UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED September 30, 2018
| [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to _______________.
COMMISSION FILE NUMBER: 000-55583
STEMCELL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 36-4827622 | ||
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | ||
C/O Stemcell Co., Ltd., 5-9-15-3F, Minamiaoyama Minato-ku, Tokyo, Japan |
107-0062 (Zip Code) |
||
| (Address of Principal Executive Offices) |
+81-3-6433-5409
Registrant’s telephone number, including area code
C/O Omotesando Helene Clinic, 3-18-17-6F, Minamiaoyama
Minato-ku, Tokyo, Japan
(Former address, if changed since last report)
(Former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [ ] Yes [X] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated
filer ☐ (Do not check if a smaller reporting company) | ||
| Smaller reporting company ☒ | Emerging growth company ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ________
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
Applicable only to issuers involved in bankruptcy proceedings during the preceding five years:
Indicate by check mark whether the registrant filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes[ ] No [ ]
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 14, 2018, there were 27,378,000 shares of common stock, $0.0001 par value, issued and outstanding.
| Page | |||
| PART I - FINANCIAL INFORMATION | |||
| ITEM 1 | condensed consolidated FINANCIAL STATEMENTs | ||
| CONSOLIDATED Balance Sheets as of SEPTEMBER 30, 2018 (unaudited) and DECEMBER 31, 2017 | F1 | ||
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|
F2 | ||
| CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND SEPTEMBER 30, 2017 (UNAUDITED) | F3 | ||
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|
F4 | ||
| ITEM 2 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS | 4 | |
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ITEM 3 |
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4 | |
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ITEM 4 |
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5 | |
| PART II-OTHER INFORMATION | |||
| ITEM 1 | LEGAL PROCEEDINGS | 5 | |
| ITEM 1A | RISK FACTORS | ||
| ITEM 2 | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 5 | |
| ITEM 3 | DEFAULTS UPON SENIOR SECURITIES | 5 | |
| ITEM 4 | MINE SAFETY DISCLOSURES | 5 | |
| ITEM 5 | OTHER INFORMATION | 5 | |
| ITEM 6 | EXHIBITS | 5 | |
| SIGNATURES | 6 | ||
-1-
PART I - FINANCIAL INFORMATION
This Quarterly Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements are based on management's beliefs and assumptions, and on information currently available to management. Forward-looking statements include the information concerning our possible or assumed future results of operations set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements also include statements in which words such as "expect," "anticipate," "intend," "plan," "believe," "estimate," "consider," or similar expressions are used.
Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties, and assumptions. Our future results and shareholder values may differ materially from those expressed in these forward-looking statements. Readers are cautioned not to put undue reliance on any forward-looking statements.
-2-
| ITEM 1 | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
The balance sheets as of September 30, 2018 and December 31, 2017, the statements of operations for the three and nine months ended September 30, 2018 and 2017, and statements of cash flows for the nine months ended September 30, 2018 and 2017, follow. The unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. All such adjustments are of a normal and recurring nature.
-3-
STEMCELL HOLDINGS, INC.
| As of | As of | |||||
| 30-Sep-18 | 31-Dec-17 | |||||
| (UNAUDITED) | ||||||
| ASSETS | ||||||
| Current Assets | ||||||
| Cash | $ | 5,115,747 | $ | 4,483,705 | ||
| Trade receivables | 2,026,360 | 177,064 | ||||
| Clinic-AR from related party | 535,603 | 145,980 | ||||
| Clinic-AR from third party | 1,093,207 | 53,184 | ||||
| Prepaid expenses and other current assets | 1,200,515 | 416,790 | ||||
| TOTAL CURRENT ASSETS | 9,971,432 | 5,276,723 | ||||
| Property and equipment, net | 1,226,137 | 1,033,605 | ||||
| Deferred tax assets | 61,291 | 61,842 | ||||
| Security deposits | 773,988 | 46,010 | ||||
| TOTAL ASSETS | $ | 12,032,848 | $ | 6,418,180 | ||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||
| Current Liabilities | ||||||
| Accounts payable to related party | $ | 400,725 | $ | 278,593 | ||
| Accrued expenses and other liabilities | 4,612,484 | 1,781,670 | ||||
| Income tax payables | 1,010,235 | 550,218 | ||||
| TOTAL CURRENT LIABILITIES | 6,023,444 | 2,610,481 | ||||
| TOTAL LIABILITIES | 6,023,444 | 2,610,481 | ||||
| Commitments and contingencies (NOTE 5) | ||||||
| Shareholders’ Equity | ||||||
|
Preferred stock ($.0001 par value, 20,000,000 shares authorized; none issued and outstanding as of September 30, 2018 and December 31, 2017) |
- |
|
- | |||
|
Common stock ($.0001 par value, 500,000,000 shares authorized; 27,378,000 shares and 27,596,000 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively) | ||||||
| 2,739 | 2,760 | |||||
| Additional paid-in capital | 64,602 | 65,116 | ||||
| Retained earnings | 6,124,422 | 3,807,116 | ||||
| Accumulated other comprehensive loss | (182,359) | (67,292) | ||||
| TOTAL SHAREHOLDERS’ EQUITY | 6,009,404 | 3,807,699 | ||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 12,032,848 | $ | 6,418,180 | ||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-F1-
STEMCELL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
| Three months | Three months | Nine months | Nine months | ||||||
| Ended | Ended | Ended | Ended | ||||||
| September 30, 2018 | September 30, 2017 | September 30, 2018 |
September 30, 2017 | ||||||
| Revenues from related parties: | |||||||||
| Stemcell culturing & tissue handling technical assistance fees | $ | 1,963,744 | $ | 861,165 | $ | 4,579,939 | $ | 3,016,632 | |
| Coordination fees | 558,588 | 290,357 | 1,455,215 | 909,593 | |||||
| Marketing services | 412,832 | 159,850 | 1,259,688 | 239,952 | |||||
| Rental services | 114,538 | 55,602 | 349,489 | 275,437 | |||||
| Total revenues from related parties: | 3,049,702 | 1,366,974 | 7,644,331 | 4,441,614 | |||||
| Revenues from third parties | |||||||||
| Marketing services | 287,160 | 60,301 | 623,233 | 76,321 | |||||
| Rental services | 66,458 | 97,937 | 202,781 | 148,713 | |||||
| Total revenues from third parties | 353,618 | 158,238 | 826,014 | 225,034 | |||||
| Total revenues | 3,403,320 | 1,525,212 | 8,470,345 | 4,666,648 | |||||
| Cost of revenues | 745,878 | 290,431 | 1,930,035 | 838,870 | |||||
| Gross profit | 2,657,442 | 1,234,781 | 6,540,310 | 3,827,778 | |||||
| Operating expenses | |||||||||
| Selling, general and administrative expenses | 835,800 | 350,970 | 2,502,806 | 985,364 | |||||
| Total operating expenses | 835,800 | 350,970 | 2,502,806 | 985,364 | |||||
| Other (expense) income | (10,521) | (1,107) | 4,162 | (1,099) | |||||
| NET INCOME BEFORE TAXES | 1,811,121 | 882,704 | 4,041,666 | 2,841,315 | |||||
| Income tax expenses | 774,073 | 370,924 | 1,675,123 | 1,164,161 | |||||
| NET INCOME | $ | 1,037,048 | $ | 511,780 | $ | 2,366,543 | $ | 1,677,154 | |
| Other Comprehensive Income | |||||||||
| Foreign currency translation adjustment | (162,414) | (10,068) | (115,067) | 42,416 | |||||
| TOTAL COMPREHENSIVE INCOME | $ | 874,634 | $ | 501,712 | $ | 2,251,476 | $ | 1,719,570 | |
| BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE | $ | 0.04 | $ | 0.02 | $ | 0.09 | $ | 0.06 | |
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED (*) | 27,378,000 | 27,596,000 | 27,491,392 | 27,596,000 | |||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
(*) As of May 23, 2018, the Company with the approval of its board of directors, by written consent in lieu of a meeting, authorized the cancellation of shares owned by four shareholders. The shareholders have provided consent for the cancellation of shares. The total number of shares cancelled was 218,000 shares.
-F2-
STEMCELL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
| Nine months | Nine months | |||||
| Ended | Ended | |||||
| September 30, 2018 | September 30, 2017 | |||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||
| Net income | $ | 2,366,543 | $ | 1,677,154 | ||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
| Depreciation expense | 134,550 | 83,803 | ||||
| Changes in operating assets and liabilities: | ||||||
| Trade receivables | (1,849,296) | (181,868) | ||||
| Clinic-AR from related party | (389,623) | - | ||||
| Clinic-AR from third party | (1,040,023) | - | ||||
| Deferred tax assets | 551 | - | ||||
| Prepaid expenses and other current assets | (783,725) | (526,804) | ||||
| Accounts payable to related party | 122,132 | (312,447) | ||||
| Accrued expenses and other current liabilities | 2,830,814 | 1,816,427 | ||||
| Income tax payables | 460,017 | (725,445) | ||||
| Net cash provided by operating activities | 1,851,940 | 1,830,820 | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
| Purchase of property and equipment | (327,082) | (526,275) | ||||
| Security deposits paid | (727,978) | (46,092) | ||||
| Net cash used in investing activities | (1,055,060) | (572,367) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||
| Loan (to) from director | (922,934) | 320 | ||||
| Principal payment received on loan to director | 922,934 | - | ||||
| Repurchase of common stock | (49,771) | - | ||||
| Net cash (used in) provided by financing activities | (49,771) | 320 | ||||
| Net effect of exchange rate changes on cash | (115,067) | (42,416) | ||||
| Net change in cash | 632,042 | 1,301,189 | ||||
| Cash - beginning of period | 4,483,705 | 2,646,855 | ||||
| Cash - end of period | $ | 5,115,747 | $ | 3,948,044 | ||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||
| Income taxes paid | $ | 762,001 | $ | 1,898,605 | ||
| NON-CASH FINANCING AND INVESTING TRANSACTIONS | ||||||
| Retirement of treasury stock | $ | 49,771 | $ | - | ||
| The accompanying notes are an integral part of these unaudited consolidated financial statements. | ||||||
-F3-
STEMCELL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2018
NOTE 1 - ORGANIZATION, DESCRIPTION OF BUSINESS, AND BASIS OF PRESENTATION
Stemcell Holdings, Inc., formerly known as Perfect Acquisition, Inc. (the “Company”), was incorporated under the laws of the State of Delaware on December 31, 2015, with an objective to acquire, or merge with, an operating business. On March 23, 2016, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Takaaki Matsuoka, our current President, CEO and Director. Pursuant to the Stock Purchase Agreement, on March 24, 2016, Takaaki Matsuoka transferred to the Company, 500 shares of the common stock of Stemcell Co., Ltd., a Japanese corporation (“Stemcell”), which represented all of its issued and outstanding shares, in return for cash consideration of JPY 5,000,000 ($44,476). Following the effective date of the share purchase transaction, Stemcell became a wholly-owned subsidiary of the Company.
The Company, through Stemcell, concentrates on regenerative medicine-related business which includes but is not limited to the culturing, storing and delivery of stem cells, providing related technical assistance related thereto and other ancillary services to facilitate cell therapies.
The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or the SEC, including the instructions to Form 10-Q and Regulation S-X. In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three and nine month periods, have been made. Results for the interim periods presented are not necessarily indicative of the results that might be expected for the full year. When used in these notes, the terms “Company”, “we”, “us” or “our” mean the Company. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the most recent year, as reported in the Form 10-K for the year ended December 31, 2017, have been omitted. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2017, as reported by us in our Annual Report on Form 10-K filed with the SEC on March 30, 2018.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Stemcell Co., Ltd. Intercompany accounts and transactions are eliminated.
USE OF ESTIMATES
The presentation of financial statements in conformity with accounting principles generally accepted in the United states of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions made by management include going concern and valuation allowance on deferred income tax. Operating results in the future could vary from the amounts derived from management's estimates and assumptions.
FOREIGN CURRENCY TRANSLATION
The reporting currency of the Company is the United States Dollar (“US$”) and the accompanying financial statements have been expressed in US$. Stemcell maintains its books and records in its local currency, Japanese YEN (“JPY”), which is a functional currency as being the primary currency of the economic environment in which its operation is conducted. In accordance with Accounting Standard Codification (“ASC”) Topic 830-30, “Translation of Financial Statement”, assets and liabilities of the Company whose functional currency is not US$ are translated into US$, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements are recorded as a separate component of accumulated other comprehensive income (loss) within the statements of shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Translation of amounts from the local currency of Stemcell into US$1 has been made at the following exchange rates for the nine months ended as September 30, 2018:
| September 30, 2018 | |
| Current JPY: US$1 exchange rate | 113.68 |
| Average JPY: US$1 exchange rate | 109.67 |
RELATED PARTY TRANSACTIONS
A related party is generally defined as (i) the Company’s management, (ii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or (iii) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. The Company conducts business with its related parties in the ordinary course of business.
Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
REVENUE RECOGNITION
The Company applies ASC 605 for revenue recognition. The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. The Company provides the warranty for the delivery of its service. If the Company cannot deliver its service to customers successfully, the Company will retry its operation until the delivery is completed. The Company has four revenue streams as described below.
Stem Cell Culturing and Tissue Handling Technical Assistance Revenue
Stem cell culturing and tissue handling technical assistance revenue is recognized by providing technical assistance to customers for culturing stem cells or handling of tissues when persuasive evidence of an arrangement exists, the cells are cultured or tissues handled and have been delivered, the sales price is fixed or determinable, collection of the resulting receivable is reasonably assured, there are no material contingencies and the Company does not have significant obligations for future performance. When collectability is not reasonably assured, the Company defers the revenue until the cash is received. Revenue is recorded net of any discounts given to the customer.
During the nine months ended September 30, 2018, the Company derived all its stem cell culturing and tissue handling technical assistance revenue from Omotesando Helene Clinic (the “Helene Clinic”), which is fully owned by Takaaki Matsuoka. Pursuant to the agreement entered into by the two parties, once technical assistance is provided to the cells or tissues that were cultured or handled, no returns are allowed.
Coordination Service Revenue
During the nine months ended September 30, 2018, all the coordination service was delivered to Helene Clinic. Pursuant to the service agreement entered into by the Company and Helene Clinic, the Company’s performance obligations under the coordination service include introducing patients to clinics, arranging schedules and any related translation thereof. Revenue is recognized when a series of abovementioned services are delivered and treatments for the patient are completed as identified by Helene Clinic.
Marketing and Other Services Revenue
During the nine months ended September 30, 2018, the Company provided internet marketing services by optimizing search engines for (i) eight third-party clinics and (ii) six health clinics, including Helene Clinic, that are fully-owned or managed by Takaaki Matsuoka. Since July 2017, the Company commenced outsourcing services to clinics, encompassing administration services including accounting, payroll, tax support, clinic non-medical operations, recruiting and HR planning, facilities and maintenance services, IT support and legal services enabling the clinics to concentrate more on medical activities.
Rental & Lease Revenue
The Company leased certain medical equipment and properties to medical clinics. For the nine-months ended September 30, 2018, rental revenue was derived from (i) four third-party clinics and (ii) six clinics, including Helene Clinic, which are fully-owned or managed by Takaaki Matsuoka.
CONCENTRATION OF CREDIT RISKS
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash. The Company places its cash with financial institutions. The Company does not require collateral or other security to support financial instruments subject to credit risks.
The Company receives lump-sum payments from individual patients for the services to be delivered by the Company and Helene Clinic as a whole. Historically, the Company deducted 10% of the total customer payments and remitted the remainder to Helene Clinic, after which the Company billed and received payments from Helene Clinic, which represents the Company’s coordination services fee, stem cell culturing and tissue handling technical assistance services. Since the beginning of 2017, the Company changed this business model to deduct the 10% of the total customer payments and the amount to be recognized as stem cell culturing and tissue handling technical assistance revenue prior to remitting the remainder to Helene Clinic. As of September 30, 2018, and December 31, 2017, the Company had accounts receivable from Helene Clinic of $221,767 and $42,350 respectively, and accounts payable to Helene Clinic of $400,725 and $278,593, respectively. Also see Note 3.
Net revenues from customers accounting for 10% or more of total revenues are as follows:
| Three months ended September 30, 2018 | Three months ended September 30, 2017 | Nine months ended September 30, 2018 | Nine months ended September 30, 2017 | ||||
| % | % | % | % | ||||
| Omotesando Helene Clinic | 76.2 | 80.8 | 73.8 | 84.8 | |||
| Total | 76.2 | 80.8 | 73.8 | 84.8 |
EFFECT OF RECENTLY ADOPTED AND ISSUED PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers. This amendment updates addressing revenue from contracts with customers, which clarifies existing accounting literature relating to how and when a company recognizes revenue. Under the standard, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. This standard update is effective for the Company on January 1, 2019, and is to be applied retrospectively or the cumulative effect as of the date of adoption, with early application not permitted. Since the Company is an Emerging Growth Company and has made the election under Section 107(b) for extended transition to new or revised accounting standards, it follows the effective date for private companies. We are currently conducting a detailed assessment of the impact that this guidance will have on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued Accounting Standards Update 2016-02 (“ASU 2016-02”) which requires lessees to recognize most leases on the balance sheet. This is expected to increase both reported assets and liabilities. The new lease standard does not substantially change lessor accounting. This standard will be effective for the Company on January 1, 2020, although early adoption is permitted. Since the company is an Emerging Growth Company and has made the election under Section 107(b) for extended transition to new or revised accounting standards, it follows the effective date for private companies. Lessees and lessors will be required to apply the new standard at the beginning of the earliest period presented in the financial statements in which they first apply the new guidance, using a modified retrospective transition method. The requirements of this standard include a significant increase in required disclosures. We began a detailed assessment of the impact that this guidance will have on our consolidated financial statements and related disclosures, and our analysis is ongoing.
In
February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain
Tax Effect from Accumulated Other Comprehensive Income. ASU 2018-02 allows for a reclassification from accumulated other comprehensive
income to retained earnings for standard tax effects resulting from the Tax Cuts and Jobs Act. We are currently evaluating the
impact of adopting the new standard on our consolidated financial statements. ASU 2018-02 will be effective for us on January
1, 2019.
NOTE 3 - RELATED-PARTY TRANSACTIONS
For the three and nine-months ended September 30, 2018, the Company derived stem cell culturing and tissue handling technical assistance revenue and coordination revenue in the amount of $1,963,744 and $558,588, $4,579,939 and $1,455,215, respectively, from Helene Clinic which is fully-owned by Takaaki Matsuoka, the sole director of the Company.
For the three and nine-months ended September 30, 2017, the Company derived stem cell culturing and tissue handling technical assistance revenue and coordination revenue in the amount of $861,165 and $290,357, $3,016,632 and $909,593, respectively, from Helene Clinic which is fully-owned by Takaaki Matsuoka, the sole director of the Company.
For the three and nine-months ended September 30, 2018, the Company provided marketing and other services in the amount of $412,832 and $1,259,688 to six clinics which are fully-owned or managed by Takaaki Matsuoka, the sole director of the Company.
For the three and nine-months ended September 30, 2017, the Company provided marketing and other services in the amount of $159,850 and $239,952 to six clinics which are fully-owned or managed by Takaaki Matsuoka, the sole director of the Company.
For the three and nine-months ended September 30, 2018, the Company leased its equipment in the amount of $114,538 and $349,489 to six clinics which are fully-owned or managed by Takaaki Matsuoka, the sole director of the Company.
For the three and nine-months ended September 30, 2017, the Company leased its equipment in the amount of $55,602 and $275,437 to five clinics which are fully-owned or managed by Takaaki Matsuoka, the sole director of the Company.
As of September 30, 2018, the Company had a balance for accounts payable in the amount of $400,725 to Helene Clinic, which is fully owned by Takaaki Matsuoka, the sole director of the Company. As of December 31, 2017, the Company had a balance for accounts payable in the amount of $278,593 to Helene Clinic, which is fully-owned by Takaaki Matsuoka, the sole director of the Company.
As of September 30, 2018, the Company had a balance for accounts receivable in the amount of $535,603 from six clinics which are fully owned or managed by Takaaki Matsuoka, the sole director of the Company. As of December 31, 2017, the Company had a balance for accounts receivable in the amount of $145,980 from six clinics which are fully-owned or managed by Takaaki Matsuoka, the sole director of the Company.
Management determined that the Company has no interest in any residual gains or losses of the related party clinics. Therefore, management determined that consolidation of these clinics was not required under the guidance of ASC 810-15 Variable Interest Entities.
Throughout 2017 and through April 17, 2018, the Company’s office space was provided rent-free by Helene Clinic. On April 18, 2018, the Company changed the address of its principal executive offices from, 5-9-15-3F, 5-10-2 Minamiaoyama Minato-ku, Tokyo, 107-0062, Japan to the new, and current, address of 2nd Kuyo Building 2F 5-10-2 Minami Aoyama Minato-ku, Tokyo Japan. The Company rents its new office space from an unrelated third-party.
As of March 31, 2018, the Company had provided a short-term loan in the amount of $922,934 to Takaaki Matsuoka, CEO and director of the Company. Management determined this action is a violation of Sarbanes Oxley Section 402 and required him to repay the loan with an annual market interest rate of 8%. On May 31, 2018, the loan principal balance was repaid in full; however, the interest of $18,448 was still not paid as of September 30, 2018. Management expects to collect this interest payment by December 31, 2018. Also see PartⅠ, Item 4, and PartⅡ, Item 5 below.
NOTE 4 - INCOME TAXES
Stemcell Holdings, Inc., the holding company registered in the state of Delaware, does not plan to engage in any business activities. No provision for income taxes in the U.S. has been made as the Company had no U.S. taxable income.
Stemcell Co., Ltd., the wholly owned subsidiary of the Company, is registered in Japan and subject to income taxes within Japan at applicable tax rate on the taxable income as reported in Japan statutory financial statements in accordance with relevant income tax laws. The reconciliation of the effective national income tax rate of Stemcell to the statutory income tax rate in Japan for the three and nine months ended September 30, 2018 and 2017 is as follows.
| Three months ended September 30, 2018 | Three months ended September 30, 2017 | Nine months ended September 30, 2018 | Nine months ended September 30, 2017 | ||||
| Japan national income tax rate | 23.40% | 23.40% | 23.40% | 23.40% | |||
| Valuation allowance recognized with respect to loss in Stemcell | 0.00% | 0.00% | 0.00% | 0.00% | |||
| Others | 0.00% | 0.00% | 0.00% | 0.00% | |||
| Total | 23.40% | 23.40% | 23.40% | 23.40% |
Income taxes are calculated on a separate entity basis. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. There currently is no tax benefit recorded for the United States. The provisions for income taxes for the nine months ended September 30, 2018 and 2017, respectively, are summarized as follows:
| Three months ended September 30, 2018 | Three months ended September 30, 2017 | Nine months ended September 30, 2018 | Nine months ended September 30, 2017 | |||||
| Current | $ | 774,073 | $ | 370,924 | $ | 1,675,123 | $ | 1,164,161 |
| Deferred | - | - | - | - | ||||
| Total | $ | 774,073 | $ | 370,924 | $ | 1,675,123 | $ | 1,164,161 |
NOTE 5 –COMMITMENTS AND CONTINGENCIES
The Company has continued a lease agreement to rent space for Kita Senju Clinic, an unrelated third party clinic, from April, 2017 with a monthly rent of $7,690 for a lease term of 3 years. The monthly rent is paid by Kita Senju Clinic. In the event it fails to pay the rent, the Company is responsible for the payment. The Company has also put down the initial deposit for the lease in the amount of $46,010.
The Company has entered a lease contract to rent space for Kamata Clinic, an unrelated third party clinic, from January, 2018 with a monthly rent of $6,343 for a lease term of 3 years. The monthly rent is paid by Kamata Clinic. In the event it fails to pay the rent, the Company is responsible for the payment. The Company has also put down the initial deposit for the lease in the amount of $34,262.
The Company has entered a lease contract to rent space for Funabashi Clinic, an unrelated third party clinic, from January, 2018 with a monthly rent of $7,798 for a lease term of 3 years. The monthly rent is paid by Funabashi Clinic. In the event it fails to pay the rent, the Company is responsible for the payment. The Company has also put down the initial deposit for the lease in the amount of $40,443.
The Company has entered a lease contract to rent space for Chiba Clinic, an unrelated third party clinic, from May, 2018 with a monthly rent of $5,517 for a lease term of 2 years. The monthly rent is paid by Chiba Clinic. In the event it fails to pay the rent, the Company is responsible for the payment. The Company has also put down the initial deposit for the lease in the amount of $36,147.
The Company has entered a lease contract to rent space for Fukuoka Clinic, an unrelated third party clinic, from April, 2018 with a monthly rent of $8,813 for a lease term of 3 years. The monthly rent is paid by Fukuoka Clinic. In the event it fails to pay the rent, the Company is responsible for the payment. The Company has also put down the initial deposit for the lease in the amount of $155,904.
The Company has entered a lease contract to rent space for Hachioji Clinic, an unrelated third party clinic, from April, 2018 with a monthly rent of $8,488 for a lease term of 2 years. The monthly rent is paid by Hajioji Clinic. In the event it fails to pay the rent, the Company is responsible for the payment. The Company has also put down the initial deposit for the lease in the amount of $20,020.
The Company has entered a lease contract to rent space for Hiroshima Clinic, an unrelated third party clinic, from October, 2018 with a monthly rent of $3,321 for a lease term of 3 years. The monthly rent is paid by Hiroshima Clinic. In the event it fails to pay the rent, the Company is responsible for the payment. The Company has also put down the initial deposit for the lease in the amount of $30,823.
We are not a party to any material pending legal proceedings other than that which arise in the ordinary course of business. We believe that any liability that would ultimately result from the resolution on these matters will not, individually or in the aggregate, have a material adverse effect on our financial position or results of operations.
NOTE 6- NET INCOME PER SHARE
The following table shows the computation of basic net income per share of our common stock. There are no instruments that have dilutive effect on the number of shares computation.
Three Months ended September 30, 2018 |
Three Months ended September 30, 2017 |
Nine months ended September 30, 2018 |
Nine months ended September 30, 2017 | ||
| Net Income | Numerator (a) | 1,037,048 | 511,780 | 2,366,543 | 1,677,154 |
| Weighted Average Number of Common Shares Outstanding, Basic and Dilutive | Denominator (b) | 27,378,000 | 27,596,000 | 27,491,392 | 27,596,000 |
| Basic and Diluted Net Income | (a)/(b) | $0.04 | $0.02 | $0.09 | $0.06 |
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| ITEM 2 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Disclaimer Regarding Forward Looking Statements
Our Management’s Discussion and Analysis or Plan of Operations contains not only statements that are historical facts, but also statements that are forward-looking. Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.
Although the forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.
Company Overview
The Company was originally incorporated with the name Perfect Acquisition, Inc., under the laws of the State of Delaware on December 31, 2015, with an objective to acquire, or merge with, an operating business.
On January 27, 2016, Jeffrey DeNunzio, our then sole shareholder, entered into a Share Purchase Agreement with Takaaki Matsuoka. Pursuant to the Agreement, Mr. DeNunzio transferred to Takaaki Matsuoka, 40,000,000,000 shares (adjusted for stock split) of our common stock which represented all of our issued and outstanding shares at that time.
On January 27, 2016, we changed our name to Stemcell Holdings, Inc.
On January 27, 2016, Mr. DeNunzio resigned as our Chief Executive Officer, Chief Financial Officer, President, Director, Secretary, and Treasurer. The resignation was not the result of any disagreement with us on any matter relating to our operations, policies or practices.
On January 27, 2016, Mr. Takaaki Matsuoka was appointed as our Chief Executive Officer, Chief Financial Officer, President, Director, Secretary, and Treasurer.
On March 23, 2016, we entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Takaaki Matsuoka, our President, CEO and Director. Pursuant to this Stock Purchase Agreement, on March 24, 2016, Takaaki Matsuoka transferred 500 shares of the common stock of Stemcell Co., Ltd., a Japan corporation (“Stemcell”), which represents 100% of its issued and outstanding shares, to us in consideration of JPY5,000,000 ($44,476). As a result of this transaction, we gained a 100% interest in the issued and outstanding shares of Stemcell’s common stock and Stemcell became a wholly-owned subsidiary of ours. We are now the controlling and sole shareholder of Stemcell.
On May 2, 2016, Takaaki Matsuoka entered into a Stock Purchase Agreement with Primavera Singa Pte Ltd, a Singapore corporation (“Primavera Singa”). Pursuant to the Agreement, Takaaki Matsuoka transferred to Primavera Singa, 34,599,066,000 shares (adjusted for stock split) of our common stock in consideration of JPY3,000,000 ($28,145) which represented approximately 86.5% of our then issued and outstanding shares. Shiho Matsuoka, the wife of our sole officer and director Takaaki Matsuoka, owns and controls 100% of Primavera Singa Pte., Ltd.
Following the closing of this share purchase transaction, Primavera Singa Pte., Ltd. became the controlling shareholder of the Company.
On October 26, 2016, our Board of Directors and seven of our largest shareholders approved to cancel 39,972,404,000 shares of the shares owned by those seven major shareholders (the “Stock Cancellation”).
On October 29, 2016, the Company performed the forward stock split, whereby every one (1) share of our common stock was automatically reclassified and changed into two thousand (2,000) shares (the “2000-for-1 Forward Stock Split”). The authorized number of shares and par value per share were not affected by the 2000-for-1 Forward Stock Split. The 2000-for-1 Forward Stock Split was executed subsequent to the Stock Cancellation.
Business Information of Stemcell
Our principal executive offices are located at the offices of our wholly-owned subsidiary, Stemcell Co., Ltd., and are located at 5-10-2 Minamiaoyama, Minato-ku, Tokyo, Japan. We changed office location in the first half of 2018 due to business expansion.
We, through Stemcell, our wholly-owned subsidiary, provide cell culturing, cell storage, tissue handling, delivery and technical assistance thereof to designated (by local health authorities) medical clinics and institutions as well as other ancillary services to facilitate cell therapies, including coordination to arrange such therapies between and among sales agents, patients and clinics. We also provide marketing services and medical and other equipment rental services to clinics.
Results of Operations for the Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
Summary of Results of Operations
| Three Months Ended September 30, | |||||
| 2018 | 2017 | ||||
| Revenue from related parties | $ | 3,049,702 | $ | 1,366,974 | |
| Revenue from third parties | 353,618 | 158,238 | |||
| Total revenues | 3,403,320 | 1,525,212 | |||
| Cost of revenues | 745,878 | 290,431 | |||
| Gross profit | 2,657,442 | 1,234,781 | |||
| 78% | 81% | ||||
| Operating expenses: | |||||
| Selling, General and administrative | 835,800 | 350,970 | |||
| Total operating expenses | 835,800 | 350,970 | |||
| Operating income | 1,821,642 | 883,811 | |||
| Other expense | (10,521) | (1,107) | |||
| Income tax expense | 774,073 | 370,924 | |||
| Net income | $ | 1,037,048 | $ | 511,780 | |
Operating Income; Net Income
Our net income increased by $525,268, from $511,780 to $1,037,048, for the three months ended September 30, 2017 compared to September 30, 2018. Our operating income increased by $937,831, from $883,811 to $1,821,642 for the same periods. Although cost of revenues increased from $290,431 to $745,878, from the three months ended September 30, 2017 compared to September 30, 2018 due to a direct overhead increase compared to the prior year period, total revenue increased significantly from the three months ended September 30, 2017 compared to September 30, 2018 from $1,525,212 to $3,403,320. The changes are detailed below.
Revenue
We earned total revenues of $3,403,320 for the three months ended September 30, 2018, compared to $1,525,212 for the three months ended September 30, 2017. In the period in 2018, the total revenue was made up of $3,049,702 of revenue from related parties and $353,618 from revenue from third parties, while in the period in 2017, the total revenue was made up of $1,366,974 of revenue from related parties and $158,238 from revenue from third parties. The revenue from related parties is derived from the cell culturing, cell storage, tissue handling, delivery and technical assistance services, marketing and rental services we provide to clinics owned or managed by our Chief Executive Officer. The revenue from third parties is from providing marketing and rental services to clinics that are not controlled by our Chief Executive Officer. The total revenues of $3,403,320 for the three months ended September 30, 2018, increased by $1,878,108 from $1,525,212 for the prior year same periods, mostly from related parties by an increase in active marketing and promotional activities.
Cost of Revenues
Our cost of revenues for the three months ended September 30, 2018 were $745,878, compared to $290,431 for the three months ended September 30, 2017. Our cost of revenues primarily related to material, equipment and labor costs related to providing technical assistance to culture cells and handle tissues and equipment and labor cost increases for expanded services to clinics. As our revenues grow we expect our cost of revenues will also continue to increase proportionally.
Gross Profit
Our gross profit for the three months ended September 30, 2018 was $2,657,442, compared to $1,234,781 for the three months ended September 30, 2017, gross margin for three months ended September 30, 2018 was 78%, compared to 81% for the three months ended September 30, 2017, primarily due to an increase in direct labor headcount, as well as a material increase to improve product quality.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $484,830, from $350,970 for the three months ended September 30, 2017 to $835,800 for the three months ended September 30, 2018, primarily due to an increase in active marketing and promotional activities, as well as a back office headcount increase to enforce supporting services related to our business expansion.
Other Expense
Other expense for the three months ended September 30, 2018 was $10,521, compared to $1,107 for the three months ended September 30, 2017 primarily due to patent application compulsory print fee tax.
Income tax expenses
Income tax for the three months ended September 30, 2018 was $774,073, compared to $370,924 for the three months ended September 30, 2017, which was a result of net income before income taxes increase from $882,704 for the three months ended September 30, 2017 to $1,811,121 for the three months ended September 30, 2018.
Results of Operations for the Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
Summary of Results of Operation
| Nine months Ended September 30, | |||||
| 2018 | 2017 | ||||
| Revenue from related parties | $ | 7,644,331 | $ | 4,441,614 | |
| Revenue from third parties | 826,014 | 225,034 | |||
| Total revenues | 8,470,345 | 4,666,648 | |||
| Cost of revenues | 1,930,035 | 838,870 | |||
| Gross profit | 6,540,310 | 3,827,778 | |||
| Operating expenses: | |||||
| Selling, General and administrative | 2,502,806 | 985,364 | |||
| Total operating expenses | 2,502,806 | 985,364 | |||
| Operating income | 4,037,504 | 2,842,414 | |||
| Other income (expense) | 4,162 | (1,099) | |||
| Income tax expense | 1,675,123 | 1,164,161 | |||
| Net income | $ | 2,366,543 | $ | 1,677,154 | |
Operating Income; Net Income
Our net income increased by $689,389, from $1,677,154 to $2,366,543, for the nine months ended September 30, 2017 compared to September 30, 2018. Our operating income increased by $1,195,090 from $2,842,414 to $4,037,504 for the same periods. The change in our net income and operating income for the nine months ended September 30, 2018, compared to the prior year period, is primarily a result of us having a significant increase in revenue which was partially offset by a significant increase in costs of revenue and selling, general and administrative expenses for the period in 2018, which was primarily a result of additional costs and expenses related to expansion. The changes are detailed below.
Revenue
We earned total revenues of $8,470,345 for the nine months ended September 30, 2018, compared to $4,666,648 for the nine earned months ended September 30, 2017. In the period in 2018, the total revenue was made up of $7,644,331 of revenue from related parties and $826,014 from revenue from third parties, while in the period in 2017, the total revenue was made up of $4,441,614 of revenue from related parties and $225,034 from revenue from third parties. The revenue from related parties is derived from the cell culturing, cell storage, tissue handling, delivery and technical assistance services, marketing and rental service we provide to clinics owned or managed by our Chief Executive Officer. The revenue from third parties is from providing marketing and rental services to clinics that are not controlled by our Chief Executive Officer. The total revenues of $8,470,345 for the nine months ended September 30, 2018, increased by $3,803,697 from $4,666,648 for the prior year same periods, mostly from related parties by an increase in active marketing and promotional activities.
Cost of Revenues
Our cost of revenues for the nine months ended September 30, 2018 were $1,930,035, compared to $838,870 for the nine months ended September 30, 2017. Our cost of revenues primarily related to material, equipment and labor costs related to providing technical assistance to culture cells and handle tissues and equipment and labor cost increases for expanded services to clinics. As our revenues grow we expect our cost of revenues will also continue to increase proportionally.
Gross Profit
Our gross profit for the nine months ended September 30, 2018 was $6,540,310, compared to $3,827,778 for the nine months ended September 30, 2017, gross margin decreased by 5%, from 82% for the nine months ended September 30, 2017 to 77% for the nine months ended September 30, 2018, primarily due to an increase in direct labor cost, as well as a material increase to improve product quality.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $1,517,442 from $985,364 for the nine months ended September 30, 2017 to $2,502,806 for the nine months ended September 30, 2018, primarily due to an increase in active marketing and promotional activities, as well as a back office headcount increase to enforce supporting services related to our business expansion.
Other Income (Expense)
Other income (expense) for the nine months ended September 30, 2018 was $4,162, compared to ($1,099) for the nine months ended September 30, 2017 primarily due to accrued 8% interest income from short-term loan provided to Takaaki Matsuoka, CEO and director of the Company in the amount of $922,934.
Income tax expenses
Income tax for the nine months ended September 30, 2018 was $1,675,123, compared to $1,164,161 for the nine months ended September 30, 2017, which was a result of net income before income taxes increase from $2,841,315 for the nine months ended September 30, 2017 to $4,041,666 for the nine months ended September 30, 2018.
Liquidity and Capital Resources for the Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
Introduction
As of September 30, 2018, our cash balance was $5,115,747 and our working capital was $3,947,988. Our cash balance is currently sufficient to fund our operations for at least twelve months. Operating cash flow was $1,851,940 for the nine months ended September 30, 2018, which increased by $21,120 from $1,830,820 the prior year same period. Capital expenditures, composed primarily of property and equipment purchases, were $327,082, and security deposits paid were $727,978, for the nine months ended September 30, 2018.
If our revenue cannot cover our operating funds, we would need to either borrow funds from Takaaki Matsuoka, our sole Director, or obtain bank financing. Takaaki Matsuoka has informally agreed to advance funds to allow us to pay for operating expenses. He, however, has no formal commitment, arrangement or legal obligation to advance or loan funds to the Company. If we need additional cash and cannot raise it, we will either have to suspend operations until we raise the cash we need, or cease operations entirely.
Our cash, current assets, total assets, current liabilities, and total liabilities as of September 30, 2018 and as of December 31, 2017, respectively, are as follows:
| September 30, 2018 | December 31, 2017 | Change | ||||||
| Cash | $ | 5,115,747 | $ | 4,483,705 | $ | 632,042 | ||
| Total Current Assets | 9,971,432 | 5,276,723 | 4,694,710 | |||||
| Total Assets | 12,032,848 | 6,418,180 | 5,614,668 | |||||
| Total Current Liabilities | 6,023,444 | 2,610,481 | 3,412,963 | |||||
| Total Liabilities | $ | 6,023,444 | $ | 2,610,481 | $ | 3,412,963 |
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP). In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. In some cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates. We have reviewed our critical accounting policies and estimates with management. See Note 2 to our consolidated financial statements included in Part 1 of this report for discussion of our critical accounting policies.
Concentrations of Risk
Our revenue is highly dependent on one customer, Omotesando Helene Clinic, which comprised 76.2% and 73.8% of our total revenue for the three and nine months ended September 30, 2018, respectively. Our business will be significantly affected should we lose this customer. Helene Clinic is fully-owned by Takaaki Matsuoka, our CEO and director.
Principal Commitments
With the exception of our lease agreements for Kita Senju Clinic, Kamata Clinic, Chiba Clinic, Fukuoka Clinic, Hachioji Clinic, Hiroshima Clinic and Funabashi Clinic, we are not a party to any agreements other than those services we provide to our customers as part of our normal course of business. See Note 5 to our consolidated financial statements included in Part I of this report.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements.
Going Concern Analysis
As of September 30, 2018, we had cash of $5,115,747. The combination of our growth in revenues, cash flows from operations and net income leads management to believe that it is probable that our cash resources will be sufficient to meet our cash requirements for current operations through and beyond twelve months from the date of this filing. As a result, the accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. While we believe in the viability of our strategy to generate sufficient revenues and cash flows and to control costs, there can be no assurances to that effect. Our ability to continue as a going concern is dependent upon our ability to further implement our business plan, generate sufficient revenues and cash flows and to control operating expenses.
| ITEM 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.
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| ITEM 4 | CONTROLS AND PROCEDURES |
(a) Evaluation of Disclosure Controls Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure and control procedures are also designed to ensure that such information is accumulated and communicated to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures.
As of September 30, 2018, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer (our Principal Executive Officer) and chief financial officer (our Principal Financial Officer), of the effectiveness of the design and operation of our disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their desired control objectives. Additionally, in evaluating and implementing possible controls and procedures, management is required to apply its reasonable judgment. Based on the evaluation described above, and as a result, in part, of the loan of $922,934 that the Company made to the CEO, which is a violation of Sarbanes Oxley Act, management has concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective consistent with our reporting in our Annual Report on Form 10-K for the year ended December 31, 2017.
As funds become available to us, we expect to implement additional measures to improve disclosure controls and procedures.
(b) Changes in Internal Controls over Financial Reporting
On April 9, 2018, our Board of Directors accepted the resignation of Ms. Erika, Nakazawa from the position of Chief Financial Officer effective immediately. The resignation was not the result of any disagreement with us on any matter relating to our operations, policies or practices. On April 9, 2018, our Board of Directors approved the appointment of Ms. Rei Mochizuki as our new Chief Financial Officer, effective immediately. We believe this change strengthened our internal controls over financial reporting based on Ms. Mochizuki’s experience. There were no other changes in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
(c) Officer’s Certifications
Appearing as an exhibit to this quarterly report on Form 10-Q are “Certifications” of our Chief Executive and Financial Officer. The Certifications are required pursuant to Sections 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”). This section of the quarterly report on Form 10-Q contains information concerning the Controls Evaluation referred to in the Section 302 Certifications. This information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.
PART II - OTHER INFORMATION
| ITEM 1 | LEGAL PROCEEDINGS |
We are not current a party to any legal proceedings.
In the ordinary course of business, we are from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of our management, other than as set forth herein, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.
| ITEM 1A | RISK FACTORS |
Our operations and financial results are subject to various risk and uncertainties, including those described including those described in part I, item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, which could adversely affect our business, financial condition, results of operations and cash flows. There have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, 2017.
| ITEM 2 | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
During the nine months ended September 30, 2018, we did not issue any unregistered securities.
| ITEM 3 | DEFAULTS UPON SENIOR SECURITIES |
There have been no events which are required to be reported under this Item.
| ITEM 4 | MINE SAFETY DISCLOSURES |
There have been no events which are required to be reported under this Item.
| ITEM 5 | OTHER INFORMATION |
As noted in our Quarterly Report on Form 10-Q for the period ended June 30, 2018, we loaned Mr. Takaaki Matsuoka, our Chief Executive Officer, $922,934 on February 28, 2018. We believe this loan was in violation of the Sabares-Oxley Act of 2002. As soon as we made the determination, we notified Mr. Matsuoka that he had until May 31, 2018 to repay the loan in full, with interest calculated as an annual market interest rate of 8%. Mr. Matsuoka repaid the principal of the loan in full on May 31, 2018. However, he has not yet paid the interest. Management expects to collect the interest of $18,448 by December 31, 2018.
| ITEM 6 | EXHIBITS |
|
Exhibit No. |
Description | |
| 3.1 (1) | Certificate of Incorporation | |
| 3.2 (2) | Certificate of Amendment | |
| 3.3 (1) | Bylaws | |
| 10.1 (3) | Stock Purchase Agreement | |
| 10.2 (4) | Master Outsourcing and Contract Agreement between Stemcell Ltd. and Omotesando Helene Clinic dated June 30, 2016 | |
| 31.1 * | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | |
| 31.2 * | Rule 13a-14(a)/15d-14(a) Certification of Chief Accounting Officer | |
| 32.1 * | Section 1350 Certification of Chief Executive Officer | |
| 32.2 * | Section 1350 Certification of Chief Accounting Officer | |
| 101.INS ** | XBRL Instance Document | |
| 101.SCH ** | XBRL Taxonomy Extension Schema | |
| 101.CAL ** | XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF ** | XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB ** | XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE ** | XBRL Taxonomy Extension Presentation Linkbase | |
*Filed herewith.
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
| (1) | Incorporated by reference from our Registration Statement on Form 10, as filed with the Commission on February 12, 2015. |
| (2) | Incorporated by reference from Exhibit 3.2 to our Form 10-12G/A filed with the Commission on June 29, 2016. |
| (3) | Incorporated by reference from our Form 8-K, as filed with the Commission on March 28, 2016. | |
| (4) | Incorporated by reference from our Form 10-Q for the period ended June 30, 2018, filed with the Commission on August 14, 2018. |
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In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
Stemcell Holdings, Inc.
(Registrant)
By: /s/ Takaaki Matsuoka
Name: Takaaki Matsuoka
Chief Executive Officer
Dated: November 14, 2018
By: /s/ Rei Mochizuki
Name: Rei Mochizuki
Chief Financial Officer
Dated: November 14, 2018
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EXHIBIT 31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
I, Takaaki Matsuoka, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Stemcell Holdings, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exhibit Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: November 14, 2018 | ||
| /s/ Takaaki Matsuoka | ||
| By: | Takaaki Matsuoka | |
| Chief Executive Officer |
EXHIBIT 31.2
Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer
I, Rei Mochizuki, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Stemcell Holdings, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exhibit Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: November 14, 2018 | ||
| /s/ Rei Mochizuki | ||
| By: | Rei Mochizuki | |
| Chief Financial Officer and Chief Accounting Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 USC, SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Stemcell Holdings, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2018, as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Takaaki Matsuoka, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: November 14, 2018 | ||
| /s/ Takaaki Matsuoka | ||
| By: | Takaaki Matsuoka | |
| Chief Executive Officer |
A signed original of this written statement required by Section 906 has been provided to Stemcell Holdings, Inc. and will be retained by Stemcell Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 USC, SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Stemcell Holdings, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2018, as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Rei Mochizuki, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: November 14, 2018 | ||
| /s/ Rei Mochizuki | ||
| By: | Rei Mochizuki | |
| Chief Financial Officer and Chief Accounting Officer |
A signed original of this written statement required by Section 906 has been provided to Stemcell Holdings, Inc. and will be retained by Stemcell Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Document and Entity Information - USD ($) |
9 Months Ended | |
|---|---|---|
Sep. 30, 2018 |
Nov. 14, 2018 |
|
| Document And Entity Information | ||
| Entity Registrant Name | Stemcell Holdings, Inc. | |
| Entity Central Index Key | 0001666487 | |
| Document Type | 10-Q | |
| Document Period End Date | Sep. 30, 2018 | |
| Amendment Flag | false | |
| Current Fiscal Year End Date | --12-31 | |
| Entity Well Known Seasoned Issuer | No | |
| Entity Voluntary Filer Status | No | |
| Entity Current Reporting Status | Yes | |
| Entity Filer Category | Smaller Reporting Company | |
| Entity Public Float | $ 0 | |
| Entity Common Stock Shares Outstanding | 27,378,000 | |
| Document Fiscal Period Focus | Q3 | |
| Document Fiscal Year Focus | 2018 |
BALANCE SHEETS (Parenthetical) - $ / shares |
Sep. 30, 2018 |
Dec. 31, 2017 |
|---|---|---|
| StockholdersEquity | ||
| Preferred Stock Par Or Stated Value Per Share | $ 0.0001 | $ 0.0001 |
| Preferred Stock Shares Authorized | 20,000,000 | 20,000,000 |
| Preferred Stock Shares Issued | 0 | 0 |
| Preferred Stock Shares Outstanding | 0 | 0 |
| Common Stock Par Or Stated Value Per Share | $ 0.0001 | $ .0001 |
| Common Stock Shares Authorized | 500,000,000 | 500,000,000 |
| Common Stock Shares Issued | 27,378,000 | 27,596,000 |
| Common Stock Shares Outstanding | 27,378,000 | 27,596,000 |
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
|
| Revenues from related parties | ||||
| Stem cell culturing & tissue handling technical assistance fees | $ 1,963,744 | $ 861,165 | $ 4,579,939 | $ 3,016,632 |
| Coordination fees | 558,588 | 290,357 | 1,455,215 | 909,593 |
| Marketing services | 412,832 | 159,850 | 1,259,688 | 239,952 |
| Rental services | 114,538 | 55,602 | 349,489 | 275,437 |
| Total revenues from related parties | 3,049,702 | 1,366,974 | 7,644,331 | 4,441,614 |
| Revenues from third parties | ||||
| Marketing services | 287,160 | 60,301 | 623,233 | 76,321 |
| Rental services | 66,458 | 97,937 | 202,781 | 148,713 |
| Total revenues from third parties | 353,618 | 158,238 | 826,014 | 225,034 |
| Total revenues | 3,403,320 | 1,525,212 | 8,470,345 | 4,666,648 |
| Cost of revenues | 745,878 | 290,431 | 1,930,035 | 838,870 |
| Gross profit | 2,657,442 | 1,234,781 | 6,540,310 | 3,827,778 |
| Selling, general and administrative expenses | 835,800 | 350,970 | 2,502,806 | 985,364 |
| Total operating expenses | 835,800 | 350,970 | 2,502,806 | 985,364 |
| Other (expense) income | (10,521) | (1,107) | 4,162 | (1,099) |
| Net income before taxes | 1,811,121 | 882,704 | 4,041,666 | 2,841,315 |
| Income tax expenses | 774,073 | 370,924 | 1,675,123 | 1,164,161 |
| Net Income | 1,037,048 | 511,780 | 2,366,543 | 1,677,154 |
| Foreign currency translation adjustment | (162,414) | (10,068) | (115,067) | 42,416 |
| Total comprehensive income | $ 874,634 | $ 501,712 | $ 2,251,476 | $ 1,719,570 |
| Basic and Diluted Net Income (Loss) Per Common Share | $ 0.04 | $ 0.02 | $ 0.09 | $ 0.06 |
| Weighted Average Number of Common Shares Outstanding-Basic and Diluted | 27,378,000 | 27,596,000 | 27,491,392 | 27,596,000 |
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS |
9 Months Ended |
|---|---|
Sep. 30, 2018 | |
| Accounting Policies [Abstract] | |
| NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS |
NOTE 1 - ORGANIZATION, DESCRIPTION OF BUSINESS, AND BASIS OF PRESENTATION
Stemcell Holdings, Inc., formerly known as Perfect Acquisition, Inc. (the “Company”), was incorporated under the laws of the State of Delaware on December 31, 2015, with an objective to acquire, or merge with, an operating business. On March 23, 2016, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Takaaki Matsuoka, our current President, CEO and Director. Pursuant to the Stock Purchase Agreement, on March 24, 2016, Takaaki Matsuoka transferred to the Company, 500 shares of the common stock of Stemcell Co., Ltd., a Japanese corporation (“Stemcell”), which represented all of its issued and outstanding shares, in return for cash consideration of JPY 5,000,000 ($44,476). Following the effective date of the share purchase transaction, Stemcell became a wholly-owned subsidiary of the Company.
The Company, through Stemcell, concentrates on regenerative medicine-related business which includes but is not limited to the culturing, storing and delivery of stem cells, providing related technical assistance related thereto and other ancillary services to facilitate cell therapies.
The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or the SEC, including the instructions to Form 10-Q and Regulation S-X. In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three and nine month periods, have been made. Results for the interim periods presented are not necessarily indicative of the results that might be expected for the full year. When used in these notes, the terms “Company”, “we”, “us” or “our” mean the Company. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the most recent year, as reported in the Form 10-K for the year ended December 31, 2017, have been omitted. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2017, as reported by us in our Annual Report on Form 10-K filed with the SEC on March 30, 2018.
|
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||
| NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES |
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Stemcell Co., Ltd. Intercompany accounts and transactions are eliminated.
USE OF ESTIMATES
The presentation of financial statements in conformity with accounting principles generally accepted in the United states of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions made by management include going concern and valuation allowance on deferred income tax. Operating results in the future could vary from the amounts derived from management's estimates and assumptions.
FOREIGN CURRENCY TRANSLATION
The reporting currency of the Company is the United States Dollar (“US$”) and the accompanying financial statements have been expressed in US$. Stemcell maintains its books and records in its local currency, Japanese YEN (“JPY”), which is a functional currency as being the primary currency of the economic environment in which its operation is conducted. In accordance with Accounting Standard Codification (“ASC”) Topic 830-30, “Translation of Financial Statement”, assets and liabilities of the Company whose functional currency is not US$ are translated into US$, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements are recorded as a separate component of accumulated other comprehensive income (loss) within the statements of shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Translation of amounts from the local currency of Stemcell into US$1 has been made at the following exchange rates for the nine months ended as September 30, 2018:
RELATED PARTY TRANSACTIONS
A related party is generally defined as (i) the Company’s management, (ii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or (iii) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. The Company conducts business with its related parties in the ordinary course of business.
Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
REVENUE RECOGNITION
The Company applies ASC 605 for revenue recognition. The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. The Company provides the warranty for the delivery of its service. If the Company cannot deliver its service to customers successfully, the Company will retry its operation until the delivery is completed. The Company has four revenue streams as described below.
Stem Cell Culturing and Tissue Handling Technical Assistance Revenue
Stem cell culturing and tissue handling technical assistance revenue is recognized by providing technical assistance to customers for culturing stem cells or handling of tissues when persuasive evidence of an arrangement exists, the cells are cultured or tissues handled and have been delivered, the sales price is fixed or determinable, collection of the resulting receivable is reasonably assured, there are no material contingencies and the Company does not have significant obligations for future performance. When collectability is not reasonably assured, the Company defers the revenue until the cash is received. Revenue is recorded net of any discounts given to the customer.
During the nine months ended September 30, 2018, the Company derived all its stem cell culturing and tissue handling technical assistance revenue from Omotesando Helene Clinic (the “Helene Clinic”), which is fully owned by Takaaki Matsuoka. Pursuant to the agreement entered into by the two parties, once technical assistance is provided to the cells or tissues that were cultured or handled, no returns are allowed.
Coordination Service Revenue
During the nine months ended September 30, 2018, all the coordination service was delivered to Helene Clinic. Pursuant to the service agreement entered into by the Company and Helene Clinic, the Company’s performance obligations under the coordination service include introducing patients to clinics, arranging schedules and any related translation thereof. Revenue is recognized when a series of abovementioned services are delivered and treatments for the patient are completed as identified by Helene Clinic.
Marketing and Other Services Revenue
During the nine months ended September 30, 2018, the Company provided internet marketing services by optimizing search engines for (i) eight third-party clinics and (ii) six health clinics, including Helene Clinic, that are fully-owned or managed by Takaaki Matsuoka. Since July 2017, the Company commenced outsourcing services to clinics, encompassing administration services including accounting, payroll, tax support, clinic non-medical operations, recruiting and HR planning, facilities and maintenance services, IT support and legal services enabling the clinics to concentrate more on medical activities.
Rental & Lease Revenue
The Company leased certain medical equipment and properties to medical clinics. For the nine-months ended September 30, 2018, rental revenue was derived from (i) four third-party clinics and (ii) six clinics, including Helene Clinic, which are fully-owned or managed by Takaaki Matsuoka.
CONCENTRATION OF CREDIT RISKS
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash. The Company places its cash with financial institutions. The Company does not require collateral or other security to support financial instruments subject to credit risks.
The Company receives lump-sum payments from individual patients for the services to be delivered by the Company and Helene Clinic as a whole. Historically, the Company deducted 10% of the total customer payments and remitted the remainder to Helene Clinic, after which the Company billed and received payments from Helene Clinic, which represents the Company’s coordination services fee, stem cell culturing and tissue handling technical assistance services. Since the beginning of 2017, the Company changed this business model to deduct the 10% of the total customer payments and the amount to be recognized as stem cell culturing and tissue handling technical assistance revenue prior to remitting the remainder to Helene Clinic. As of September 30, 2018, and December 31, 2017, the Company had accounts receivable from Helene Clinic of $221,767 and $42,350 respectively, and accounts payable to Helene Clinic of $400,725 and $278,593, respectively. Also see Note 3.
Net revenues from customers accounting for 10% or more of total revenues are as follows:
EFFECT OF RECENTLY ADOPTED AND ISSUED PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers. This amendment updates addressing revenue from contracts with customers, which clarifies existing accounting literature relating to how and when a company recognizes revenue. Under the standard, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. This standard update is effective for the Company on January 1, 2019, and is to be applied retrospectively or the cumulative effect as of the date of adoption, with early application not permitted. Since the Company is an Emerging Growth Company and has made the election under Section 107(b) for extended transition to new or revised accounting standards, it follows the effective date for private companies. We are currently conducting a detailed assessment of the impact that this guidance will have on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued Accounting Standards Update 2016-02 (“ASU 2016-02”) which requires lessees to recognize most leases on the balance sheet. This is expected to increase both reported assets and liabilities. The new lease standard does not substantially change lessor accounting. This standard will be effective for the Company on January 1, 2020, although early adoption is permitted. Since the company is an Emerging Growth Company and has made the election under Section 107(b) for extended transition to new or revised accounting standards, it follows the effective date for private companies. Lessees and lessors will be required to apply the new standard at the beginning of the earliest period presented in the financial statements in which they first apply the new guidance, using a modified retrospective transition method. The requirements of this standard include a significant increase in required disclosures. We began a detailed assessment of the impact that this guidance will have on our consolidated financial statements and related disclosures, and our analysis is ongoing.
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effect from Accumulated Other Comprehensive Income. ASU 2018-02 allows for a reclassification from accumulated other comprehensive income to retained earnings for standard tax effects resulting from the Tax Cuts and Jobs Act. We are currently evaluating the impact of adopting the new standard on our consolidated financial statements. ASU 2018-02 will be effective for us on January 1, 2019. |
NOTE 3 - RELATED PARTY TRANSACTIONS |
9 Months Ended |
|---|---|
Sep. 30, 2018 | |
| Related Party Transactions [Abstract] | |
| NOTE 3 - RELATED PARTY TRANSACTIONS |
NOTE 3 - RELATED-PARTY TRANSACTIONS
For the three and nine-months ended September 30, 2018, the Company derived stem cell culturing and tissue handling technical assistance revenue and coordination revenue in the amount of $1,963,744 and $558,588, $4,579,939 and $1,455,215, respectively, from Helene Clinic which is fully-owned by Takaaki Matsuoka, the sole director of the Company.
For the three and nine-months ended September 30, 2017, the Company derived stem cell culturing and tissue handling technical assistance revenue and coordination revenue in the amount of $861,165 and $290,357, $3,016,632 and $909,593, respectively, from Helene Clinic which is fully-owned by Takaaki Matsuoka, the sole director of the Company.
For the three and nine-months ended September 30, 2018, the Company provided marketing and other services in the amount of $412,832 and $1,259,688 to six clinics which are fully-owned or managed by Takaaki Matsuoka, the sole director of the Company.
For the three and nine-months ended September 30, 2017, the Company provided marketing and other services in the amount of $159,850 and $239,952 to six clinics which are fully-owned or managed by Takaaki Matsuoka, the sole director of the Company.
For the three and nine-months ended September 30, 2018, the Company leased its equipment in the amount of $114,538 and $349,489 to six clinics which are fully-owned or managed by Takaaki Matsuoka, the sole director of the Company.
For the three and nine-months ended September 30, 2017, the Company leased its equipment in the amount of $55,602 and $275,437 to five clinics which are fully-owned or managed by Takaaki Matsuoka, the sole director of the Company.
As of September 30, 2018, the Company had a balance for accounts payable in the amount of $400,725 to Helene Clinic, which is fully owned by Takaaki Matsuoka, the sole director of the Company. As of December 31, 2017, the Company had a balance for accounts payable in the amount of $278,593 to Helene Clinic, which is fully-owned by Takaaki Matsuoka, the sole director of the Company.
As of September 30, 2018, the Company had a balance for accounts receivable in the amount of $535,603 from six clinics which are fully owned or managed by Takaaki Matsuoka, the sole director of the Company. As of December 31, 2017, the Company had a balance for accounts receivable in the amount of $145,980 from six clinics which are fully-owned or managed by Takaaki Matsuoka, the sole director of the Company.
Management determined that the Company has no interest in any residual gains or losses of the related party clinics. Therefore, management determined that consolidation of these clinics was not required under the guidance of ASC 810-15 Variable Interest Entities.
Throughout 2017 and through April 17, 2018, the Company’s office space was provided rent-free by Helene Clinic. On April 18, 2018, the Company changed the address of its principal executive offices from, 5-9-15-3F, 5-10-2 Minamiaoyama Minato-ku, Tokyo, 107-0062, Japan to the new, and current, address of 2nd Kuyo Building 2F 5-10-2 Minami Aoyama Minato-ku, Tokyo Japan. The Company rents its new office space from an unrelated third-party.
As of March 31, 2018, the Company had provided a short-term loan in the amount of $922,934 to Takaaki Matsuoka, CEO and director of the Company. Management determined this action is a violation of Sarbanes Oxley Section 402 and required him to repay the loan with an annual market interest rate of 8%. On May 31, 2018, the loan principal balance was repaid in full; however, the interest of $18,448 was still not paid as of September 30, 2018. Management expects to collect this interest payment by December 31, 2018. Also see PartⅠ, Item 4, and PartⅡ, Item 5 below. |
NOTE 4 - INCOME TAXES |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NOTE 4 - INCOME TAXES |
NOTE 4 - INCOME TAXES
Stemcell Holdings, Inc., the holding company registered in the state of Delaware, does not plan to engage in any business activities. No provision for income taxes in the U.S. has been made as the Company had no U.S. taxable income.
Stemcell Co., Ltd., the wholly owned subsidiary of the Company, is registered in Japan and subject to income taxes within Japan at applicable tax rate on the taxable income as reported in Japan statutory financial statements in accordance with relevant income tax laws. The reconciliation of the effective national income tax rate of Stemcell to the statutory income tax rate in Japan for the three and nine months ended September 30, 2018 and 2017 is as follows.
Income taxes are calculated on a separate entity basis. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. There currently is no tax benefit recorded for the United States. The provisions for income taxes for the nine months ended September 30, 2018 and 2017, respectively, are summarized as follows:
|
NOTE 5 - COMMITMENTS AND CONTINGENCIES |
9 Months Ended |
|---|---|
Sep. 30, 2018 | |
| Commitments and Contingencies Disclosure [Abstract] | |
| NOTE 5 - COMMITMENTS AND CONTINGENCIES |
NOTE 5 –COMMITMENTS AND CONTINGENCIES
The Company has continued a lease agreement to rent space for Kita Senju Clinic, an unrelated third party clinic, from April, 2017 with a monthly rent of $7,690 for a lease term of 3 years. The monthly rent is paid by Kita Senju Clinic. In the event it fails to pay the rent, the Company is responsible for the payment. The Company has also put down the initial deposit for the lease in the amount of $46,010.
The Company has entered a lease contract to rent space for Kamata Clinic, an unrelated third party clinic, from January, 2018 with a monthly rent of $6,343 for a lease term of 3 years. The monthly rent is paid by Kamata Clinic. In the event it fails to pay the rent, the Company is responsible for the payment. The Company has also put down the initial deposit for the lease in the amount of $34,262.
The Company has entered a lease contract to rent space for Funabashi Clinic, an unrelated third party clinic, from January, 2018 with a monthly rent of $7,798 for a lease term of 3 years. The monthly rent is paid by Funabashi Clinic. In the event it fails to pay the rent, the Company is responsible for the payment. The Company has also put down the initial deposit for the lease in the amount of $40,443.
The Company has entered a lease contract to rent space for Chiba Clinic, an unrelated third party clinic, from May, 2018 with a monthly rent of $5,517 for a lease term of 2 years. The monthly rent is paid by Chiba Clinic. In the event it fails to pay the rent, the Company is responsible for the payment. The Company has also put down the initial deposit for the lease in the amount of $36,147.
The Company has entered a lease contract to rent space for Fukuoka Clinic, an unrelated third party clinic, from April, 2018 with a monthly rent of $8,813 for a lease term of 3 years. The monthly rent is paid by Fukuoka Clinic. In the event it fails to pay the rent, the Company is responsible for the payment. The Company has also put down the initial deposit for the lease in the amount of $155,904.
The Company has entered a lease contract to rent space for Hachioji Clinic, an unrelated third party clinic, from April, 2018 with a monthly rent of $8,488 for a lease term of 2 years. The monthly rent is paid by Hajioji Clinic. In the event it fails to pay the rent, the Company is responsible for the payment. The Company has also put down the initial deposit for the lease in the amount of $20,020.
The Company has entered a lease contract to rent space for Hiroshima Clinic, an unrelated third party clinic, from October, 2018 with a monthly rent of $3,321 for a lease term of 3 years. The monthly rent is paid by Hiroshima Clinic. In the event it fails to pay the rent, the Company is responsible for the payment. The Company has also put down the initial deposit for the lease in the amount of $30,823.
We are not a party to any material pending legal proceedings other than that which arise in the ordinary course of business. We believe that any liability that would ultimately result from the resolution on these matters will not, individually or in the aggregate, have a material adverse effect on our financial position or results of operations. |
NOTE 6 - NET INCOME PER SHARE |
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||
| NOTE 6 - NET INCOME PER SHARE |
NOTE 6- NET INCOME PER SHARE
The following table shows the computation of basic net income per share of our common stock. There are no instruments that have dilutive effect on the number of shares computation.
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NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||
| PRINCIPLES OF CONSOLIDATION |
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Stemcell Co., Ltd. Intercompany accounts and transactions are eliminated. |
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| USE OF ESTIMATES |
USE OF ESTIMATES
The presentation of financial statements in conformity with accounting principles generally accepted in the United states of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions made by management include going concern and valuation allowance on deferred income tax. Operating results in the future could vary from the amounts derived from management's estimates and assumptions. |
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| FOREIGN CURRENCY TRANSLATION |
FOREIGN CURRENCY TRANSLATION
The reporting currency of the Company is the United States Dollar (“US$”) and the accompanying financial statements have been expressed in US$. Stemcell maintains its books and records in its local currency, Japanese YEN (“JPY”), which is a functional currency as being the primary currency of the economic environment in which its operation is conducted. In accordance with Accounting Standard Codification (“ASC”) Topic 830-30, “Translation of Financial Statement”, assets and liabilities of the Company whose functional currency is not US$ are translated into US$, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements are recorded as a separate component of accumulated other comprehensive income (loss) within the statements of shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Translation of amounts from the local currency of Stemcell into US$1 has been made at the following exchange rates for the nine months ended as September 30, 2018:
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| RELATED PARTY TRANSACTIONS |
RELATED PARTY TRANSACTIONS
A related party is generally defined as (i) the Company’s management, (ii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or (iii) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. The Company conducts business with its related parties in the ordinary course of business.
Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
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| REVENUE RECOGNITION |
REVENUE RECOGNITION The Company applies ASC 605 for revenue recognition. The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. The Company provides the warranty for the delivery of its service. If the Company cannot deliver its service to customers successfully, the Company will retry its operation until the delivery is completed. The Company has four revenue streams as described below.
Stem Cell Culturing and Tissue Handling Technical Assistance Revenue
Stem cell culturing and tissue handling technical assistance revenue is recognized by providing technical assistance to customers for culturing stem cells or handling of tissues when persuasive evidence of an arrangement exists, the cells are cultured or tissues handled and have been delivered, the sales price is fixed or determinable, collection of the resulting receivable is reasonably assured, there are no material contingencies and the Company does not have significant obligations for future performance. When collectability is not reasonably assured, the Company defers the revenue until the cash is received. Revenue is recorded net of any discounts given to the customer.
During the nine months ended September 30, 2018, the Company derived all its stem cell culturing and tissue handling technical assistance revenue from Omotesando Helene Clinic (the “Helene Clinic”), which is fully owned by Takaaki Matsuoka. Pursuant to the agreement entered into by the two parties, once technical assistance is provided to the cells or tissues that were cultured or handled, no returns are allowed.
Coordination Service Revenue
During the nine months ended September 30, 2018, all the coordination service was delivered to Helene Clinic. Pursuant to the service agreement entered into by the Company and Helene Clinic, the Company’s performance obligations under the coordination service include introducing patients to clinics, arranging schedules and any related translation thereof. Revenue is recognized when a series of abovementioned services are delivered and treatments for the patient are completed as identified by Helene Clinic.
Marketing and Other Services Revenue
During the nine months ended September 30, 2018, the Company provided internet marketing services by optimizing search engines for (i) eight third-party clinics and (ii) six health clinics, including Helene Clinic, that are fully-owned or managed by Takaaki Matsuoka. Since July 2017, the Company commenced outsourcing services to clinics, encompassing administration services including accounting, payroll, tax support, clinic non-medical operations, recruiting and HR planning, facilities and maintenance services, IT support and legal services enabling the clinics to concentrate more on medical activities.
Rental & Lease Revenue
The Company leased certain medical equipment and properties to medical clinics. For the nine-months ended September 30, 2018, rental revenue was derived from (i) four third-party clinics and (ii) six clinics, including Helene Clinic, which are fully-owned or managed by Takaaki Matsuoka. |
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| CONCENTRATION OF CREDIT RISKS |
CONCENTRATION OF CREDIT RISKS
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash. The Company places its cash with financial institutions. The Company does not require collateral or other security to support financial instruments subject to credit risks.
The Company receives lump-sum payments from individual patients for the services to be delivered by the Company and Helene Clinic as a whole. Historically, the Company deducted 10% of the total customer payments and remitted the remainder to Helene Clinic, after which the Company billed and received payments from Helene Clinic, which represents the Company’s coordination services fee, stem cell culturing and tissue handling technical assistance services. Since the beginning of 2017, the Company changed this business model to deduct the 10% of the total customer payments and the amount to be recognized as stem cell culturing and tissue handling technical assistance revenue prior to remitting the remainder to Helene Clinic. As of September 30, 2018, and December 31, 2017, the Company had accounts receivable from Helene Clinic of $221,767 and $42,350 respectively, and accounts payable to Helene Clinic of $400,725 and $278,593, respectively. Also see Note 3.
Net revenues from customers accounting for 10% or more of total revenues are as follows:
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| EFFECT OF RECENTLY ADOPTED AND ISSUED PRONOUNCEMENTS |
EFFECT OF RECENTLY ADOPTED AND ISSUED PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers. This amendment updates addressing revenue from contracts with customers, which clarifies existing accounting literature relating to how and when a company recognizes revenue. Under the standard, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. This standard update is effective for the Company on January 1, 2019, and is to be applied retrospectively or the cumulative effect as of the date of adoption, with early application not permitted. Since the Company is an Emerging Growth Company and has made the election under Section 107(b) for extended transition to new or revised accounting standards, it follows the effective date for private companies. We are currently conducting a detailed assessment of the impact that this guidance will have on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued Accounting Standards Update 2016-02 (“ASU 2016-02”) which requires lessees to recognize most leases on the balance sheet. This is expected to increase both reported assets and liabilities. The new lease standard does not substantially change lessor accounting. This standard will be effective for the Company on January 1, 2020, although early adoption is permitted. Since the company is an Emerging Growth Company and has made the election under Section 107(b) for extended transition to new or revised accounting standards, it follows the effective date for private companies. Lessees and lessors will be required to apply the new standard at the beginning of the earliest period presented in the financial statements in which they first apply the new guidance, using a modified retrospective transition method. The requirements of this standard include a significant increase in required disclosures. We began a detailed assessment of the impact that this guidance will have on our consolidated financial statements and related disclosures, and our analysis is ongoing.
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effect from Accumulated Other Comprehensive Income. ASU 2018-02 allows for a reclassification from accumulated other comprehensive income to retained earnings for standard tax effects resulting from the Tax Cuts and Jobs Act. We are currently evaluating the impact of adopting the new standard on our consolidated financial statements. ASU 2018-02 will be effective for us on January 1, 2019. |