, 2009. The Company has identified the embedded derivatives related to the issued Notes and anti-dilutive warrants. These embedded derivatives included in our debt contain certain conversion features and reset provision. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date and to fair value as of each subsequent reporting date. At March 31, 2017, we no longer have convertible notes with these embedded features.
Inflation
Our opinion is that inflation has not had, and is not expected to have, a material effect on our operations.
Climate Change
Our opinion is that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.
Concentrations of Credit Risk
As of March 31, 2017, two customers represented 61% and 14%, respectively, representing an aggregate of 75% of our accounts receivable. As of December 31, 2016, four customers represented 45%, 13% , 13% and 12% respectively, representing, an aggregate of 83%, of the Company’s accounts receivable.
For the three months ended March 31, 2017, our revenues earned from the sale of products and services were $1,154,986, of which one customer represented 13% of our revenues. For the three months ended March 31, 2016, revenues earned from the sale of products and services were $710,946, of which one customer represented 12% of our revenues.
Recent Accounting Policies
There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s financial position, results of operations or cash flows.
Liquidity and Capital Resources
In the three months ended March 31, 2017, we achieved positive cash flow from operations of $268,333 but will continue to finance our considerable operational cash needs with cash generated from financing activities.
Operating Activities
Net cash provided by operating activities was $268,333 in the three month period ended March 31, 2017 as compared to $62,073 of cash used in the three months ended March 31, 2016.
Our cash provided by for operations in the three months ended March 31, 2017 reflected a net loss generated during the period of $2,472,107, adjusted for non-cash items such as stock-based compensation of $82,791, loss on settlement of litigation of $316,800, depreciation of $18,834, amortization of debt discounts of $73,143, net loss on change in fair value of derivative liabilities of $1,891,205, loss on settlement of debt of $125,525, net bad debt recoveries of $8,486, net gain on sale of property and equipment of $10,737 and income from investments of $59,367. In addition we had a net increase in operating assets of $34,157 and an increase in accrued expenses of $91,364, accounts payable of $205,542 and in deferred revenue of $47,983.
Investing Activities
Net cash provided by investing activities was $580,000 for the three months ended March 31, 2017 represented proceeds from our equity investment of $80,000, $400,000 from sale of property and equipment and $100,000 receipt of deposit for the sale of our intellectual property and customers as compared to cash provided by investing activities of $42,683 from $50,000 from our equity investments, $500 from sale of property and equipment, net with repurchase of our common stock of $7,817 for the same period last year.
Financing Activities
Net cash used in financing activities was an aggregate of $499,944 in the three month period ended March 31, 2017 as compared to cash provided of $236,422 in the three month period ended in March 31, 2016. In the three month period ended March 31, 2017 we received proceeds from restructuring of financing agreement of $51,700, net with repayments of notes payable of $93,651 and $457,993 related party notes.
Existing Capital Resources and Future Capital Requirements
Our MyoCell product candidate has not received regulatory approval or generated any material revenues. We do not expect to generate any material revenues or cash from sales of our MyoCell product candidate until commercialization of MyoCell, if ever. We have generated substantial net losses and negative cash flow from operations since inception and anticipate incurring significant net losses and negative cash flows from operations for the foreseeable future. Historically, we have relied on proceeds from the sale of our common stock and our incurrence of debt to provide the funds necessary to conduct our research and development activities and to meet our other cash needs.
At March 31, 2017, we had cash and cash equivalents totaling $619,109. However our working capital deficit as of such date was approximately $5.9 million. Our independent registered public accounting firm has issued its report dated March 15, 2017 in connection with the audit of our financial statements as of December 31, 2016 that included an explanatory paragraph describing the existence of conditions that raise substantial doubt about our ability to continue as a going concern and Note 2 of our unaudited financial statement for the quarter ended March 31, 2017 addresses the issue of our ability to continue as a going concern.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.