RGIN Regenicin Inc (CE)

NOTES TO THE FINANCIAL STATEMENTS

(A Development Stage Company)

  (UNAUDITED)

NOTE 1 - THE COMPANY  

Windstar, Inc. (the “Company”) was incorporated in the state of Nevada on September 6, 2007 and is in the development stage. On July 19, 2010, the Company amended its Articles of Incorporation to change the name of the Company to Regenicin, Inc.

The Company’s original business was the development of a purification device.  Such business was assigned to the Company’s former management in July 2010.

The Company  has adopted a new business plan and intends to help develop and commercialize a potentially lifesaving technology by the introduction of tissue-engineered skin substitutes to restore the qualities of healthy human skin for use in the treatment of burns, chronic wounds and a variety of plastic surgery procedures. To this end, the Company has entered into an agreement with Lonza Walkersville, Inc. (Lonza”) for the exclusive license to use certain proprietary know-how and information necessary to develop and seek approval by the U.S. Food and Drug Administration (“FDA”) for the commercial sale of a product known as PermaDerm.

The first product, PermaDerm®, is the only tissue-engineered skin prepared from autologous (patient’s own) skin cells. It is a combination of cultured epithelium with a collagen-fibroblast implant that produces a skin substitute that contains both epidermal and dermal components. This model has been shown in preclinical studies to generate a functional skin barrier and in clinical studies to promote closure and healing of burns. Clinically, the Company believes self-to-self skin grafts for permanent skin tissue are not rejected by the immune system of the patient, unlike with porcine or cadaver grafts in which immune system rejection is an important possibility. PermaDerm® was initially designated as an Orphan Device by the FDA for treatment of burns. The Company has applied to the FDA late last year for an Orphan designation as a biologic/drug for PermaDerm®. In June of 2012, the FDA granted Orphan Status for the PermaDerm® product. Such a designation has certain benefits to the recipient, but these do not include the immediate commercialization of the product. The Company will still need to work with the FDA for the development of the product, now with the advantages of the Orphan designation. The Company hopes to initiate clinical trials in the first half of 2013 with submission to the FDA for Orphan Product approval for PermaDerm® anticipated by the end of 2013. The Company intends to apply for Biological License Approval in 2014. The major difference between commercialization as an Orphan Product and a full Biological License Approval is the Orphan Product has additional FDA reporting requirements and additional procedural administration steps in order to use the product on specific patients such as IRB approval for each patient .

The second product is anticipated to be TempaDerm®. TempaDerm® uses cells obtained from human donors to allow the development of banks of cryopreserved (frozen) cells and cultured skin substitute to provide a continuous supply of non-allogenic skin substitutes to treat much smaller wound areas on patients such as ulcers. This product has applications in the treatment of chronic skin wounds such as diabetic ulcers, decubitus ulcers and venous stasis ulcers. This product is in the early development stage and does not have FDA approval.

The Company’s management believes the technology has many different uses beyond the burn indication. The other uses include chronic wounds, reconstructive surgery and the individual components of the PermaDerm® technology such as tendon wraps made of collagen or temporary coverings to protect the patients from infections while waiting for PermaDerm®. The collagen technology used for PermaDerm® is a wide-open field in wound healing and uses such as stem cell  grafting substrates. It is important to know that all of the technologies mentioned above are products by themselves regardless of whether PermaDerm® is approved for burns. The Company could pursue any or all of them independently if financing permitted. Even if PermaDerm® was not approved for burn treatments, it could be approved for chronic wounds or reconstruction.

NOTE 2 - BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended December 31, 2012 are not necessarily indicative of the results that may be expected for the year ending September 30, 2013. These unaudited financial statements should be read in conjunction with the audited financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2012, as filed with the Securities and Exchange Commission.

Going Concern:

The Company’s financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred cumulative losses of approximately $8.7 million from inception, expects to incur further losses in the development of its business and has been dependent on funding operations through the issuance of convertible debt and private sale of equity securities. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans include continuing to finance operations through the private or public placement of debt and/or equity securities and the reduction of expenditures. However, no assurance can be given at this time as to whether the Company will be able to achieve these objectives. The financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Development Stage Activities and Operations:

The Company is in the development stage and has had no revenues.  A development stage company is defined as one in which all efforts are devoted substantially to establishing a new business and even if planned principal operations have commenced, revenues are insignificant.

Recent Pronouncements:

Management does not believe that any of the recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.

NOTE 3 - LOSS PER SHARE

Basic loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share give effect to dilutive convertible securities, options, warrants and other potential common stock outstanding during the period, only in periods in which such effect is dilutive. The following securities have been excluded from the calculation of net loss per share, as their effect would be anti-dilutive:

NOTE 4 - INTANGIBLE ASSETS

In July 2010, the Company entered into an agreement with Lonza for the exclusive license to use certain proprietary know-how and information necessary to develop and seek approval by the U.S. Food and Drug Administration (FDA”) for the commercial sale of a product known as PermaDerm.

The Company paid Lonza $3,000,000 for the exclusive know-how license and assistance to seek approval from the FDA for the commercial sale of PermaDerm in the U.S., and later for approval in foreign jurisdictions for commercial sale of PermaDerm throughout the world. In conjunction with Lonza, the Company intends to create and implement a strategy to conduct human clinical trials and to assemble and present the relevant information and data in order to obtain the necessary approvals for PermaDerm and possible related products.

In August 2010, the Company paid $7,500 and obtained the rights to the trademarks PermaDerm® and TempaDerm® from KJR-10 Corp.

Intangible assets, which include purchased licenses, patents and patent rights, are stated at cost and will be amortized using the straight-line method over their useful lives based upon the pattern in which the expected benefits will be realized, or on a straight-line basis, whichever is greater.

Management reviews intangible assets subject to amortization whenever events or changes in circumstances indicate that the carrying amount of such an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to the future undiscounted cash flows the assets are expected to generate. If such assets are considered impaired, the impairment to be recognized is equal to the amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. In assessing recoverability, management must make assumptions regarding estimated future cash flows and discount factors. If these estimates or related assumptions change in the future, the Company may be required to record impairment charges. The Company did not record any impairment charges in the three months ended December 31, 2012 and 2011.

NOTE 5 - LOANS PAYABLE

Loan Payable:

In February 2011, certain investors advanced a total of $85,000. These loans do not bear interest and are due on demand. In June 2011, the Company repaid $75,000 of the advances from the proceeds of the Preferred Stock Offering (see Note 7). At both December 31, 2012 and September 30, 2012, the loan payable totaled $10,000.

Loans Payable - Related Parties:

In October 2011, Craig Eagle, a director of the Company, advanced the Company $35,000. The loan does not bear interest and is due on demand. At both December 31, 2012 and September 30, 2012, the loan balance was $35,000.

In February 2012, John Weber, the Company’s Chief Financial Officer, advanced the Company $13,000 and another $10,000 in April 2012. The loans do not bear interest and are due on demand. At both December 31, 2012 and September 30, 2012, the loan balance was $23,000

NOTE 6 - NOTES PAYABLE

Insurance Financing Note:

In August 2012, the Company renewed its policy and financed premiums totaling $47,000. The note is payable over a nine-month term. At December 31, 2012 and September 30, 2012, the balance owed under the note was $32,908 and $42,160, respectively.

Bridge Financing:

On December 21, 2011, the Company issued a $150,000 promissory note (“Note 2”) to an individual. Note 2 bore interest so that the Company would repay $175,000 on the maturity date of June 21, 2012, which correlated to an effective rate of 31.23%. Additional interest of 10% will be charged on any late payments. At maturity, the Company was supposed to issue one million shares of common stock as additional consideration. The shares have been issued. For financial reporting purposes, the Company recorded a discount of $56,250 to reflect the value of these shares. The discount was amortized over the term of Note 2. Note 2 was not paid at the maturity date and the Company is incurring the additional interest described above. At both December 31, 2012 and September 30, 2012, the Note 2 balance was $175,000. Accrued interest payable incurred after the maturity date is $9,253 and $4,842 at December 31, 2012 and September 30, 2012, respectively.

On January 18, 2012, the Company issued a $165,400 convertible promissory note (“Note 3”) to an individual. Note 3 bore interest at the rate of 5% per annum and was due on June 18, 2012. Note 3 and accrued interest thereon was convertible into units at a conversion price of $2.00 per unit. A unit consisted of one share of Series A Convertible Preferred Stock (“Series A Preferred”) and a warrant to purchase one-fourth (1/4), or 25% of one share of common stock. For financial reporting purposes, the Company recorded a discount of $6,686 to reflect the beneficial conversion feature. The discount was amortized over the term of Note 3. Upon maturity, Note 3 was not automatically converted and the Units were not issued. Instead, in October 2012, a new note was issued with a six month term. The new note bears interest at the rate of 8% per annum and the principal and accrued interest thereon are convertible into shares of common stock at a rate of $0.05 per share. In addition, at the date of conversion, the Company will issue two-year warrants to purchase an additional 500,000 shares of common stock at $0.10 per share. At both December 31, 2012 and September 30, 2012, the Note 3 balance was $165,400.

On January 27, 2012, the Company issued a $149,290 convertible promissory note (“Note 4”) to an individual. Note 4 bore interest at the rate of 8% per annum and was due on March 31, 2012. Note 4 and accrued interest thereon was convertible into shares of common stock at a rate of $0.05 per share. In addition, at the date of conversion, the Company was to issue two-year warrants to purchase an additional 500,000 shares of common stock at $0.10 per share. On March 31, 2012, Note 4 and the accrued interest became due and the Company was supposed to issue 3,027,683 shares of common stock. The Company did not issue the common stock and as such, the shares have been classified as common stock to be issued at both December 31, 2012 and September 30, 2012. In addition, the warrants to purchase 500,000 shares were not issued. For financial reporting purposes, the Company recorded a discount of $7,653 to reflect the value of the warrants and a discount of $149,290 to reflect the value of the beneficial conversion feature.

In March 2012, the Company issued a series of convertible promissory notes (“Notes 5-9”) totaling $186,000 to four individuals. Notes 5-9 bore interest at the rate of 33% per annum and were due in August and September 2012. Notes 5-9 and accrued interest thereon were convertible into shares of common stock at the rate of $0.05 per share and automatically convert on the maturity dates unless paid sooner by the Company. For financial reporting purposes, the Company recorded discounts of $186,000 to reflect the beneficial conversion features. The discounts were amortized over the terms of Notes 5-9. At maturity, the principal and interest automatically converted and the Company was supposed to issue 4,335,598 shares of common stock. As of September 30, 2012, the shares were not issued and were classified as common stock to be issued. In December 2012, the Company issued 4,079,000 shares to the note holders of Notes 5, 6, 7 and 9. The unissued shares for Note 8 are classified as common stock to be issued at December 31, 2012.

In April 2012 through June 2012, the Company issued a series of convertible promissory notes (“Notes 10-18”) totaling $220,000 to nine individuals. Notes 10-18 bore interest at the rate of 33% per annum and were due in October through November 2012. Notes 10-18 and accrued interest thereon were convertible into shares of common stock at the rate of $0.05 per share and automatically converted on the maturity dates unless paid sooner by the Company. For financial reporting purposes, the Company recorded discounts of $215,900 to reflect the beneficial conversion features. The discounts were amortized over the terms of Notes 10-18. In December 2012, the Company issued 5,124,500 shares of its common stock for the conversion of principal and accrued interest through the various maturity dates of the notes.

In April 2012, the Company issued a convertible promissory notes (“Note 19”) totaling $25,000 to an individual for services previously rendered. Note 19 bore interest at the rate of 33% per annum and was due in October 2012. Note 19 and accrued interest thereon was convertible into shares of common stock at the rate of $0.05 per share and automatically converted on the maturity date unless paid sooner by the Company. For financial reporting purposes, the Company recorded a discount of $24,837 to reflect the beneficial conversion feature. The discount is being amortized over the term of Note 19. In December 2012, the Company issued 582,500 shares of its common stock for the conversion of principal and accrued interest through the maturity date.

In July 2012, the Company issued a series of convertible promissory notes (“Notes 20-22”) totaling $100,000 to three individuals. Notes 20-22 bear interest at the rate of 10% per annum and are due in December 2012 and January 2013. Notes 20-22 and accrued interest thereon are convertible into shares of common stock at the rate of $0.10 per share and automatically convert on the maturity dates unless paid sooner by the Company. For financial reporting purposes, the Company recorded discounts of $67,500 to reflect the beneficial conversion features. The discounts are being amortized over the terms of Notes 20-22. At maturity, the principal and interest of Note 20 and 21 automatically converted and the Company was supposed to issue 787,500 shares of common stock. As of December 31, 2012, the shares have not been issued but were issued in February 2013. As such, the shares have been classified as common stock to be issued. At September 30, 2012, Notes 20-22 balances were $65,842, net of debt discounts of $34,158. At December 31, 2012, the Note 22 balance was $21,352, net of debt discounts of $3,648. In February 2013, the Company issued 262,500 shares of common stock for the conversion of Note 22 and accrued interest thereon.

 In July 2012, the Company issued a convertible promissory note (“Note 23”) totaling $100,000 to an individual. Note 23 bears interest at the rate of 8% per annum and is due in January 2013. Note 23 and accrued interest thereon are convertible into shares of common stock at the rate of $0.05 per share and automatically convert on the maturity date, unless paid sooner by the Company. In addition, at the date of conversion, the Company is to issue a two-year warrant to purchase an additional 500,000 shares of common stock at $0.10 per share. For financial reporting purposes, the Company recorded a discount of $100,000 to reflect the beneficial conversion feature. The discount is being amortized over the term of the Note. At December 31, 2012, the Note 23 balance was $91,848 net of a debt discount of $8,152. In January 2013, the Company issued 2,080,000 shares of common stock for the conversion of Note 23 and accrued interest thereon.

 In December 2012, the Company issued a convertible promissory note (“Note 24”) totaling $100,000 to an individual. Note 24 bears interest at the rate of 8% per annum and is due in June 2013. Note 24 and accrued interest thereon are convertible into shares of common stock at the rate of $0.05 per share and automatically convert on the maturity date, unless paid sooner by the Company. In addition, at the date of conversion, the Company is to issue a two-year warrant to purchase an additional 500,000 shares of common stock at $0.10 per share. For financial reporting purposes, the Company recorded a discount of $100,000 to reflect the beneficial conversion feature. The discount is being amortized over the term of the Note. At December 31, 2012, the Note 23 balance was $4,268, net of a debt discount of $95,732.

In January 2013, the Company issued a convertible promissory note (“Note 25”) totaling $35,000 to an individual. Note 25 bears interest at the rate of 8% per annum and is due in July 2013. Note 25 and accrued interest thereon is convertible into shares of common stock at the rate of $0.05 per share and automatically convert on the maturity dates unless paid sooner by the Company. In addition, at the date of conversion, the Company is to issue a two-year warrant to purchase an additional 175,000 shares of common stock at $0.50 per share

Convertible Promissory Note:

In October 2012, the Company issued a promissory note to a financial institution (the “Lender”) to borrow up to a maximum of $225,000. The note bears interest so that the Company would repay a maximum of $250,000 at maturity, which correlated to an effective rate of 10.59%. Material terms of the note include the following:

1. The Company shall receive a $50,000 loan upon the signing of the note. The Company received such funds in October 2012.

2. The Lender may make additional loans in such amounts and at such dates at its sole discretion.

3. The maturity date of each loan is one year after such loan is received.

4. The original interest discount is prorated to each loan received.

5. Principal and accrued interest is convertible into shares of the Company’s common stock at the lesser of $0.069 or 70% of the lowest trading price in the 25 trading days previous to the conversion.

6. Unless otherwise agreed to in writing by both parties, at no time can the Lender convert any amount of the principal and/or accrued interest owed into common stock that would result in the Lender owning more than 4.99% of the common stock outstanding.

7. There is a one-time interest payment of 10% of amounts borrowed that is due at the maturity date of each loan.

8. At all times during which the note is convertible, the Company shall reserve from its authorized and unissued common stock to provide for the issuance of common stock under the full conversion of the promissory note. The Company will at all times reserve at least 13,000,000 shares of its common stock for conversion.

9. The Company agreed to include on its next registration statement it files, all shares issuable upon conversion of balances due under the promissory note. Failure to do so would result in liquidating damages of 25% of the outstanding principal balance of the promissory note but not less than $25,000.

The Company is accreting the original issue discount (“OID”) on the initial loan over the life of the loan using the effective interest method. For the three months ended December 31, 2012, the accretion amounted to $886.

The conversion feature contained in the promissory note is considered to be an embedded derivative. The Company bifurcated the conversion feature and recorded a derivative liability on the balance sheet. The Company recorded the derivative liability equal to its estimated fair value of $33,214. Such amount was also recorded as a discount to the convertible promissory note and is being amortized to interest expense using the effective interest method. For the three months ended December 31, 2012, amortization of the debt discount amounted to $3,349. At December 31, 2012, the unamortized discount is $29,865.

The Company is required to mark-to-market the derivative liability at the end of each reporting period. For the three months ended December 31, 2012, the Company recorded a loss on the change in fair value of the conversion option of $710 and as of December 31, 2012, the fair value of the conversion option was $33,924.

At December 31, 2012, the balance of the convertible note was $21,021 comprised of the original proceeds of $50,000, accreted OID of $886 less the unamortized debt discount of $29,865.

In January 2013, the Company borrowed an additional $25,000 .

NOTE 7 - STOCKHOLDERS’ DEFICIENCY

Preferred Stock:

Series A

Series A Preferred pays a dividend of 8% per annum on the stated value and have a liquidation preference equal to the stated value of the shares. Each share of Preferred Stock has an initial stated value of $1 and was convertible into shares of the Company’s common stock at the rate of 10 for 1. Series A Preferred contains a full ratchet anti-dilution feature on the shares of common stock underlying the Series A Preferred for three years on any stock issued below $0.10 per share with the exception of shares issued in a merger or acquisition. As the Company issued common stock at $0.05 per share for the conversion of debt, the conversion rate for the Series A Preferred is now 20 to 1.

In June and July 2011, the Company issued 1,345,000 shares of Series A Preferred in a private placement, In January and February 2012, 460,000 shares of Series A Preferred were converted into 4,600,000 shares of common stock.

The dividends are cumulative commencing on the issue date whether or not declared. Dividends amounted to $11,695 and $27,361 for the three months December 30, 2012, and 2011 respectively. At December 31, 2012 and September 30, 2012, dividends payable total $145,939 and $134,244, respectively, and are included in accrued expenses.

Series B

On January 23, 2012, the Company designated a new class of preferred stock called Series B Convertible Preferred Stock (“Series B Preferred”). Four million shares have been authorized with a liquidation preference of $2.00 per share. Each share of Series B Preferred is convertible into ten shares of common stock. Holders of Series B Convertible Preferred Stock have a right to a dividend (pro-rata to each holder) based on a percentage of the gross revenue earned by the Company in the United States, if any, and the number of outstanding shares of Series B Convertible Preferred Stock, as follows: Year 1 - Total Dividend to all Series B holders = .03 x Gross Revenue in the U.S. Year 2 - Total Dividend to all Series B holders = .02 x Gross Revenue in the U.S. Year 3 - Total Dividend to all Series B holders = .01 x Gross Revenue in the U.S. At December 31, 2012 no shares of Series B Preferred are outstanding.

Common Stock Issuances:

On December 18, 2012, the Company issued 801,000 shares of its common stock as a finder’s fee to an entity for introducing investors and/or lenders who provided funding to the Company. The shares were valued at $89,370.

On December 18, 2012, the Company issued 9,786,000 shares of its common stock for the conversion of notes payable and accrued interest.

In January and February 2013, the Company issued 3,130,000 shares of common stock for the conversion of notes payable and accrued interest.

Stock-Based Compensation:

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 505, “ Equity .” Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services as defined by ASC 505.

Stock based compensation amounted to $89,370 and $0 for the three months ended December 31, 2012 and 2011, respectively, and is included in interest expense.

NOTE 8 – LONZA TRANSACTION

  The agreement with Lonza contemplates that, upon receipt of the full FDA approval, in the second stage of the transaction, the Company will execute a Stock Purchase Agreement pursuant to which it will purchase all of the outstanding stock of Cutanogen Corporation (“Cutanogen”) from Lonza for an additional purchase price of $2 million. Cutanogen holds certain patents and exclusive licenses to patent rights owned by The Regents of the University of California, University of Cincinnati, and Shriners Hospital for Children related to the commercialization of PermaDerm®. Upon the Company’s acquisition of Cutanogen, it will obtain beneficial use of the Cutanogen licenses. The beneficial use will extend globally.

When Lonza acquired Cutanogen, it inherited milestone payment obligations to the former Cutanogen shareholders in the total amount of up to $4.8 million. These payments are owed as PermaDerm® is moved through the FDA approval process. As a result, the deal with Lonza will ultimately include paying those milestones plus the $2 million to Lonza. 

On May 17, 2012, the Company received a letter from Lonza America Inc., alleging that the Company has been delinquent in payments in the amount of $783,588 under the Know-How License and Stock Purchase Agreement (the “Agreement”) with Lonza Walkersville, Inc. (“Lonza Walkersville”). Collectively Lonza America and Lonza Walkerville are referred to herein as “Lonza”. After extensive discussions and correspondence with Lonza Walkersville, the Company responded to the letter by Lonza America on July 20, 2012, explaining that such payments are not due and detailing the various instances of breach committed by Lonza Walkersville under the Agreement. In turn, a response was received from Lonza America on July 26, 2012 alleging that the Agreement has been terminated.

There is an ongoing dispute with Lonza about the performance and payment obligations under the Agreement. Management believes that Lonza’s position, as set forth in the above mentioned letters, is untenable in that, among other things: (1) Lonza’s billings call for the payment of amounts not currently owing, (2) Lonza has failed to submit to an audit of its charges; and (3) Lonza has refused to provide an appropriate plan for the processing of the biotechnology through the FDA as required by the Agreement. Additionally, management believes that Lonza’s response is designed to allow it to retain the Company’s over $3.5 million in payments along with the biotechnology that the Company was expected to purchase as part of the Agreement.

Management acknowledges the Company’s obligations to make payments that are called for under the Agreement. However, management believes that meritorious defenses and claims to Lonza’s claim of breach under the Agreement exist, and the Company intends to pursue these claims and causes of action using all legal means necessary should the issues raised in the above mentioned letters not be resolved consensually.

Management cannot predict the likelihood of prevailing in the dispute with Lonza. The Company may be required to seek another manufacturer in the event that this dispute is not resolved between them or Lonza is unable or unwilling to manufacture the Company's products as a result of this dispute.

NOTE 9 - RELATED PARTY TRANSACTIONS

The Company’s principal executive offices are located in Little Falls, New Jersey. The headquarters is located in the offices of McCoy Enterprises LLC, an entity controlled by Mr. McCoy. The office is attached to his residence but has its own entrances, restroom and kitchen facilities.

The Company also maintains an office in Pennington, New Jersey, which is the materials and testing laboratory. This office is owned by Materials Testing Laboratory, and the principal is an employee of the Company.

No rent is charged for either premise.