NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF MARCH 31, 2018
(UNAUDITED)
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 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 a cash consideration of JPY 5,000,000
($44,476). Following the effective date of the share purchase transaction, Stemcell Holdings, Inc. gained a 100% interest in the
issued and outstanding shares of Stemcell’s common stock and Stemcell became a wholly owned subsidiary of the Company.
The Company 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
thereof and other ancillary services to facilitate cell therapies through Stemcell, which is our wholly owned subsidiary.
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-month period, 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, 2017.
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:
|
March 31, 2018
|
Current JPY: US$1 exchange rate
|
106.26
|
Average JPY: US$1 exchange rate
|
108.35
|
|
|
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 three months ended March 31, 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 three months ended March 31, 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 three months ended March 31, 2018, the Company
provided internet marketing services by optimizing search engines for four third-party clinics and 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 Revenue
The Company leased certain medical equipment and properties
to medical clinics. For the three months ended March 31, 2018, rental revenue was derived from three third-party clinics and five
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 received lump-sum payments from individual
patients for the services to be delivered by them and Helene Clinic as a whole. Historically, the Company deducted 10% of the
total payments and remitted the remainder to Helene Clinic, after which the Company billed and received payments from Helene Clinic
for stem cell culturing and tissue handling technical assistance services. Since the beginning of 2017, the Company changed this
business model to deduct the 10% 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 March 31, 2018, and December 31, 2017, the Company had accounts
receivable from Helene Clinic of $81,129 and $0 respectively, and accounts payable to Helene Clinic of $222,957 and $278,593,
respectively. Accounts receivables from Helene clinic is from services provided other than stemcell culturing and tissue handling
technical assistance services. Also see Note 3.
Net revenues from customers accounting for 10% or more
of total revenues are as follows:
|
|
|
Three months ended March 31, 2018
|
|
Three months ended March 31, 2017
|
|
|
|
%
|
|
%
|
Omotesando Helene Clinic
|
69.0
|
|
81.0
|
Total
|
|
|
69.0
|
|
81.0
|
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 was effective for interim and annual reporting periods beginning after December
15, 2016 for public companies and December 15, 2017 for private companies, and was to be applied retrospectively or the cumulative
effect as of the date of adoption. In July 2015, a one-year deferral of the effective date of the new guidance was approved. 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. As such, ASU 2014-09 will be effective for the Company
on January 1, 2019. 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. For
public and private companies, respectively, the standard will be effective for the first interim reporting period within annual
periods beginning after December 15, 2018 and 2019, 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. As such, ASU 2016-02 will be effective for the Company on January 1, 2020. 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.
NOTE 3 - RELATED-PARTY TRANSACTIONS
For the three months ended March 31, 2018, the Company
derived stem cell culturing and tissue handling technical assistance revenue and coordination revenue in the amounts of $1,103,751
and $381,511, respectively, up by $397,699 and $250,098 respectively, compared to the three months ended March 31, 2017, from Helene
Clinic which is fully owned by Takaaki Matsuoka, the sole director of the Company.
For the three months ended March 31, 2018, the Company
provided marketing and other services in the amount of $425,003 respectively up by $385,539 compared to the three months ended
March 31, 2017 to six clinics which are fully owned or managed by Takaaki Matsuoka, the sole director of the Company.
For the three months ended March 31, 2018, the Company
leased property and equipment in the amount of $117,913 to five clinics which are fully owned or managed by Takaaki Matsuoka, the
sole director of the Company, which was down by $1,042 compared to the three months ended March 31, 2017.
As of March 31, 2018, the Company had a balance for accounts
payable in the amount of $222,957 to Helene Clinic, which is fully owned 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.
For the three months ended March 31, 2018, office space
of the Company was provided rent-free by Helene Clinic.
As of March 31, 2018, the Company has provided a short-term
loan in the amount of $922,934 to Takaaki Matsuoka, CEO and director of the Company, for which the repayment date is May 31, 2018.
Management determined this action is a violation of Sarbanes Oxley Section 402 and is requiring him to repay the loan with an
annual market interest rate by 8% on May 25, 2018. Also see Part I, Item 4, and Part II, 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 months ended March 31, 2018 and 2017 is as
follows.
|
|
Three months ended
March 31, 2018
|
|
Three months ended
March 31, 2017
|
Japan national income tax rate
|
|
38.66%
|
|
36.97%
|
Valuation allowance recognized with respect to loss in Stemcell
|
|
0.00%
|
|
0.00%
|
Others
|
|
0.00%
|
|
-1.53%
|
Total
|
|
38.66%
|
|
35.44%
|
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 three months ended March 31,
2018 and 2017, respectively, are summarized as follows:
|
|
|
Three months ended March 31, 2018
|
|
Three months ended March 31, 2017
|
Current
|
|
$
|
499,370
|
$
|
183,242
|
Deferred
|
|
|
-
|
|
-
|
Total
|
|
$
|
499,370
|
$
|
183,242
|
NOTE 5 –COMMITMENTS AND CONTINGENCIES
The Company has continued a lease agreement to rent space
for Kita Senju 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 from January 2018 with a monthly rent of $6,343 for a lease term of 3 years. In the event it fails to pay the
rent, the Company is responsible for the payment. The monthly rent is paid by Kamata Clinic. 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 from January 2018 with a monthly rent of $7,798 for a lease term of 3 years. In the event it fails to pay
the rent, the Company is responsible for the payment. The monthly rent is paid by Funabashi Clinic. 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(Kuyosa)
for the new principal executive offices from March 2018 with a monthly rent of $19,791 for a lease term of 2 years. The Company
has also put down the initial deposit for the lease in the amount of $183,249.
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 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 a dilutive effect on the number of shares computation.
|
|
Three months ended
March 31, 2018
|
Three months ended
March 31, 2017
|
Net Income
|
Numerator (a)
|
$792,358
|
$333,819
|
Weighted Average Number of Common Shares Outstanding, Basic and Dilutive
|
Denominator (b)
|
27,596,000
|
27,596,000
|
Basic and Diluted Net Income per share
|
(a)/(b)
|
$0.03
|
$0.01
|
-F4-
Table
of Contents