UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal quarter ended
| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ____________
Commission file number:
(Exact name of Registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
| OTC OB |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes þ No o
Indicate by check mark whether
the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding twelve 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. Yes o
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data File required to be submitted 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
such files). o Yes þ
Indicate by check mark whether the registrant is a large, accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer o | |
| 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. o
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o
As of November 22, 2021, the registrant had shares of its $0.005 par value common stock issued and outstanding.
Documents incorporated by reference: None.
UPD HOLDING CORP.
TABLE OF CONTENTS
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report on Form 10-Q that are not historical fact are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements contained herein are based on current expectations that involve a number of risks and uncertainties. These statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” or “anticipates,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. Investors are cautioned that these forward-looking statements that are not historical facts are only predictions. No assurances can be given that the future results indicated, whether expressed or implied, will be achieved. Because of the number and range of assumptions underlying the Company’s projections and forward-looking statements, many of which are subject to significant uncertainties and contingencies that are beyond the reasonable control of the Company, some of the assumptions inevitably will not materialize, and unanticipated events and circumstances may occur subsequent to the date of this report. These forward-looking statements are based on current expectations and the Company assumes no obligation to update this information. Therefore, the actual experience of the Company and the results achieved during the period covered by any particular projections or forward-looking statements may differ substantially from those projected. The inclusion of projections and other forward-looking statements should not be regarded as a representation by the Company or any other person that these estimates and projections will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate.
| 1 |
PART I – FINANCIAL INFORMATION
| Item 1. | Financial Statements |
UPD Holding Corp.
Consolidated Balance Sheets
| September 30, | June 30, | |||||||
| 2021 | 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Right of use asset, net | ||||||||
| Other assets | ||||||||
| Goodwill | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued interest | ||||||||
| Convertible notes payable, net of discount | ||||||||
| Derivative liability | ||||||||
| Notes payable, net | ||||||||
| Related party notes payable | ||||||||
| Lease liability | ||||||||
| Total current liabilities | ||||||||
| Lease liability, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders' deficit | ||||||||
| Preferred stock, $ par value; authorized and issued and outstanding | ||||||||
| Common stock, $ par value; shares authorized and issued and outstanding at September 30, 2021 and June 30, 2021, respectively | ||||||||
| Additional paid-in-capital | ||||||||
| Stock payable | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total UPD Holding Corp. stockholders' deficit | ( | ) | ( | ) | ||||
| Non-controlling interest | ( | ) | ( | ) | ||||
| Total stockholders' deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders' deficit | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 2 |
UPD Holding Corp.
Consolidated Statements of Operations
(Unaudited)
| For the Three Months Ended | ||||||||
| September 30, | September 30, | |||||||
| 2021 | 2020 | |||||||
| Revenues: | ||||||||
| Net revenue | $ | $ | ||||||
| Operating costs and expenses: | ||||||||
| Professional fees | ||||||||
| General and administrative | ||||||||
| Total operating costs and expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Interest expense, net | ( | ) | ( | ) | ||||
| Loss on change in fair value of derivative liability | ( | ) | ||||||
| Loss from continuing operations, before income taxes | ( | ) | ( | ) | ||||
| Provision for income taxes | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Less: net loss attributable to non-controlling interest | ( | ) | ||||||
| Net loss attributable to UPD Holding Corp. | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted loss per share from: | $ | ( | ) | $ | ( | ) | ||
| Weighted average shares outstanding | ||||||||
| Basic and diluted | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
UPD Holding Corp.
Consolidated Statements of Changes in Stockholders’ Deficit
For the Three Months Ended September 30, 2021
(Unaudited)
| Preferred Stock | Common Stock | Additional Paid In | Stock | Accumulated | Total UPD Holding Corp. Stockholders’ | Non- Controlling | Total Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Payable | Deficit | Deficit | Interest | Deficit | |||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||
| Beneficial conversion feature for convertible debt | — | — | ||||||||||||||||||||||||||||||||||||||
| Fair value of warrants issued with debt | — | — | ||||||||||||||||||||||||||||||||||||||
| Debt settlement of liabilities | — | — | ||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||
For the Three Months Ended September 30, 2020
(Unaudited)
| Preferred Stock | Common Stock | Additional Paid In | Stock | Accumulated | Total UPD Holding Corp. Stockholders’ | Non- Controlling | Total Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Payable | Deficit | Deficit | Interest | Deficit | |||||||||||||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
UPD Holding Corp.
Consolidated Statements of Cash Flows
(Unaudited)
| For the Three Months Ended | ||||||||
| September 30, | September 30, | |||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Loss on change in fair value of derivative liability | ||||||||
| Non-cash warrant amortization | ||||||||
| Amortization of debt discount | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Other assets | ( | ) | ||||||
| Accrued interest | ||||||||
| Accounts payable | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from related party notes payable | ||||||||
| Proceeds from issuance of convertible notes payable | ||||||||
| Proceeds from issuance notes payable | ||||||||
| Interest payments on notes payable | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Non-Cash Supplemental Disclosures | ||||||||
| Debt settlement with stock payable | $ | $ | ||||||
| Debt discount on convertible notes | $ | $ | ||||||
| Warrant discount issued on debt | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 5 |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BUSINESS AND ORGANIZATION
UPD Holding Corp. (“UPD”, “Company”), incorporated in the State of Nevada, is a holding Company seeking to acquire assets and businesses to provide a competitive advantage through cost-sharing and other synergies. The Company is pursuing business development opportunities in the rehabilitation services industry.
On February 16, 2021, UPD completed its acquisition of Vital Behavioral Health, Inc., which intends to operate U.S. facilities focusing on substance abuse treatment and offer various programs that help provide a continuum of care to its patients.
The Company previously operated in the food and beverage industry through Record Street Brewing (“RSB”), which was sold as of December 31, 2020.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The Company consolidates the assets, liabilities, and operating results of its wholly owned and majority-owned subsidiaries: (i) iMetabolic Corp, a Nevada corporation; (ii) United Product Development Corp., a Nevada corporation; (iii) Vital Behavioral Health, Inc., a Nevada corporation (since February 16, 2021); (iv) VBH Frankfort LLC, a Nevada limited liability company (since February 16, 2021); (v) VSL Frankfort LLC, a Nevada limited liability company (since February 16, 2021); (vi) VBH Garden Grove Inc. (since February 17, 2021); (vii) VBH Kentucky Inc., a Nevada corporation (since March 16, 2021); and (viii) Record Street Brewing Co., a Nevada corporation (through December 31, 2020). All intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with original maturities of 90 days of less at the date of purchase. The Company is exposed to credit risk in the event of default by the financial institutions or the issuers of these investments to the extent the amounts on deposit or invested are in excess of amounts that are insured. As of September 30, 2021 and June 30, 2021 the Company did not have any cash equivalents or cash deposits in excess of the federally insured limits.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from these estimates.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the party’s own credit risk.
| 6 |
Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The Company's financial instruments consist primarily of cash and cash equivalents, restricted cash, accounts payable and convertible and other notes payable. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments.
The fair value of the Company’s derivative liabilities are estimated using a Black-Scholes option pricing model with Level 3 unobservable inputs. Prior to the fiscal year ended June 30, 2021 the Company did not have any instruments valued within Level 3 of the fair value hierarchy.
The Company presents both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net loss by the weighted average number of shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period under the treasury stock method using the if-converted method. Due to the incurrence of net losses, the Company did not include outstanding instruments convertible into common stock that would be anti-dilutive.
Business Combinations
Business combinations are accounted for at fair value. Acquisition costs are expensed as incurred and recorded in general and administrative expenses. Measurement period adjustments are made in the period in which the amounts are determined, and the current period income effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition date. All changes that do not qualify as measurement period adjustments are also included in current period earnings. The accounting for business combinations requires estimates and judgment as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair value for assets acquired and liabilities assumed. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the financial statements could result in a possible impairment of goodwill, require acceleration of the amortization expense of finite-lived intangible assets, or the recognition of additional consideration which would be expensed.
Lease Accounting
The Company leases office space and outpatient clinical space under a lease arrangement. These properties are generally leased under non-cancelable agreements that contain lease terms in excess of twelve months on the date of entry as well as renewal options for additional periods. The agreements, which have been classified as operating leases, generally provide for base minimum rental payment, as well non-lease components including insurance, taxes, maintenance, and other common area costs.
At the lease commencement date, the Company recognizes a right-of-use asset and a lease liability for all leases, except short-term leases with an original term of twelve months or less. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any prepayments to the lessor and initial direct costs such as brokerage commissions, less any lease incentives received. All right-of-use assets are periodically reviewed for impairment in accordance with standards that apply to long-lived assets. The lease liability is initially measured at the present value of the lease payments, discounted using the rate implicit in the contract if available or an estimate of our incremental borrowing rate for a collateralized loan with the same term as the underlying lease. The discount rates used for the initial measurement of lease liabilities as of the date of entry were based on the original lease terms.
| 7 |
Lease payments included in the measurement of lease liabilities consist of (i) fixed lease payments for the non-cancelable lease term, (ii) fixed lease payments for optional renewal periods where it is reasonably certain the renewal option will be exercised, and (iii) variable lease payments that depend on an underlying index or rate, based on the index or rate in effect at lease commencement. Certain real estate lease agreements require payments for non-lease costs such as utilities and common area maintenance. The Company has elected an accounting policy to not separate implicit components of the contract that may be considered non-lease related.
Lease expense for operating leases consists of the fixed lease payments recognized on a straight-line basis over the lease term plus variable lease payments as incurred. The lease payments are allocated between a reduction of the lease liability and interest expense. Depreciation of the right-of-use asset for operating leases reflects the use of the asset on straight-line basis over the expected term of the lease.
Property and Equipment
Property and Equipment are stated at cost less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred and additions and improvements that significantly extend the lives of assets are capitalized. Upon sale or other retirement of depreciable property, the cost and accumulated depreciation are removed from the related accounts and any gain or loss is reflected in operations. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The useful lives of tenant improvements are the lesser of the estimated useful life of the asset or the term of the lease (2 years for current lease); furniture and fixtures are to years; operating lease right of use assets over the expected term of the operating lease; and office and computer equipment are to years.
The Company periodically reviews property and equipment when events or changes in circumstances indicate that their carrying amounts may not be recoverable or their depreciation or amortization periods should be accelerated. Recoverability is assessed based on several factors, including the intention with respect to maintaining facilities and projected discounted cash flows from operations. An impairment loss would be recognized for the amount by which the carrying amount of the assets exceeds their fair value, as approximated by the present value of their projected discounted cash flows.
Goodwill
Goodwill represents the excess of fair value over identifiable tangible and intangible net assets acquired in business combinations. Goodwill is not amortized, instead goodwill is reviewed for impairment at least annually, or on an interim basis between annual tests when events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value.
Advertising Expense
The Company recognizing advertising expense in the period in which
it is incurred. For the three months ended September 30, 2021 the Company incurred advertising expense of $
| 8 |
Revenue Recognition
The Company previously licensed its beer and beverage products to its customers. The royalties earned from these licensing agreements represent revenue earned under contracts in which the Company bills and collects from its licensee in arrears. The Company determines the measurement of revenue and the timing of revenue recognition utilizing the following core principles:
| 1. | Identifying the contract with a customer; |
| 2. | Identifying the performance obligations in the contract; |
| 3. | Determining the transaction price; |
| 4. | Allocate the transaction price to the performance obligations in the contract; and |
| 5. | Recognize revenue when (or as) the Company satisfies its performance obligations. |
Revenues from licensing royalties are recognized when the Company’s performance obligations are satisfied upon its licensee’s sales to its customers. The Company primarily invoices its licensee on a quarterly basis, net of returns. The Company did not realize material revenues in the current period through the disposition date on December 31, 2020.
The Company’s expected rehab service and facility revenue will be recognized in accordance with the same five core principles after meeting the applicable licensing requirements.
Income Taxes
The Company recognizes deferred tax liabilities and assets using the liability method. Under this method, deferred tax liabilities and assets are determined based on the temporary differences between the financial statements carrying values and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. In determining the future tax consequences of events that have been recognized in the financial statements or tax returns, judgment and interpretation of statutes is required. Judgments and interpretation of statutes are inherent in this process. Future income tax assets are recorded in the financial statements if realization is considered more likely than not.
For previously taken tax positions considered to be uncertain, the Company prescribes a recognition threshold and measurement attribute. In the event certain tax positions do not meet the appropriate recognition threshold, de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions is required.
The Company files income tax returns in the U.S. federal jurisdiction.
Debt Issuance Costs
Debt issuance costs incurred in connection with the issuance of long-term debt are capitalized, netted against debt principal for balance sheet purposes, and amortized to interest expense over the terms of the related debt agreements using the effective interest method.
Derivative Liabilities
The Company classifies all of its embedded debt conversion features, and other derivative financial instruments as equity if the contracts (1) require physical settlement or net-share settlement or (2) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (1) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), (2) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement), or (3) contracts that contain reset provisions. The Company assesses classification of its equity-linked instruments at each reporting date to determine whether a change in classification between equity and liabilities (assets) is required. As of June 30, 2021, the Company did not have enough authorized and unissued shares to settle all outstanding equity-linked instruments resulting in the reclassification of certain instruments to liability. The Company reclassifies outstanding instruments based on allocating the unissued shares to contracts with the earliest inception date resulting in the contracts with the latest inception date being recognized as liabilities first.
| 9 |
The Company accounts for contracts convertible into common stock in excess of its authorized capital as derivative as liabilities. The derivative liabilities are re-measured at fair value with the changes in the value reported as a component of other income (expense) in the accompanying results of operations. The derivative liabilities are measured at fair value using a Black Scholes option pricing Model. The model is based on assumptions including quoted market prices and estimated volatility factors based on historical quoted market prices for the Company’s common stock and are classified within Level 3 of the fair value hierarchy as established by US GAAP. As of September 30, 2021, all derivative liability contracts are convertible into a fixed number of shares of common stock.
Going Concern
The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and allow it to continue as a going concern, has reoccurring net losses and net capital deficiency. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plans to obtain such resources for the Company include (i) obtaining capital from management and significant stockholders sufficient to meet its minimal operating expenses; (ii) obtaining funding from outside sources through the sale of its debt and/or equity securities; and (iii) completing a merger with or acquisition of an existing operating company. Management provides no assurances that the Company will be successful in accomplishing any of its plans.
NOTE 3- DISCONTINUED OPERATIONS
On December 31, 2020, the Company discontinued
its
During the three months ended September 30, 2021, and the year ended June 30, 2021 , RSB did not engage in material operations or generate material revenues. The Company did not allocate any interest expense to discontinued operations apart from interest accrued on the obligations that were assumed.
NOTE 4 – ACQUISITIONS
In February 2021, through a Stock Exchange Agreement
(“Exchange Agreement”) in which
| 10 |
The following table represents the fair value of the consideration paid allocated to the assets and liabilities acquired in applying the acquisition method for the completion of the Vital business combination:
| Description | As of February 16, 2021 | |||
| Fair value of 16,840,000 shares of restricted common stock | $ | |||
| Lease liabilities | ||||
| Other current liabilities | ||||
| Notes payable forgiven | ( | ) | ||
| Total consideration | $ | |||
| Cash | ||||
| Right of use assets | ||||
| Goodwill | ||||
| Total assets acquired | $ | |||
Through the Vital acquisition, the Company intends to operate multiple facilities in the U.S. that will focus on substance abuse treatment and offer various programs that help provide a continuum of care to its patients. VBHF is intended to operate as an out-patient substance abuse treatment facility in Frankfort, Kentucky. VSLF is intended to offer sober-designated living quarters for individuals who are in recovery. Each of Vital, VBHF, and VSLF are in the early development stage and have not received any operational licenses or permits through the date of this report.
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
| September 30, | June 30, | |||||||
| 2021 | 2021 | |||||||
| Furniture and fixtures | $ | $ | ||||||
| Computer equipment and software | ||||||||
| Leasehold improvements | ||||||||
| Property and equipment | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation during the three months ended September 30, 2021, and
the year ended June 30, 2021, was $
NOTE 6 – NOTES AND CONVERTIBLE NOTES PAYABLE
The Company’s notes payable consists of the following:
| Note Description | September 30, 2021 | June 30, 2021 | ||||||
| Notes Payable: | ||||||||
| Related Party Notes Payable due October 2020 a nominal interest rate of 6% | $ | $ | ||||||
| Notes Payable due August 2022 a nominal interest rate of 12% | ||||||||
| Total Notes payable | $ | $ | ||||||
| Unamortized discount | ( | ) | ||||||
| Notes payable, net | ||||||||
| Accrued interest | ||||||||
| Total notes payable, net | $ | $ | ||||||
| 11 |
Throughout the fiscal year ended June 30, 2021, the Company did not have the financial resources to make current payments on these notes payable. All of the outstanding notes payable are due to officers of the Company who have informally agreed to defer payment until such time as the Company’s liquidity improves, however, they are under no formal obligation to continue to do so and may demand payment. The Company has not incurred significant penalties associated with the current defaults.
In August 2021, the Company entered into a promissory
note with a lender in which the Company received cash proceeds totaling $
The Company’s convertible notes payable consist of the following:
| September 30, | June 30, | |||||||
| Convertible Note Description | 2021 | 2021 | ||||||
| Notes payable convertible into common stock at $0.025 per share; nominal interest rate of 12%; and matured in April 2018 (related party) | $ | $ | ||||||
| Notes payable convertible into common stock at $0.05 per share; nominal interest rate of 12%; and matures in March 2022 | ||||||||
| Notes payable convertible into common stock at $0.10 per share; nominal interest rate of 12%; and matures in February 2022 | ||||||||
| Notes payable convertible into common stock at $0.05 per share; nominal interest rate of 12%; and matures in July 2022 | ||||||||
| Total Convertible notes payable | $ | $ | ||||||
| Unamortized discount | ( | ) | ( | ) | ||||
| Convertible notes payable, net | ||||||||
| Accrued interest | ||||||||
| Total convertible notes payable, net | $ | $ | ||||||
The principal and interest of the Company’s
outstanding convertible notes, with the exception of the related party notes totaling $
During the year ended June 30, 2021,
a note holder became a related party through the acquisition (in a private transaction not involving the Company) of shares of outstanding
common stock in excess of 5%. In October 2020, the Company issued the related party a note payable for total cash proceeds of $
In December 2020, the Company settled
related party convertible notes payable and accrued interest totaling approximately $
In July 2021, the Company entered into
a total of $
| 12 |
As of September 30, 2020, the Company
did not have enough authorized and unissued shares of common stock to settle all its convertible debt obligations. As a result, the Company
recognized obligations to issue a total of shares of common stock upon convertible debt conversion to derivative liabilities
in the accompanying consolidated balance sheets.
During the three months ended September 30,
2021, and the year ended June 30, 2021, the Company received $
During the three months ended September 30, 2021,
and the year ended June 30, 2021, the Company made no payments on the outstanding notes and convertible notes payable, and recorded $
NOTE 7 – RELATED PARTY TRANSACTIONS
During the fiscal year ended June 30, 2021, the
Company’s Chief Executive Officer (“CEO”) provided the Company $
As noted in Note 4, the Company acquired a
The Company sold an individual a
Effective December 31, 2020, Dr. George D. Shoenberger
was appointed as a Board member of the Company. As of the date of the appointment and through September 30, 2021, Dr. Shoenberger held
a convertible note payable issued in 2016 with an initial principal balance of $
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In May 2020, the Company entered into a
Throughout several of the most recent fiscal years,
the Company received working capital advances from a significant shareholder. In December 2020, the Company settled the then outstanding
obligations due to the shareholder totaling approximately $
During the previous periods the Company’s
Chief Operating Officer (“COO”) and Director made working capital advances to the Company that were converted to a promissory
note payable. The notes accrue interest at a rate of
During the fiscal year ended June 30, 2021, certain
previously outstanding shareholder advances totaling approximately $
NOTE 8 – STOCKHOLDERS EQUITY
In June 2021, the Company issued a related party
fully vested shares of restricted common stock for the settlement of convertible notes payable and accrued interest totaling approximately
$
In April 2021, the Company issued an investor
a 4.67% non-controlling interest in its previously wholly owned subsidiary VBH Kentucky, Inc. for cash proceeds totaling $
In February 2021, the Company issued
fully vested shares of restricted common stock for total consideration of approximately $
In February 2021, the Company issued a consultant
fully vested shares of restricted common stock for total consideration of approximately $
In December 2020, the Company issued a related
party fully vested shares of restricted common stock for the settlement of convertible notes payable and accrued interest totaling
approximately $
In December 2020, the Company issued a consultant
fully vested shares of common stock for total consideration of approximately $
Stock Payable
On September 2, 2021, the Company entered into
certain Mutual Release and Settlement Agreement with Athens Common, LLC to extinguish $
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Warrants
In August 2021, the
| Number of Warrants | Weighted Average Exercise Price | |||||||
| Outstanding at year ended June 30, 2020 | | $ | ||||||
| Granted | ||||||||
| Exercised | - | - | ||||||
| Expired | - | - | ||||||
| Outstanding at year ended June 30, 2021 | $ | |||||||
| Granted | ||||||||
| Exercised | - | - | ||||||
| Expired | - | - | ||||||
| Outstanding at three months ended September 30, 2021 | $ | |||||||
Warrants granted in the three months ended September
30, 2021, were valued using the Black Scholes Model with the risk-free interest rate of
NOTE 9 – OPERATING LEASES
As of September 30, 2021, the Company, through its Vital subsidiaries, has the following a non-cancelable lease arrangement:
| · | Office facility intended to be used in its substance
abuse treatment operations located in Frankfort, Kentucky (the “Frankfort Lease”). The term of the Frankfort Lease is
months with no explicit extension options. The base monthly payment of the term of the Frankfort Lease is $ |
| · | Vital Behavioral Health, Inc. leased a facility in Fayetteville, Georgia with an initial base rent of
$ |
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The following table summarizes the Company’s undiscounted cash payment obligations for its non-cancelable lease liabilities through the end of the expected term of the lease:
| 2022 | $ | |||
| 2023 | ||||
| 2024 | - | |||
| 2025 | - | |||
| 2026 | - | |||
| Total undiscounted cash payments | ||||
| Less interest | ( | ) | ||
| Present value of payments | $ | |||
The weighted average remaining term of the Company’s non-cancelable operating leases as of September 30, 2021, was approximately .
On January 14, 2021, our wholly owned subsidiary,
United Product Development Corporation (the “Subsidiary”), a Nevada corporation, entered into a commercial lease (the “Lexington
Lease”) with Athens Commons, LLC, a Kentucky limited liability company, for the lease of a
The total lease expense incurred during the year
ended June 30, 2021, inclusive of the cancelled Lexington Lease, was $
On September 2, 2021, the Company entered into
certain Mutual Release and Settlement Agreement with Athens Common, LLC to extinguish $
NOTE 10 – SUBSEQUENT EVENTS
On October 8, 2021, International Metabolic Institute, LLC, a Nevada Limited Liability Company (as the Licensor), completed a Mutual Termination of License Agreement with our wholly owned subsidiary, iMetabolic, Inc. (as the Licensee). The termination agreement terminated the Licensor’s licensing to our subsidiary, iMetabolic, Inc., the Licensee, to commercialize consumer products pursuant to the trademarked brand, “iMetabolic” in exchange for the Licensee’s payment of certain compensation to the Licensor.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited interim consolidated financial statements and related notes which are included in Item 1 of this Quarterly Report on Form 10-Q, and with our audited financial statements included in our Form 10-K for the fiscal year ended June 30, 2021, filed with the Securities and Exchange Commission on October 13, 2021.
This discussion and analysis provide information that management believes is relevant to an assessment and understanding of our results of operations and financial condition for the periods presented. The following selected financial information is derived from our historical consolidated financial statements and should be read in conjunction with such consolidated financial statements and notes thereto set forth elsewhere herein and the “Forward- Looking Statements” explanation included herein.
RESULTS OF OPERATIONS
Results of Operations for the Three Months Ended September 30, 2021, and 2020.
Below is a summary of the results of operations for the three months ended September 30, 2021, and 2020.
| For the Three Months Ended September 30, | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| Revenue: | ||||||||||||||||
| Net revenue | $ | - | $ | - | $ | - | 0.00 | % | ||||||||
| Operating expenses | ||||||||||||||||
| Professional fees | 57,817 | 45,616 | 12,201 | 26.75 | % | |||||||||||
| General and administrative | 240,161 | 2,480 | 237,681 | 9583.91 | % | |||||||||||
| Total operating costs and expenses | 297,978 | 48,096 | 249,882 | 9610.66 | % | |||||||||||
| Operating loss | 297,978 | 48,096 | 249,882 | 9610.66 | % | |||||||||||
| Interest expense, net | (27,659 | ) | (5,859 | ) | (21,800 | ) | 372.08 | % | ||||||||
| Loss on change in fair value of derivative liability | (38,943 | ) | - | (38,943 | ) | -0.00 | % | |||||||||
| Net loss | $ | (364,580 | ) | $ | (53,955 | ) | $ | (310,625 | ) | -9238.58 | % | |||||
Revenue and Cost of Revenue
We generated no revenue for the three months ended September 30, 2021, and September 30, 2020.
Professional Fees
We incurred professional fees of $57,817 and $45,616 for the three months ended September 30, 2021, and September 30, 2020, respectively. Our professional fees increased by $12,201 for the three months ended September 30, 2021, compared to the same period in 2020. The increase is primarily attributable to accounting and legal fees.
As funding permits, we expect to incur higher professional fees associated with on-going development of our brand, customers, and other relationship development.
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General and Administrative Expenses
For the three months ended September 30, 2021, and September 30, 2020, we incurred general and administrative expenses of $240,161 and $2,480, respectively, representing an increase of $237,681 for the three months ended September 30, 2021, compared to the same period in 2020. The $237,681 increase in general and administrative expenses is primarily attributable to incurring rent expense and related facilities costs totaling approximately $69,584; approximately $51,786 in payroll expenses; approximately $11,388 in insurance expense and approximately $86,590 in consulting fees, none of which were incurred during the three months ended September 30, 2020.
We expect our expenses to increase over the next several periods should we be successful in our new business plan, which will primarily consist of facilities costs, management and other salaries, travel, and other corporate overhead.
Interest Expense
Interest expense was $27,659 and $5,859 for the three months ended September 30, 2021, and September 30, 2020, respectively, representing an increase of $21,800. The increase is primarily the result of the incurrence of new debt obligations totaling $544,000.
Change in Fair Value of Derivative Liabilities
As of September 30, 2021, the Company did not have enough authorized and unissued shares of common stock to settle all its convertible debt obligations. As a result, the Company recognized obligations to issue a total of 4,367,807 shares of common stock upon convertible debt conversion to derivative liabilities in the accompanying consolidated balance sheets. For the three months ended September 30, 2021, the Company recognized a loss on the change in the fair value of derivative liabilities of $38,943. The Company had derivative liability obligations of $276,906 as of September 30, 2021.
Liquidity and Capital Resources
As of September 30, 2021, we had a working capital deficit of approximately $1,244,902. Over the next twelve months, we have estimated that in order to maintain reporting company status as defined under the Securities Exchange Act of 1934, we will require cash for general and administrative expenses primarily consisting of facilities costs payroll expenses and professional fees, which include accounting, legal and other professional fees, as well as filing fees.
We believe we will be able to meet these costs by raising additional funds through various financing sources, including the sale of our common or preferred stock and the procurement of commercial debt financing, and through our operations which are expected to commence during the second quarter of fiscal 2022. However, no assurance can be given that we will be able to raise additional capital, when needed or at all, or that such capital, if available, will be on acceptable terms. Further, we have recently entered the rehabilitation services industry and may not be able to operate our facilities at levels sufficient to meet our on-going obligations.
For the three months ended September 30, 2021, our operational cash flows primarily consisted of incurring expenses in the normal course of business at levels commensurate with its funding levels and resulting inabilities to commence commercially viable operations. Net cash used in operating activities was $335,677 during the three months ended September 30, 2021 and consisted of a net loss of $364,580 and net change in operating assets and liabilities of $35,624, which was offset by non-cash items of $64,527. The primary non-cash items for the three months ended September 30, 2021, consisted of amortization of debt discount of $11,067 and non-cash warrant amortization of $5,500 and change in derivative liabilities of $38,943. The significant change in operating assets and liabilities was an increase in accounts payable and accrued liabilities. We expect these operational cash uses to increase as we begin our operations in the first half of fiscal 2022.
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Our investing activities consisted of acquiring property and equipment totaling approximately $56,807. We expect to make additional capital expenditures as its rehabilitation facilities increase operations.
During the three months ended September 30, 2021, we generated $544,000 of net cash from financing activities through the issuance of convertible debt and notes payable which was offset by a $5,000 payment of accrued interest. We expect to continue our financing efforts throughout fiscal 2022.
Off-Balance Sheet Arrangements
During the three months ended September 30, 2021, and the year ended June 30, 2020, we did not engage in any off-balance sheet arrangements as set forth in Item 303(a)(4) of the Regulation S-K.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with US GAAP. The preparation of these financial statements requires our management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by our management for changes in facts and circumstances, and material changes in these estimates could occur in the future.
Business Combinations
Business combinations are accounted for at fair value. Acquisition costs are expensed as incurred and recorded in general and administrative expenses; previously held equity interests are valued at fair value upon the acquisition of a controlling interest; restructuring costs associated with a business combination are expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date affect income tax expense. Measurement period adjustments are made in the period in which the amounts are determined, and the current period income effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition date. All changes that do not qualify as measurement period adjustments are also included in current period earnings. The accounting for business combinations requires estimates and judgment as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair value for assets acquired and liabilities assumed. The fair values assigned to tangible and intangible assets acquired and liabilities assumed, including contingent consideration, are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the financial statements could result in a possible impairment of goodwill or the recognition of additional consideration which would be expensed. The fair value of contingent consideration is re-measured each period based on relevant information and changes to the fair value are included in the operating results for the period.
Goodwill
Goodwill represents the excess of fair value over identifiable tangible and intangible net assets acquired in business combinations. Goodwill is not amortized, instead goodwill is reviewed for impairment at least annually, or on an interim basis between annual tests when events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value.
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Embedded Conversion Features and Other Equity-linked Instruments (Derivative Liabilities)
The Company classifies all of its embedded debt conversion features, and other derivative financial instruments as equity if the contracts (1) require physical settlement or net-share settlement or (2) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (1) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), (2) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement), or (3) contracts that contain reset provisions. The Company assesses classification of its equity-linked instruments at each reporting date to determine whether a change in classification between equity and liabilities (assets) is required. As of September 30, 2021, the Company did not have enough authorized and unissued shares to settle all outstanding equity-linked instruments resulting in the reclassification of certain instruments to liability. The Company reclassifies outstanding instruments based on allocating the unissued shares to contracts with the earliest inception date resulting in the contracts with the latest inception date being recognized as liabilities first.
The Company accounts for contracts convertible into common stock in excess of its authorized capital as derivative as liabilities. The derivative liabilities are re-measured at fair value with the changes in the value reported as a component of other income (expense) in the accompanying consolidated results of operations. The derivative liabilities are measured at fair value using a Black Scholes option pricing model. The model is based on assumptions including quoted market prices and estimated volatility factors based on historical quoted market prices for the Company’s common stock and are classified within Level 3 of the fair value hierarchy as established by US GAAP. As of September 30, 2021, all derivative liability contracts are convertible into a fixed number of shares of common stock.
DESCRIPTION OF OUR CURRENT BUSINESS – REHABILITATION SERVICES
VBH Garden Grove
VBH Garden Grove intends to identify substance use disorder treatment facilities located in California to provide patient solutions that are able to economically accept select insurance payors to facilitate a broader patient base for Vital. VBH Garden Grove has identified various potential license holders and facilities located in Southern California and is in the due diligence phase for transaction consideration; however, there are no binding transactions for any licenses or facilities in California as of October 13, 2021.
Business of Vital Behavioral Health, Inc.
Vital’s operational plans are contingent upon whether we are able to:
| · | Obtain sufficient debt or equity financing to operate U.S. substance abuse facilities. |
| · | Secure leases for the substance abuse facilities. |
| · | Secure and have approved the required state licenses to operate the substance abuse facilities. |
| · | Meet applicable zoning requirements. |
Upon our acquisition of Vital we became a health and wellness company with a focus in the drug and alcohol rehabilitation services industry. Vital intends to operate U.S. facilities focusing on substance abuse treatment and offer various programs that help provide a continuum of care to its patients. We intend to become a national operator of clinical and transitional housing services for clients affected by substance use disorders and co-occurring disorders. Our treatment plans will be based on an individualized approach and will be customized to meet each client’s specific needs.
The facilities we intend to operate have access to Medically Monitored Withdrawal Management Services (MMWM), a Partial Hospitalization Program (PHP), an Intensive Outpatient Program (IOP), and an Outpatient Program (OP). Clients who participate in the PHP, IOP, and OP treatment programs will be eligible for housing through sober living accommodations that will be designed to give a client the ability to participate in his or her daily affairs and work and to have access to daily on-campus treatment at convenient times and locations.
We intend that most of our treatment facilities will be enrolled in Medicare or Medicaid and will bill and accept payments from those governmental programs. In most cases, it takes between 45 and 90 days for a Medicaid application to be processed and either accepted or denied by the state Medicaid office. However, depending on the circumstances and the state in which one resides, the application process could be shorter or longer. Most facilities that accept Medicaid generally provide programs with some degree of medical care and substance rehabilitation, including group and individual therapy, 12-step meetings, and other recovery activities, on a 24 hours per day basis in a highly structured setting. Short-term programs may last between 3 and 6 weeks and be followed by outpatient therapy. Long-term programs often last between 6 and 12 months and focus on re-socializing patients as they prepare to re-enter their communities. Intensive outpatient services (IOPs) typically offer at least 9 hours of therapy per week in sets of three 3-hour sessions, and some studies have found them to be similar to residential and inpatient programs in both services and effectiveness.
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Partial hospitalization programs (PHPs) provide care for people who need a more comprehensive level of treatment than standard or intensive outpatient. These programs typically consist of approximately 20 hours a week of treatment and may include vocational and educational counseling, family therapy, medically supervised use of medications, and treatment of co-occurring disorders. IOPs may also offer these services, but the time commitment of a PHP typically is greater.
We will offer both IOP and PHP services at our facilities and accept Medicare and Medicaid payor-qualified patients and clients.
VSL Frankfort intends to offer sober-designated living quarters for individuals who are in recovery. Operations for VSL Frankfort are intended to commence once VBH Kentucky obtains the operating entitlements for its outpatient substance use treatment facility in Frankfort, Kentucky. Until such time, VSL Frankfort’s operations will be limited to planning and preparation.
All of our plans reflected above and below are contingent upon receiving adequate debt and/or equity financing of which there are no assurances we will be successful in obtaining.
Our Future Services and Solutions
We intend to provide quality, comprehensive, and compassionate care to adults struggling with alcohol and/or drug abuse and dependence as well as co-occurring mental health issues. We will maintain a research-based, disciplined treatment plan for all patients with schedules designed to engage the patient in an enriched recovery experience. Our purpose and passion are to empower the individual, their families, and the broader community through the promotion of optimal wellness of the mind, body, and spirit.
We plan to offer the following types of therapy: motivational interviewing, cognitive behavioral therapy, rational emotive behavior therapy, dialectical behavioral therapy, solution-focused therapy, eye movement desensitization and reprocessing, and systematic family intervention. Our variety of therapy settings includes individual, group, and family therapies, recovery-oriented challenge therapies, expressive therapies (with a focus on music and art), and trauma therapies.
We also intend to provide Medicated-Assisted Treatment (“MAT”), which is the use of FDA-approved medications, in combination with counseling and behavioral therapies, to provide a “whole-patient” approach to the treatment of substance use disorders. We believe that it is particularly effective for treating certain conditions such as opioid use disorder, alcohol use disorder, and tobacco use disorder. The use of MAT has been shown to significantly reduce overdoses from opioids and to improve long-term abstinence.
Considering the high level of co-occurring substance abuse, mental health, and medical conditions, we will offer patients a spectrum of psychiatric, medical, and wellness-focused services based upon individual needs as assessed through comprehensive evaluations at admission and throughout participation in the program. To maximize the likelihood of long-term recovery, all program levels will provide patients access to the following services: assessment of individual substance abuse, mental health, medical history, and physical condition promptly upon admission; psychiatric evaluations; psychological evaluations, and services based on patient needs; follow-up appointments with physicians and psychiatrists; medication monitoring; educational classes regarding health risks, nutrition, smoking cessation, HIV awareness, life skills, healthy nutritional programs, and dietary plans; access to fitness facilities; interactive wellness activities; and structured daily schedules designed for restorative sleep patterns.
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We plan to emphasize clinical treatment, as well as the therapeutic value of overall physical and nutritional wellness. We are committed to providing fresh and nutritious meals throughout a patient’s stay in order to promote healthy routines, beginning with diet and exercise. Our facilities will offer comprehensive work-out facilities either on-site or within walking distance, as well as various exercise classes and other amenities. We will support long-term recovery for patients through research-based methodologies and individualized treatment planning while utilizing 12-step programs, which are a set of guiding principles outlining a course of action for recovery.
We plan to have a differentiated ability to manage dual diagnosis cases and coordinate treatment of individuals suffering from the common combination of mental illness and substance abuse simultaneously. These patients participate in education and discussion-oriented groups designed to provide information regarding the psychiatric disorders that co-occur with chemical dependency.
We plan to have a strong emphasis on tracking patient satisfaction scores in order to measure our patient and staff interaction and overall outcome and reputation. In addition to patient satisfaction surveys that we will receive after a patient’s discharge, we also will solicit feedback during a patient’s stay at our inpatient facilities. This allows us to further tailor an individual’s treatment plan to emphasize the programs that have been more impactful to a particular patient.
We believe in tracking clinical outcomes. We intend to track and measure patient outcomes in order to drive continual improvement in our programs.
We plan offer a full spectrum of treatment services to patients based upon individual needs that are assessed through comprehensive evaluations at admission and throughout their participation in the program. The assignment and frequency of services will correspond to individualized treatment plans within the context of the level of care and treatment intensity level.
| · | Detoxification (“detox”). Detoxification is usually conducted at an inpatient facility for patients with physical or psychological dependence. Detoxification services are designed to clear toxins out of the body so that the body can safely adjust and heal itself after being dependent upon a substance. Patients are medically monitored 24 hours per day, seven days per week, by experienced medical professionals who work to alleviate withdrawal symptoms through medication, as appropriate. We plan to provide detoxification services for several substances including alcohol, sedatives, and opiates. |
| · | Residential Treatment. Residential care is a structured treatment approach designed to prepare patients to return to the general community with a sober lifestyle, increased functionality, and improved overall wellness. Treatment is provided on a 24 hours per day, seven days per week basis, and services generally include a minimum of two individual therapy sessions per week, regular group therapy, family therapy, didactic and psycho-educational groups, exercise (if cleared by medical staff), case management, and recreational activities. Medical and psychiatric care will be available to all patients, as needed, through our planned contracted professional physician groups. |
| · | Partial Hospitalization. Partial hospitalization is a structured program providing care a minimum of 20 hours per week. This program is designed for patients who are stable enough physically and psychologically to participate in everyday activities but who still require a degree of medical monitoring. Services include a minimum of weekly individual therapy, regular group therapy, family education and family therapy, didactic and psycho-educational groups, exercise (if cleared by medical staff), case management, and off-site recovery meetings and activities. Medical and psychiatric care will be available to all patients, as needed, through our planned contracted professional physician groups. |
| · | Intensive Outpatient Services. Less intensive than the aforementioned levels of care, intensive outpatient services are comprised of a structured program providing care three days per week for three hours per day at a minimum. Designed as a “step down” from partial hospitalization, this program reinforces progress and assists in the attainment of sobriety, reduction of detrimental behaviors, and improved overall wellness of patients while they integrate and interact in the community. Services include weekly individual therapy, group therapy, family education and family therapy, didactic and psycho-educational groups, case management, off-site recovery meetings and activities, and intensive transitional and aftercare planning. |
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| · | Outpatient Services. Traditional outpatient services are delivered in regularly scheduled sessions, usually less the nine hours per week. Outpatient services include professionally directed screening, assessment, therapy, and other services designed to support successful transition to the community and long-term recovery. These services are tailored to a person’s specific needs and stage of recovery and may involve many modalities, including motivational enhancement, family therapy, educational groups, occupational and recreational therapy, psychotherapy, and pharmacotherapy. |
| · | Ancillary Services. In addition to our inpatient and outpatient treatment services, we intend to provide medical monitoring for adherence to addiction treatment, clinical diagnostic laboratory services, and physician services to our patients through our contracted laboratories and professional physician groups. We believe toxicological monitoring of patients is an important component of substance abuse treatment. Patients are evaluated for illicit substances upon admission and thereafter on a random basis and as otherwise determined to be medically necessary by the treating physician. |
| · | Sober Living Facilities. We plan to provide sober living arrangements that serve as an interim environment for patients transitioning from inpatient treatment centers to lower levels of care and eventually back to their former living arrangements. Sober living facilities enable us to utilize existing beds for patients requiring higher levels of care, while still providing housing for patients completing outpatient treatment programs. We provide sober living arrangements to patients through our owned and leased properties in Texas, Nevada, Mississippi, and Florida. We plan to continue using sober living facilities as a complement to our outpatient services. |
Business Strategies
Vital plans to hire highly trained and experienced clinical staff to deploy research-based treatment programs with structured curricula for detoxification, inpatient treatment, partial hospitalization, and intensive outpatient care. By keeping the majority of its treatment facilities and housing on campuses that are conveniently located within walking distance to traditional community services, we are striving to create so-called ‘sober cities’ in the United States that will nurture its clients’ development at all stages from detox to long-term self-sufficiency. By applying a tailored treatment program based on the individual needs of each patient, many of whom require treatment for a co-occurring mental health disorder such as depression, bipolar disorder, or schizophrenia, we believe we will offer the level of quality care and service necessary for our patients to achieve and maintain sobriety. Development of our business and the Vital Behavioral Health and Vital Sober Living national brands is contingent upon our ability to raise sufficient funds to fund hiring clinical experts, leasing facilities, and hiring professional staff, and national sales and marketing programs. We will engage the following strategies:
| · | Clinical excellence and outcomes-driven treatment. Our operations require us to comply with the national standard for quality and sustainable outcomes in addiction treatment and to ongoing measurement and transparency regarding patient outcomes. In addition to measurement of patient outcomes and satisfaction with treatment, we plan to advance utilization of modern, evidence-based interventions that address addiction as a chronic brain disease, as supported by the science. |
| · | Improve census over time at existing facilities. We plan to connect with potential patients through a multi-faceted program that involves education about the disease of addiction and the development of relationships with healthcare professionals, digital marketing, as well as such traditional channels as television, radio and print advertising. We plan to will take a consultative, empathetic approach in operating our admissions department to allow our personnel to effectively identify and enroll patients who may benefit from our treatment service offerings. |
| · | Target complementary growth opportunities. We plan to pursue growth opportunities that are complementary to our business, including providing laboratory services to other substance abuse treatment providers and expanding other ancillary services. |
| · | Develop outpatient operations. We plan to selectively pursue opportunities to add outpatient centers to complement our broader network of inpatient treatment facilities. We believe expanding our reach by developing or acquiring premium outpatient facilities of a quality consistent with our inpatient services will further enhance our brand and our ability to provide a more comprehensive suite of services across the spectrum of care. |
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| · | Opportunistically diversify our portfolio of treatment facilities. We intend to selectively seek acquisition opportunities to expand and diversify our geographic presence, service offerings, and the portion of the population that can access our services based on their individual healthcare coverage We believe that most mental health and substance abuse treatment companies in operation are small, regional operations and this high level of fragmentation presents us with the opportunity to acquire facilities or small providers and create economies of scale and enhanced patient care. All of the above plans are contingent upon adequate funding of which there are no assurances. |
Sales and Marketing
We intend to use a multi-faceted approach to reach potential patients suffering from the disease of addiction and co-occurring psychiatric disorders. This multi-pronged approach will include:
| · | National Marketing Force. We intend to deploy and manage a team of representatives that will focus on developing relationships with hospitals, other treatment facilities, psychiatrists, therapists, social workers, employers, unions, alumni, and employee assistance programs. Our sales representatives will educate these various constituents about the disease of addiction and the variety of treatment services that we provide. |
| · | Multi-Media Marketing. Through comprehensive online directories of treatment providers, treatment provider reviews, user content that discusses the disease of addiction, treatment and recovery, as well as discussion forums and professional communities, our future addiction-related websites will serve families and individuals who are struggling with addiction and seeking treatment options. Additionally, we plan to pursue advertising opportunities in television commercials, radio spots, newspaper articles, medical journals, and other print media that promote our facilities and have the intent to build our integrated, national brand. |
| · | Recommendations by Alumni. We anticipate receiving new patients who are directly referred to our facilities by our satisfied and supportive alumni, as well as their friends and families. As our national brand continues to grow and our business continues to increase, we believe our alumni will become an increasingly important source of business for us. |
The extent that we are able to implement the foregoing or even able to implement any of the foregoing sales and marketing plans are contingent upon adequate funding, of which there are no assurances.
Admissions Center Operations
We intend to maintain a 24-hours per day, seven days per week, remote admissions center. Our centralized admissions center initially will be provided by a third-party provider that will focus on outreach and enrolling patients. As part of its role, the admissions center team will conduct benefits verification, handle initial communication with insurance companies, complete patient intake screenings, consult with our clinicians where necessary regarding a potential patient’s specific medical or psychological condition, begin the pre-certification process for treatment authorization, help each patient choose a proper treatment facility for his or her clinical and financial needs, and assist patients with arrangements and logistics.
Professional Groups
We plan to become affiliated with groups of physicians and mid-level service providers that may provide certain professional services to our patients through professional services agreements with certain of our treatment facilities (the “Professional Groups”). Under the professional services agreements, the Professional Groups may provide a physician to serve as medical director for the applicable facility. The Professional Groups may either bill the payor for their services directly or be compensated by the treatment facility based on fair market value hourly rates.
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Competition
Our competitors have greater assets, revenues, operational resources and financial resources than we do. The market for mental health and substance abuse treatment facilities is highly fragmented with approximately 12,000 different companies providing services to the adult and adolescent population, of which only 30% are operated by for-profit organizations (Source: DHHS, 2020 Data on Substance Abuse Treatment Facilities). Our inpatient treatment facilities will compete with several national competitors and many regional and local competitors. Some of our competitors are government entities that are supported by tax revenue, and others are non-profit entities that are primarily supported by endowments and charitable contributions. We do not receive financial support from these sources. Some larger companies in our industry compete with us on a national scale and offer substance use treatment services among other behavioral healthcare services. To a lesser extent, we also compete with other providers of substance use treatment services, including other inpatient behavioral healthcare facilities and general acute care hospitals.
We believe the primary competitive factors affecting our business include:
| · | quality of clinical programs and services; |
| · | reputation and brand recognition; |
| · | overall aesthetics of the facilities; |
| · | amenities offered to patients; |
| · | relationships with payors and referral sources; |
| · | sales and marketing capabilities; |
| · | information systems and proprietary data analytics; |
| · | senior management experience; and |
| · | national scope of operations. |
Revenues
We plan to generate revenues through our Vital Behavioral Health operations from behavioral health treatment services at our inpatient and outpatient treatment facilities, which will be derived from personally funded patients (i.e., private payor), insurance companies (e.g., United Healthcare and Blue Cross and Blue Shield), and government program payors (e.g., Medicaid and Medicare) that act as the primary payment or reimbursement source of funds for our patient services. We also plan to generate revenues through our Vital Sober Living operations as a landlord through the provision of sober living residences that are supported by our Vital Behavioral Health patient services. Initially, we expect that our revenue-producing operations will commence in Frankfort, Kentucky.
RESULTS OF OPERATIONS
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
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2021, our disclosure controls and procedures were not effective due to the size and nature of the existing business operation. Given the size of our current operation and existing personnel, the opportunity to implement internal control procedures that segregate accounting duties and responsibilities is limited. Until the organization can increase in size to warrant an increase in personnel, formal internal control procedure will not be implemented until they can be effectively executed and monitored. As a result of the size of the current organization, there will not be significant levels of supervision, review, independent directors nor formal audit committee.
Changes in Internal Control Over Financial Reporting
During the three months ended September 30, 2021, there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
As of the date of this report, the Company is not currently involved in any legal proceedings.
Item 1A. Risk Factors
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item. However, the risks associated with our Company are set forth in the "Risk Factors" section of our Form 10-K for our fiscal year ended June 30, 2021. In addition, the following industry-specific risks may be associated with our entry into the substance use disorder treatment business.
Item 1A. Risk Factors
Risks Related to Our Business
Our revenue, profitability and cash flows could be materially adversely affected if we are unable to operate certain key treatment facilities, our corporate office or our laboratory facilities.
We intend to derive a significant portion of our revenue from our flagship treatment facilities located in Kentucky. It is likely that a small number of facilities will continue to contribute a significant portion of our total revenue in any given year for the foreseeable future. Additionally, we have a centralized corporate office that houses our accounting, billing and collections, information technology, and admissions center departments, centralized and marketing offices. We also are building out a high complexity laboratory that will conduct quantitative drug testing and other laboratory services. If any event occurs that results in a complete or partial shutdown of any of these facilities, our centralized corporate office, our centralized marketing offices or laboratory, including, without limitation, any material changes in legislative, regulatory, economic, environmental, or competitive conditions in these states or natural disasters such as hurricanes, earthquakes, tornadoes, or floods or prolonged airline disruptions due to a natural disaster or for any reason, such event could lead to decreased revenue and/or higher operating costs, which could have a material adverse effect on our revenue, profitability, and cash flows.
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Any disruption in our national sales and marketing program, including our digital marketing resources, could have a material adverse effect on our business, financial condition, and results of operations.
If any disruption occurs in our national sales and marketing program for any reason, or if we are unable to effectively attract and enroll new patients to our network of facilities, our ability to maintain census could be adversely affected, which could have a material adverse effect on our business, financial condition and results of operations.
Internet search engines play an increasingly important role in addiction treatment marketing. Google and other search engines use complex algorithms to rank websites. The algorithms take into account many factors, including the domain name itself, website content and user-friendly factors such as the speed at which the website pages may be clicked through and viewed. We cannot predict or control changes in algorithms and website rankings, which may result in lower ranking search results for our websites. Additionally, Google and other online platforms have instituted review processes required to advertise on their websites. Some of these processes are time-consuming, complex and continuously evolving. We cannot predict how these private processes, rules and restrictions will evolve or be applied to individual advertising applicants. Unexpected changes in these areas may result in a decrease in calls to our admissions center, a decrease in interactions with potential patients and a lowering of our census, which could have and material adverse effects on our business, financial condition and results of operations.
In addition, our ability to grow or even to maintain our existing level of business depends significantly on our ability to establish and maintain close working and referral relationships with hospitals, other treatment facilities and clinicians, employers, alumni, employee assistance programs and other referral sources. We have no binding commitments with any of these referral sources. We may not be able to maintain our existing referral relationships or develop and maintain new relationships in existing or new markets. Negative changes to our existing referral relationships may cause the number of people to whom we provide care to decrease, which could have material adverse effects on our business, financial condition and results of operations.
If reimbursement rates paid by third-party payors are reduced, if we are unable to maintain favorable contract terms with payors or comply with our payor contract obligations, or if third-party payors otherwise restrain our ability to obtain or provide services to patients, our business, financial condition and results of operation could be adversely affected. This risk is heightened because we are generally an “out-of-network” provider.
Managed care organizations and other third-party payors pay for the services that we provide to many of our patients. We anticipate that approximately 90% or more of our revenue will be reimbursable by third-party payors, including amounts paid by such payors to patients, with the remaining portion payable directly by our patients. If any of these third-party payors reduce their reimbursement rates or elect not to cover some or all of our services, our business, financial condition, and results of operations may be materially adversely affected.
In addition to limits on the amounts payors will pay for the services we provide to their members or participants, controls imposed by third-party payors designed to reduce admissions and the length of stay for patients, including pre-admission authorizations and utilization review, have affected and are expected to affect our facilities. Utilization review entails the review of the admission and course of treatment of a patient by third-party payors. Inpatient utilization, average lengths of stay, and occupancy rates are likely to be negatively affected by payor-required preadmission authorization and utilization review and by payor pressure to maximize outpatient and alternative healthcare delivery services for less acutely ill patients.
We believe that, generally, health insurance companies have become more stringent and aggressive with respect to addiction treatment providers, taking measures that are putting pressure on reimbursement rates, length of stay, and timing of reimbursement throughout the industry. We expect that payor efforts to impose more stringent cost controls will continue. Although we are unable to predict the effect these controls and changes could have on our operations, significant limits on the scope of services reimbursed and on reimbursement rates and fees could have a material adverse effect on our business, financial condition, and results of operations. If the rates paid or the scope of substance use treatment services covered by third-party commercial payors are reduced, our business, financial condition, and results of operations could be materially adversely affected.
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Third-party payors often use plan structures, such as narrow networks or tiered networks, to encourage or require patients to use in-network providers. In-network providers typically provide services through third-party payors for a negotiated lower rate or other less favorable terms. Third-party payors generally attempt to limit use of out-of-network providers by requiring patients to pay higher copayment and/or deductible amounts for out-of-network care. Additionally, third-party payors have become increasingly aggressive in attempting to minimize the use of out-of-network providers by disregarding the assignment of payment from patients to out-of-network providers (i.e., sending payments directly to patients instead of to out-of-network providers), capping out-of-network benefits payable to patients, waiving out-of-pocket payment amounts, and initiating litigation against out-of-network providers for interference with contractual relationships, insurance fraud, and violation of state licensing and consumer protection laws. The majority of third-party payors consider certain of our facilities to be “out-of-network” providers. If third-party payors continue to impose and to increase restrictions on out-of-network providers, our revenue could be threatened, forcing our facilities to participate with third-party payors and accept lower reimbursement rates compared to our historic reimbursement rates.
Third-party payors also are entering into sole source contracts with some healthcare providers, which could effectively limit our pool of potential patients. Moreover, third-party payors are beginning to carve out specific services, including substance abuse treatment and behavioral health services, and establish small, specialized networks of providers for such services at fixed reimbursement rates. Continued growth in the use of carve-out arrangements could materially adversely affect our business to the extent we are not selected to participate in such smaller specialized networks or if the reimbursement rate is not adequate to cover the cost of providing the service.
If reimbursement rates paid by federal or state healthcare programs are reduced or if government payors otherwise restrain our ability to obtain or provide services to patients, our business, financial condition, and results of operation could be adversely affected.
Managed care organizations and other third-party payors, both government and commercial, pay for the services that we provide to many of our patients. We intend for a significant portion of our revenues to come from government healthcare programs, principally Medicare and Medicaid. Payments from federal and state government programs are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review, and federal and state funding restrictions, all of which could materially increase or decrease program payments, as well as affect the cost of providing service to patients and the timing of payments to facilities.
We are unable to predict the effect of recent and future policy changes on our operations. In addition, the uncertainty and fiscal pressures placed upon federal and state governments as a result of, among other things, deterioration in general economic conditions and the funding requirements from the federal healthcare reform legislation, may affect the availability of taxpayer funds for Medicare and Medicaid programs. Changes in government healthcare programs may reduce the reimbursement we receive and could adversely affect our business and results of operations.
As federal healthcare expenditures continue to increase, and state governments continue to face budgetary shortfalls, federal and state governments have made, and continue to make, significant changes in the Medicare and Medicaid programs. These changes include reductions in reimbursement levels and to new or modified demonstration projects authorized pursuant to Medicaid waivers. Some of these changes have decreased, or could decrease, the amount of money we receive for our services relating to these programs. In some cases, private third-party payers rely on all or portions of Medicare payment systems to determine payment rates. Changes to government health care programs that reduce payments under these programs may negatively impact payments from private third-party payers.
In addition to limits on the amount payors will pay for the services we provide to their members, government and commercial payors attempt to control costs by imposing controls designed to reduce admissions and the length of stay for patients, including preadmission authorizations and utilization review. The ability of governmental payors to control healthcare costs using these measures may be enhanced by the increasing consolidation of insurance and managed care companies and vertical integration of health insurers with healthcare providers. Although we are unable to predict the effect these controls and changes could have on our operations, significant limits on the scope of services reimbursed and on reimbursement rates and fees could have a material adverse effect on our business, financial condition and results of operations. If the rates paid or the scope of substance use treatment services covered by government payors are reduced, our business, financial condition and results of operations could be materially adversely affected.
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If we overestimate the reimbursement amounts that payors will pay us for out-of-network services performed, it would increase our revenue adjustments, which could have a material adverse effect on our revenue, profitability, and cash flows and lead to significant shifts in our results of operations from quarter to quarter that may make it difficult to project long-term performance.
For out-of-network services, we recognize revenue from payors at the time services are provided based on our estimate of the amount that payors will pay us for the services performed. We estimate the net realizable value of revenue by adjusting gross patient charges using our expected realization and applying this discount to gross patient charges. A significant or sustained decrease in our collection rates could have a material adverse effect on our operating results. There is no assurance that we will be able to maintain or improve historical collection rates in future reporting periods.
Estimates of net realizable value are subject to significant judgment and approximation by management. It is possible that actual results could differ from the historical estimates management has used to help determine the net realizable value of revenue. If our actual collections either exceed or are less than the net realizable value estimates, we will record a revenue adjustment, either positive or negative, for the difference between our estimate of the receivable and the amount actually collected in the reporting period in which the collection occurred. A significant negative revenue adjustment could have a material adverse effect on our revenue, profitability and cash flows in the reporting period in which such adjustment is recorded. In addition, if we record a significant revenue adjustment, either positive or negative, in any given reporting period, it may lead to significant changes in our results from operations from quarter to quarter, which may limit our ability to make accurate long-term predictions about our future performance.
Certain third-party payors are likely to account for a significant portion of our revenue, and the reduction of reimbursement rates or coverage of services by any such payor could have a material adverse effect on our revenue, profitability and cash flows.
We intend that certain payors such as Medicaid and Medicare will account for a significant portion of our revenue on an annual basis. If any of these or other third-party payors reduce their reimbursement rates for the services we provide or otherwise implement measures, such as specialized networks, that reduce the payments we receive, our revenue, profitability, and cash flows could be materially adversely affected.
A deterioration in the collectability of the accounts receivable could have a material adverse effect on our business, financial condition, and results of operations.
The collection of receivables from third-party payors and patients will be critical to our operating performance. Our primary collection risks are: (i) the risk of overestimating our net revenue at the time of billing, which may result in us receiving less than the recorded receivable; (ii) the risk of non-payment as a result of commercial insurance companies denying claims; (iii) in certain states, the risk that patients will fail to remit insurance payments to us when the commercial insurance company pays out-of-network claims directly to the patient; and (iv) resource and capacity constraints that may prevent us from handling the volume of billing and collection issues in a timely manner. Additionally, our ability to hire and retain experienced personnel may affect our ability to bill and collect accounts in a timely manner.
We intend to routinely review accounts receivable balances in conjunction with these factors and other economic conditions that might ultimately affect the collectability of the patient accounts and to adjust our allowances as warranted. Significant changes in business operations, payor mix or economic conditions, including changes resulting from legislation or other health reform efforts (including to repeal or significantly change the Affordable Care Act), could affect our collection of accounts receivable, cash flows, and results of operations. In addition, future patient concentration in states that permit commercial insurance companies to pay out-of-network claims directly to the patient instead of the provider, such as California and Nevada, could adversely affect our collection of receivables. Unexpected changes in reimbursement rates by third-party payors could have a material adverse effect on our business, financial condition, and results of operations.
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Our business depends on our information systems. Failure to effectively integrate, manage, and keep our information systems secure could disrupt our operations and have a material adverse effect on our business.
Our business depends on effective and secure information systems that assist us in, among other things, admitting patients to our facilities, monitoring census and utilization, processing and collecting claims, reporting financial results, measuring outcomes and quality of care, managing regulatory compliance controls, and maintaining operational efficiencies. These systems may include software developed in-house and systems provided by external contractors and other service providers. To the extent that these external contractors or other service providers become insolvent or fail to support the software or systems, our operations could be negatively affected. Our facilities also depend upon our information systems for electronic medical records, accounting, billing, collections, risk management, payroll, and other information. If we experience a reduction in the performance, reliability, or availability of our information systems, our operations and ability to process transactions and produce timely and accurate reports could be adversely affected.
Our information systems and applications require continual maintenance, upgrading, and enhancement to meet our operational needs. We regularly upgrade and expand our information systems’ capabilities. If we experience difficulties with the transition and integration of information systems or are unable to implement, maintain, or expand our systems properly or in a timely manner, we could suffer from, among other things, operational disruptions, regulatory problems, working capital disruptions, and increases in administrative expenses.
In addition, we could be subject to cybersecurity risks such as a cyber-attack that bypasses our information technology security systems and other security incidents that result in security breaches, including the theft, loss, destruction, or misappropriation of individually identifiable health information subject to HIPAA and other privacy and security laws, proprietary business information, or other confidential or personal data. Such an incident could disrupt our information technology systems, impede clinical operations, cause us to incur significant investigation and remediation expenses, and subject us to litigation, government inquiries, penalties, and reputational damages. Information security and the continued development, maintenance, and enhancement of our safeguards to protect our systems, data, software, and networks are a priority for us. As security threats continue to evolve, we may be required to expend significant additional resources to modify and enhance our safeguards and investigate and remediate any information security vulnerabilities. Cyber-attacks may also impede our ability to exercise sufficient disclosure controls. If we are subject to cyberattacks or security breaches, our business, financial condition, and results of operations could be adversely impacted.
Further, our information systems are vulnerable to damage or interruption from fire, flood, natural disaster, power loss, telecommunications failure, break-ins, and similar events. A failure to implement our disaster recovery plans or ultimately restore our information systems after the occurrence of any of these events could have a material adverse effect on our business, financial condition, and results of operations. Because of the confidential health information that we store and transmit, loss, theft or destruction of electronically stored information for any reason could expose us to a risk of regulatory action, litigation, liability to patients and other losses.
Our acquisition strategy exposes us to a variety of operational, integration, and financial risks, which may have a material adverse effect on our business, financial condition, and results of operations.
An element of our business strategy is to grow by acquiring other companies and assets in the mental health and substance abuse treatment industry. We evaluate potential acquisition opportunities consistent with the normal course of our business. Our ability to complete acquisitions is subject to a number of risks and variables, including our ability to negotiate mutually agreeable terms with the counterparties, our ability to finance the purchase price and our ability to obtain any licenses or other approvals required to operate the assets to be acquired. We may not be successful in identifying and consummating suitable acquisitions, which may impede our growth and negatively affect our results of operations and may also require a significant amount of management resources. In addition, rapid growth through acquisitions exposes us to a variety of operational and financial risks. We summarize the most significant of these risks below.
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Integration Risks
We must integrate our acquisitions with our existing operations. This process involves various components of our business and the businesses we have acquired, including the following:
| · | physicians and employees who are not familiar with our operations; |
| · | patients who may elect to switch to another substance abuse treatment provider; |
| · | assignment or termination of material contracts, including commercial payor agreements; |
| · | regulatory compliance programs and state and federal licensing requirements; and |
| · | disparate operating, information and record keeping systems and technology platforms. |
The integration of acquisitions with our operations could be expensive, require significant attention from management, may impose substantial demands on our operations or other projects, and may impose challenges on the combined business including, without limitation, consistencies in business standards, procedures, policies, business cultures, internal controls, and compliance. In addition, certain acquisitions require a capital outlay, and the return we achieve on such invested capital may be less than the return that we could achieve on other projects or investments.
Expected Benefits May Not Materialize
When evaluating potential acquisition targets, we identify potential synergies and cost savings that we expect to realize upon the successful completion of the acquisition and the integration of the related operations. We may, however, be unable to achieve or may otherwise never realize the expected benefits. Our ability to realize the expected benefits from potential cost savings and revenue improvement opportunities is subject to significant business, economic, and competitive uncertainties, many of which are beyond our control. Such uncertainties may include changes to regulations impacting the substance abuse treatment and behavioral healthcare industries, reductions in reimbursement rates from third-party payors, operating difficulties, difficulties obtaining required licenses and permits, patient preferences, changes in competition, and general economic or industry conditions. If we do not achieve our expected results, it may adversely impact our results of operations.
Assumptions of Unknown Liabilities
Businesses that we acquire may have unknown or contingent liabilities, including, without limitation, liabilities for failure to comply with healthcare laws and regulations. Although we typically attempt to exclude significant liabilities from our acquisition transactions and seek indemnification from the sellers of such facilities for at least a portion of these matters, we may experience difficulty enforcing those indemnification obligations, or we may incur material liabilities in excess of any indemnification for the past activities of acquired facilities. Such liabilities and related legal or other costs and/or resulting damage to a facility’s reputation could negatively impact our business.
Completing Acquisitions
Suitable acquisitions may not be accomplished due to unfavorable terms. Further, the cost of an acquisition could result in a dilutive effect on our results of operations, depending on various factors, including the amount paid for an acquired facility, the acquired facility’s results of operations, the fair value of assets acquired, and liabilities assumed, effects of subsequent legislation, and limits on reimbursement rate increases. In addition, we may have to pay cash, incur additional debt, or issue equity securities to pay for any such acquisition, which could adversely affect our financial results, result in dilution to our existing stockholders, result in increased fixed obligations, or impede our ability to manage our operations.
Managing Growth
Some of the facilities we may acquire in the future either had or may have significantly lower operating margins than the facilities we operated prior to the time of our acquisition thereof or had or may have operating losses prior to such acquisition. If we fail to improve the operating margins of the facilities we acquire, operate such facilities profitably, or effectively integrate the operations of acquired facilities, our results of operations could be negatively impacted.
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Liquidity risk could impair our ability to fund operations and meet our obligations as they become due, and our funding sources may be insufficient to fund our future operations and growth.
Liquidity is essential to our business. Liquidity risk is the potential that we will be unable to meet our obligations as they come due because of an inability to obtain adequate funding. An inability to obtain such funding, at competitive rates or at all, could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically or the healthcare industry or economy in general.
Any substantial, unexpected and/or prolonged change in the level or cost of liquidity could have a material adverse effect on our ability to fund our future operations and growth, which could have a material adverse effect on our assets, business, cash flow, condition (financial or otherwise), liquidity, prospects and results of operations.
The uncertainties associated with the factors described above raise substantial doubt about our ability to continue as a going concern. In order for us to continue operations beyond the next twelve months and to be able to discharge our liabilities and commitments in the normal course of business, we must do some or all of the following: (i) increase the bed counts and other capacities at our facilities; (ii) increase gross revenues while improving operating margins through cost savings initiatives; and (iii) obtain additional financing. There can be no assurance that we will be able to achieve any or all of the foregoing objectives.
We will need additional financing to execute our long-term business plan and fund operations, at which time additional financing may not be available on reasonable terms or at all.
To fund our acquisition development and operational strategies, we may consider raising additional funds through various financing sources, including the sale of our common or preferred stock and the procurement of commercial debt financing. However, there can be no assurance that such funds will be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to expand or continue our business as desired and operating results may be adversely affected. Any debt financing will increase expenses and must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the percentage ownership of our existing stockholders will be reduced, and our stockholders may experience additional dilution in net book value per share.
Our ability to obtain needed financing may be impaired by such factors as the capital markets, both generally and specifically in our industry, which could impact the availability or cost of future financings. Any deterioration of credit and capital markets may adversely affect our access to sources of funding, and we cannot be certain that we will have access to adequate capital to fund our acquisition and development strategies when needed. In addition, substantial sales of our common stock by existing stockholders could adversely affect our stock price and limit our ability to raise capital. If the amount of capital we are able to raise from financing activities, together with our revenue from operations, is not sufficient to satisfy our capital needs, we may be required to decrease the pace of, or eliminate, our acquisition strategy and potentially reduce or even cease operations.
Our business may face significant risks with respect to future de novo expansion, including the time and costs of identifying new geographic markets, the ability to obtain necessary licensure and other zoning or regulatory approvals and significant start-up costs including advertising, marketing, and the costs of providing equipment, furnishings, supplies, and other capital resources.
As part of our growth strategy, we intend to develop new substance abuse treatment facilities in existing and new markets, either by building a new facility or by acquiring an existing facility with an alternative use and repurposing it as a substance abuse treatment facility. Such de novo expansion involves significant risks, including, but not limited to, the following:
| · | the time and costs associated with identifying locations in suitable geographic markets, which may divert management attention from existing operations; |
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| · | the possibility of changes to comprehensive zoning plans or zoning regulations that imposes additional restrictions on use or requirements, which could impact our expansion into otherwise suitable geographic markets; |
| · | the need for significant advertising and marketing expenditures to attract patients; |
| · | our ability to provide each de novo facility with the appropriate equipment, furnishings, materials, supplies, and other capital resources; |
| · | our ability to obtain licensure and accreditation, establish relationships with healthcare providers in the community, and delays or difficulty in installing our operating and information systems; |
| · | the costs of evaluating new markets, hiring experienced local physicians, management, and staff, and opening new facilities, and the time lags between these activities and the generation of sufficient revenue to support the costs of the expansion; and |
| · | our ability to finance de novo expansion and possible dilution to our existing stockholders if our common stock is used as consideration. |
As a result of these and other risks, there can be no assurance that we will be able to develop de novo treatment facilities or that a de novo treatment facility will become profitable. De novo expansion could expose us to liabilities or loss.
Our ability to maintain census is dependent on a number of factors outside of our control, and if we are unable to maintain census (i.e., our daily patient occupancy), our business, results of operations and cash flows could be materially adversely affected.
Our revenue is directly impacted by our ability to maintain census (i.e., the daily patient occupancy of our facilities by bed count). Our ability to maintain census is dependent on a variety of factors, many of which are outside of our control, including our referral relationships, average length of stay of our patients, the extent to which third-party payors require preadmission authorization or utilization review controls, competition in the industry, and the decisions of our patients to seek and commit to treatment.
A significant decrease in census could materially adversely affect our revenue, profitability, and cash flows due to fewer or lower reimbursements received and the additional resources required to collect accounts receivable and maintain our existing level of business.
Given the patient-driven nature of the substance abuse treatment sector, our business is dependent on patients seeking and committing to treatment. Although increased awareness and de-stigmatization of substance abuse treatment in recent years has resulted in more people seeking treatment, the decision of each patient to seek treatment is ultimately discretionary. In addition, even after the initial decision to seek treatment, our patients may decide at any time to discontinue treatment and leave our facilities against the advice of our physicians and other treatment professionals. For this reason, among others, average length of stay can vary among periods without correlating to the overall operating performance of our business. If patients or potential patients decide not to seek treatment or discontinue treatment early, census could decrease and, as a result, our business, financial condition, and results of operations could be adversely affected.
We operate in a highly competitive industry where competition may lead to declines in patient volumes and an increase in labor costs, which could have a material adverse effect on our business, financial condition, and results of operations.
The substance abuse treatment industry is highly competitive, and competition among substance abuse treatment providers (including behavioral healthcare facilities) for patients has intensified in recent years. In 2018, there were approximately 4,200 substance abuse treatment businesses in the United States. There are behavioral healthcare facilities that provide substance abuse and other mental health treatment services comparable to at least some of the services offered by our facilities in each of the geographical areas in which we intend to operate. Some of our competitors are owned by tax-supported governmental agencies or by nonprofit corporations and may have certain financial advantages not available to us, including endowments, charitable contributions, tax-exempt financing, and exemptions from sales, property, and income taxes. In some markets, certain of our competitors may have greater financial resources, be better equipped, and offer a broader range of services than we do. Some of our competitors are local, independent operators or physician groups with strong established reputations within the surrounding communities, which may adversely affect our ability to attract new patients in markets where we compete with such providers. If our competitors are better able to attract patients, expand services, or obtain favorable participation agreements with third-party payors, we may experience a decline in patient volume, which could have a material adverse effect on our business, financial condition and results of operations.
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Our operations depend on the efforts, abilities, and experience of our management team, physicians, and medical support personnel, including our nurses, mental health technicians, therapists, addiction counselors, pharmacists, and clinical technicians. We compete with other healthcare providers in recruiting and retaining qualified management, mental health technicians, therapists, nurses, counselors, and other support personnel responsible for the daily operations of our facilities. The nationwide shortage of nurses and other medical support personnel has been a significant operating issue facing our industry in recent years. This shortage may require us to enhance our wages and benefits to recruit and retain nurses and other medical support personnel or require us to hire expensive temporary personnel. If we are unable to attract and retain qualified personnel, we may be unable to provide our services, the quality of our services may decline, and we could experience a decline in patient volume, all of which could have a material adverse effect on our business, financial condition, and results of operations.
Increased labor union activity is another factor that could adversely affect our labor costs. We do not currently employ a unionized labor force. In the event of the independent organization or unionization of our employees, we may become subject to the risk of labor disputes, strikes, work stoppages, slowdowns, and other labor-relations matters. Although we are not aware of any union organizing activity at any of our other facilities, we are unable to predict whether any such activity will take place in the future.
We depend heavily on key executives and other key management personnel, and the departure of one or more of our key executives or other key management personnel could have a material adverse effect on our business, financial condition, and results of operations.
The expertise and efforts of our key executives, including our Chief Executive Officer, Mark Conte, and Patrick Ogle our Chief Operating Officer other management personnel are critical to the success of our business. We currently do not have employment agreements or non-compete covenants with any of our key executives. The loss of the services of one or more of our key executives could significantly undermine our management expertise and our ability to provide efficient, quality healthcare services at our facilities. Furthermore, if one or more of our key executives were to terminate employment with us and engage in a competing business, we would be subject to increased competition, which could have a material adverse effect on our business, financial condition, and results of operations.
Failure to adequately protect our trademarks and any other proprietary rights could have a material adverse effect on our business, financial condition, and results of operations.
We intend to develop portfolio that we consider to be of significant importance to our business, and we may acquire additional trademarks or other proprietary rights in acquisitions that we pursue as part of our growth strategy. If the actions we take to establish and protect our trademarks and other proprietary rights are not adequate to prevent imitation of our services by others or to prevent others from seeking to block sales of our services as an alleged violation of their trademarks and proprietary rights, it may be necessary for us to initiate or enter into litigation in the future to enforce our trademark rights or to defend ourselves against claimed infringement of the rights of others. The cost of any such legal proceedings could be expensive, and such legal proceedings could result in an adverse determination that could have a material adverse effect on our business, financial condition, and results of operations.
Risks Related to Regulatory Matters
If we fail to comply with the extensive laws and government regulations impacting our industry, we could suffer penalties, be the subject of federal and state investigations, or be required to make significant changes to our operations, which may reduce our revenue, increase our costs, and have a material adverse effect on our business, financial condition, and results of operations.
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Healthcare service providers are required to comply with extensive and complex laws and regulations at the federal, state, and local government levels relating to, among other things:
| · | licensure, certification, and accreditation of substance use treatment services; |
| · | licensure, Clinical Laboratory Improvement Amendments of 1988 (CLIA) certification and accreditation of laboratory services; |
| · | handling, administration, and distribution of controlled substances; |
| · | necessity and adequacy of care and quality of services; |
| · | licensure, certification, and qualifications of professional and support personnel; |
| · | referrals of patients and permissible relationships with physicians and other referral sources; |
| · | claim submission and collections, including penalties for the submission of, or causing the submission of, false, fraudulent, or misleading claims and the failure to repay overpayments in a timely manner; |
| · | extensive conditions of participation for Medicare and Medicaid programs |
| · | consumer protection issues and billing and collection of patient-owed accounts issues; |
| · | communications with patients and consumers, including laws intended to prevent misleading marketing practices; |
| · | privacy and security of health-related information, patient personal information and medical records; |
| · | physical plant planning, construction of new facilities and expansion of existing facilities; |
| · | activities regarding competitors; |
| · | U.S. Federal Drug Administration (FDA) laws and regulations related to drugs and medical devices; |
| · | operational, personnel and quality requirements intended to ensure that clinical testing services are accurate, reliable, and timely; |
| · | health and safety of employees; |
| · | handling, transportation and disposal of medical specimens and infectious and hazardous waste; |
| · | corporate practice of medicine, fee-splitting, self-referral, and kickback prohibitions, including recent state and federal laws intended to eliminate bribes and kickbacks; and |
| · | the SUPPORT for Patients and Communities Act, which became law on October 24, 2018. |
A CLIA certificate demonstrates that a testing laboratory meets the federal regulations for clinical diagnostic testing, ensuring quality and safety in the laboratory and laboratory results. The Clinical Laboratory Improvement Amendments of 1988 are administered by the Centers for Medicare & Medicaid Services (CMS).
The United States has recently enacted the Eliminating Kickbacks in Recovery Act of 2018 (EKRA) to create a new federal crime for knowingly and willfully: (1) soliciting or receiving any remuneration in return for referring a patient to a recovery home, clinical treatment facility, or laboratory; or (2) paying or offering any remuneration to induce such a referral or in exchange for an individual using the services of a recovery home, clinical treatment facility, or laboratory. Certain states, including Florida, have enacted similar laws, or will likely enact similar laws in the future.
As a provider of addiction treatment services, we are subject to governmental investigations and potential claims and lawsuits by patients, employees, and others, which may increase our costs, cause reputational issues, and have a material adverse effect on our business, financial condition, results of operations, and reputation.
Given the addiction and mental health issues of patients and the nature of the services provided, the substance abuse treatment industry is heavily regulated by governmental agencies and involves significant risk of liability. We and others in our industry are exposed to the risk of governmental investigations, regulatory actions, and whistleblower lawsuits or other claims against us and our physicians and other professionals arising out of our day-to-day business operations, including, without limitation, patient treatment at our facilities and relationships with healthcare providers that may refer patients to us. Addressing any investigation, lawsuit, or other claim may distract management and divert resources, even if we ultimately prevail. Regardless of the outcome of any such investigation, lawsuit, or claim, the publicity and potential risks associated with the investigation, lawsuit, or claim could harm our reputation or the reputation of our management and negatively impact the perception of the Company by patients, investors, or others and could have a materially adverse impact on our financial condition and results of operations. Fines, restrictions, penalties, and damages imposed as a result of an investigation or a successful lawsuit or claim that is not covered by, or is in excess of, our insurance coverage may increase our costs and reduce our profitability. Our insurance premiums may increase year over year, and insurance coverage may not be available at a reasonable cost in the future, especially given the significant increase in insurance premiums generally experienced in the healthcare industry.
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We also are subject to an inherent risk of potential medical malpractice lawsuits and other potential claims or legal actions in the ordinary course of business. From time to time, we may be subject to claims alleging that we did not properly treat or care for a patient, that we failed to follow internal or external procedures that resulted in death or harm to a patient, or that our employees mistreated our patients, resulting in death or harm. Any deficiencies in the quality of care provided by our employees could expose us to governmental investigations and lawsuits from our patients. Some of these actions may involve large claims as well as significant defense costs. We cannot predict the outcome of these lawsuits or the effect that findings in such lawsuits may have on us. In an effort to resolve one or more of these matters, we may decide to negotiate a settlement, and amounts we pay to settle any of these matters may be material. All professional and general liability insurance we purchase is subject to policy limitations. We believe that, based on our past experience, our insurance coverage is adequate considering the claims arising from the operation of our facilities. While we continuously monitor our coverage, our ultimate liability for professional and general liability claims could change materially from our current estimates. If such policy limitations should be partially or fully exhausted in the future or if payments of claims exceed our estimates or are not covered by our insurance, they could have a material adverse effect on our financial condition and results of operations.
We intend to care for a large number of patients with complex medical conditions, special needs, or who require a substantial level of care and supervision. There is an inherent risk that our patients could be harmed while in treatment, whether through negligence, by accident, or otherwise. Further, patients might engage in behavior that results in harm to themselves, our employees, or to one or more other individuals. Patient safety incidents may result in regulatory enforcement actions, negative press about us, or the addiction treatment industry generally, as well as in lawsuits filed by plaintiff’s lawyers against us. These developments could diminish public perception of the quality of our services, which in turn could lead to a loss of patient placements and referrals, resulting in a material adverse effect on our business, results of operations, and financial condition.
Failure to comply with these laws and regulations could result in the imposition of significant civil or criminal penalties, loss of licenses or certifications, or require us to change our operations, or in the ultimate exclusion of one or more facilities from participation in Medicare, Medicaid, and other federal and state healthcare programs, any of which may have a material adverse effect on our business, financial condition, and results of operations. Both federal and state government agencies, as well as commercial payors, have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare organizations.
We endeavor to comply with all applicable legal and regulatory requirements; however, there is no guarantee that we will be able to adhere to all of the complex government regulations that apply to our business. We seek to structure all of our relationships with referral sources and patients to comply with applicable anti-kickback laws, physician self-referral laws, fee-splitting laws, and state corporate practice of medicine prohibitions. We monitor these laws and their implementing regulations and implement changes as necessary. However, the laws and regulations in these areas are complex and often subject to varying interpretations. For example, if an enforcement agency were to challenge the compensation paid under our contracts with professional physician groups, we could be required to change our practices, face criminal or civil penalties, pay substantial fines, or otherwise experience a material adverse effect as a result.
We may be required to spend substantial amounts to comply with legislative and regulatory initiatives relating to privacy and security of patient health information.
There currently are numerous legislative and regulatory initiatives at the federal and state levels addressing patient privacy and security concerns. For example, the regulations contained in 42 CFR Part 2 (the “Part 2 Regulations”) serve to protect patient records created by federally assisted programs for the treatment of substance use disorders (SUD) and are administered by the Substance Abuse and Mental Health Services Administration (SAMHSA) branch of the U.S. Department of Health and Human Services (HHS). Specifically, the Part 2 Regulations restrict the disclosure, and regulate the security, of our patient’s identifiable information related to substance abuse. These requirements apply to any of our facilities that receive federal assistance, which is interpreted broadly to include facilities licensed, certified or registered by a federal agency.
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In addition, the federal privacy and security regulations issued under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) require our facilities to comply with extensive requirements on the use and disclosure of protected health information and to implement and maintain administrative, physical, and technical safeguards to protect the security of such information. Additional security requirements apply to electronic protected health information. These regulations also provide patients with substantive rights with respect to their health information and impose substantial administrative obligations on our facilities, including the requirement to enter into written agreements with contractors, known as business associates, to whom our programs disclose protected health information. We may be subject to penalties as a result of a business associate violating HIPAA, if the business associate is found to be our agent. Covered entities must notify individuals, HHS and, in some cases, the media of breaches involving unsecured protected health information. HHS and state attorneys general are authorized to enforce these regulations. Violations of the HIPAA privacy and security regulations may result in significant civil and criminal penalties, and data breaches and other HIPAA violations may give rise to class action lawsuits by affected patients under state law.
Our programs remain subject to any privacy-related federal or state laws that are more restrictive than the HIPAA privacy and security regulations. These laws vary by state and may impose additional requirements and penalties. For example, some states impose strict restrictions on the use and disclosure of health information pertaining to mental health or substance abuse. Further, most states have enacted laws and regulations that require us to notify affected individuals in the event of a data breach involving individually identifiable information. In addition, the Federal Trade Commission may use its consumer protection authority to initiate enforcement actions in response to data breaches or other privacy or security lapses.
As public attention is drawn to issues related to the privacy and security of medical and other personal information, federal and state authorities may increase enforcement efforts and seek to impose harsher penalties, as well as revise and expand laws or enact new laws concerning these topics. Compliance with current as well as any newly established provisions or interpretations of existing requirements will require us to expend significant resources. Increased focus on privacy and security issues by enforcement authorities may increase the overall risk that our substance abuse treatment facilities may be found lacking under federal and state privacy and security laws and regulations.
Our treatment facilities operate in an environment of increasing state and federal enforcement activity and private litigation targeted at healthcare providers.
Both federal and state government agencies have heightened and coordinated their civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies and various segments of the healthcare industry. These investigations relate to a wide variety of topics, including relationships with physicians, billing practices and use of controlled substances. The Affordable Care Act included an additional $350 million of federal funding over ten years to fight healthcare fraud, waste, and abuse. The HHS Office of Inspector General and the Department of Justice have established national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Some of our facilities participate in Medicare or Medicaid and, therefore, could be subject to government investigation.
Even if a facility does not currently bill Medicare or Medicaid for substance use treatment services, there is a risk that specific investigative initiatives or new laws such as EKRA could result in investigations or enforcement actions that include or affect our treatment services, laboratory service providers, or marketing operations. In addition, increased government enforcement activities, even if not directed towards our treatment facilities or laboratories, also increase the risk that our facilities, physicians, and other clinicians furnishing services in our facilities, or our executives and directors, could be named as defendants in private litigation such as state or federal false claims act cases or consumer protection cases, or could become the subject of complaints at the various state and federal agencies that have jurisdiction over our operations.
Any governmental investigations, private litigation, or other legal proceedings involving any of our facilities, laboratories, executives, or directors, even if we ultimately prevail, could result in significant expense, adversely affect our reputation or profitability and materially adversely affect our financial condition and results of operation. In addition, we may be required to make changes in our laboratory, substance use treatment services or marketing or other operational practices as a result of an adverse determination in any governmental enforcement action, private litigation or other legal proceeding, which could materially adversely affect our business and results of operations.
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Changes to federal, state, and local regulations, as well as different or new interpretations of existing regulations, could adversely affect our operations and profitability.
Because our treatment programs and operations are regulated at federal, state, and local levels, we could be affected by regulatory changes in different regional markets. Increases in the costs of regulatory compliance and the risks of noncompliance may increase our operating costs, and we may not be able to recover these increased costs, which may adversely affect our results of operations and profitability.
Many of the current laws and regulations are relatively new, including the EKRA and recent state laws intended to prohibit deceptive marketing practices in the addiction treatment industry. Thus, we do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. Evolving interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our treatment facilities, equipment, personnel, services or capital expenditure programs. A determination that we have violated these laws or a public announcement that we are being investigated for possible violations of these laws could adversely affect our business, operating results, and overall reputation in the marketplace.
In addition, federal, state, and local regulations may be enacted that impose additional requirements on our facilities. Adoption of legislation or the creation of new regulations affecting our facilities could increase our operating costs, restrain our growth or limit us from taking advantage of opportunities presented and could have a material adverse effect on our business, financial condition and results of operations. Adverse changes in existing comprehensive zoning plans or zoning regulations that impose additional restrictions on the use of, or requirements applicable to, our facilities may affect our ability to operate our existing facilities or acquire new facilities, which may adversely affect our results of operations and profitability.
We are subject to uncertainties regarding the direction and impact of healthcare reform efforts, particularly efforts to repeal or significantly modify the Affordable Care Act.
The healthcare industry is subject to changing political, regulatory, scientific and technological changes, which have resulted and may continue to result in initiatives intended to reform the industry. The most prominent of recent efforts, the Affordable Care Act, as currently structured, provides for increased access to coverage for healthcare and seeks to reduce healthcare-related expenses. Among other mandates, it requires all new small group and individual market health plans to cover ten essential health benefit categories, which currently include substance abuse addiction and mental health disorder services. However, efforts by the executive branch and some members of Congress to repeal or make fundamental changes to the Affordable Care Act, its implementation and/or its interpretation have cast significant uncertainty on the future of the law. For example, in 2017, Congress eliminated the penalties associated with the individual mandate, effective January 2019, which may affect rates of insurance coverage.
We are unable to predict the full impact of the Affordable Care Act and related regulations or the impact of its repeal or modification on our operations in light of the uncertainty regarding whether or how the law will be changed, what alternative reforms, if any, may be enacted or what other actions may be taken. Any government efforts related to health reform may have an adverse effect on our business, results of operations, cash flow, capital resources and liquidity. Moreover, the general uncertainty of health reform efforts, particularly if Congress elects to repeal provisions of the Affordable Care Act but delays the implementation of repeal or fails to enact replacement provisions at the time of repeal, may negatively impact our payment sources or demand for our services.
The expansion of health insurance coverage under the Affordable Care Act has been beneficial to the substance abuse treatment industry. This is due, in part, to higher demand for treatment services, which resulted from the requirement that small group and individual market plans comply with the requirements of the Mental Health Parity and Addiction Equity Act of 2008, which previously applied only to group health plans and group insurers. The 21st Century Cures Act requires development of an action plan for enhanced enforcement of mental health parity requirements and additional guidance for health plans regarding compliance with parity laws. Increased demand for treatment services may bring new competitors to the market, some of which may be better capitalized and have greater market penetration than we do. In addition, we expect increased demand for substance use treatment services to increase the demand for case managers, therapists, medical technicians and others with clinical expertise in substance abuse treatment, which may make it more difficult to adequately staff our substance abuse treatment facilities and could significantly increase our costs in delivering treatment, which may adversely affect both our operations and profitability.
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One of the many impacts of the Affordable Care Act and subsequent legislation has been a dramatic increase in payment reform efforts by federal and state government payors as well as commercial payors. These efforts take many forms, including the growth of accountable care organizations, pay-for-performance bonus arrangements, partial capitation arrangements and the bundling of services into a single payment. One result of these efforts is that more risk of the overall cost of care is being transferred to providers. As institutional providers and their affiliated physicians assume more risk for the cost of care, we expect more services to be furnished within provider networks that are formed for these types of payment arrangements. Our ability to compete and to retain our traditional sources of patients may be adversely affected by our exclusion from such networks or our inability to be included in such networks.
Change of ownership or change of control requirements imposed by state and federal licensure and certification agencies as well as third-party payors may limit our ability to timely realize opportunities, adversely affect our licenses and certifications, interrupt our cash flows, and adversely affect our profitability.
State licensure laws and many federal healthcare programs (where applicable) impose a number of obligations on healthcare providers undergoing a change of ownership or change of control transaction. These requirements may require new license applications as well as notices given a fixed number of days prior to the closing of affected transactions. These provisions require us to be proactive when considering both internal restructuring and acquisitions of other treatment companies. Failure to provide such notices or to submit required paperwork can adversely affect licensure on a going forward basis, can subject the parties to penalties and can adversely affect our ability to operate our facilities.
Many third-party payor agreements, including government payor programs, also have change of ownership or change of control provisions. Such provisions generally include a prior notice provision as well as require the consent of the payor in order to continue the terms of the payor agreement. Abiding by the terms of such provisions may reopen pricing negotiations with third-party payors where the provider currently has favorable reimbursement terms as compared to the market. Failure to comply with the terms of such provisions can result in a breach of the underlying third-party payor agreement. As substance abuse treatment coverage and payment reform initiatives continue to expand, these types of provisions could have a significant impact on our ability to realize opportunities and could adversely affect our cash flows and profitability.
State efforts to regulate the construction or expansion of healthcare facilities could impair our ability to operate and expand our facilities.
The construction of new healthcare facilities, the expansion, transfer, or change of ownership of existing facilities and the addition of new beds, services, or equipment may be subject to state laws that require a determination of public need and prior approval by state regulatory agencies under CON laws or other healthcare planning initiatives. The National Health Planning and Resources Development Act of 1974 requires the withholding of federal funds from states that fail to adopt certificate-of-need (CON) laws regulating healthcare facilities.
CON laws require healthcare providers wishing to open or expand a healthcare facility to first prove to a regulatory body that the community needs the planned services. Review of CONs and similar proposals may be lengthy and may require public hearings. States in which we now or may in the future operate may require CONs under certain circumstances not currently applicable to us or may impose standards and other health planning requirements upon us. Violation of these state laws and our failure to obtain any necessary state approval could:
| · | result in our inability to acquire a targeted facility, complete a desired expansion or make a desired replacement; or |
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| · | result in the revocation of a facility’s license or imposition of civil or criminal penalties on us, any of which could have a material adverse effect on our business, financial condition, and results of operations. |
If we are unable to obtain required regulatory, zoning, or other required approvals for renovations and expansions, our growth may be restrained, and our operating results may be adversely affected. In the past, we have not experienced any material adverse effects from such requirements, but we cannot predict their future impact on our operations
We could face risks associated with, or arising out of, environmental, health, and safety laws and regulations.
We are subject to various federal, state, and local laws and regulations that:
| · | regulate certain activities and operations that may have environmental or health and safety effects, such as the generation, handling, and disposal of medical and pharmaceutical wastes; |
| · | impose liability for costs of cleaning up, and damages to natural resources from, past spills, waste disposals on and off-site and other releases of hazardous materials or regulated substances; and |
| · | regulate workplace safety. |
Compliance with these laws and regulations could increase our costs of operation. Violation of these laws may subject us to significant fines, penalties, or disposal costs, which could negatively impact our results of operations, financial position, or cash flows. We could be responsible for the investigation and remediation of environmental conditions at currently or formerly operated or leased sites, as well as for associated liabilities, including liabilities for natural resource damages, third-party property damage, or personal injury resulting from lawsuits that could be brought by the government or private litigants relating to our operations, the operations of our facilities, or the land on which our facilities are located.
Liability for contamination under certain environmental laws can be imposed on current or past owners or operators of a site without regard to fault. Therefore, we may be subject to these liabilities regardless of whether we lease or own the facility, or such environmental conditions were created by us, a prior owner or tenant, a third-party, or a neighboring facility whose operations may have affected such facility or land. We cannot assure you that environmental conditions relating to our prior, existing, or future sites or those of predecessor companies whose liabilities we may have assumed or acquired will not have a material adverse effect on our business.
Changes in tax laws or their interpretations, or becoming subject to additional U.S., state or local taxes, could negatively affect our business, financial condition, and results of operations.
We are subject to tax liabilities, including federal and state taxes such as excise, sales/use, payroll, franchise, withholding, and ad valorem taxes. Changes in tax laws or their interpretations could decrease the amount of revenues we receive, the value of any tax loss carryforwards and tax credits recorded on our balance sheet and the amount of our cash flow, and have a material adverse impact on our business, financial condition and results of operations. Some of our tax liabilities are subject to periodic audits by the respective taxing authority which could increase our tax liabilities. If we are required to pay additional taxes, our costs would increase.
COVID-19 RELATED RISKS
The coronavirus may negatively impact our business, results of operations and financial condition.
In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China, which has and is continuing to spread throughout China and other parts of the world, including the United States. On January 30, 2020, the World Health Organization declared the outbreak of the coronavirus disease (COVID-19) a “Public Health Emergency of International Concern.” On January 31, 2020, U.S. Health and Human Services Secretary Alex M. Azar II declared a public health emergency for the United States to aid the U.S. healthcare community in responding to COVID-19, and on March 11, 2020, the World Health Organization characterized the outbreak as a “pandemic”. The significant outbreak of COVID-19 has resulted in a widespread health crisis that could adversely affect the economies and financial markets worldwide, and could adversely affect our business, results of operations and financial condition.
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The ultimate extent of the impact of any epidemic, pandemic, or other health crisis on our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of such epidemic, pandemic or other health crisis and actions taken to contain or prevent their further spread, among others. These and other potential impacts of an epidemic, pandemic, or other health crisis, such as COVID-19, could therefore materially and adversely affect our business, financial condition, and results of operations.
The effect of the COVID-19 may adversely affect occupancy at our rehabilitation facility.
The coronavirus may materially impact occupancy rates at our facility and the availability of our rehabilitation services, which would adversely affect our business, results of operations and financial condition.
The outbreak of COVID-19 has resulted in a widespread health crisis that could adversely affect the economies and financial markets in which operate and could significant increase the risk factors described above and herein.
Risk Related to Our Stock
Because we can issue additional shares of common stock, our stockholders may experience dilution in the future.
We are authorized to issue up to 200,000,000 shares of common stock and 10,000,000 shares of preferred stock of which 194,750,907 shares of common stock are issued and outstanding. No shares of preferred stock have been issued. Our board of directors has the authority to cause us to issue additional shares of common stock and preferred stock, and to determine the rights, preferences, and privileges of shares of our preferred stock, without consent of our stockholders. Consequently, the stockholders may experience more dilution in their ownership of our stock in the future.
Trading on the OTC Pink Sheets stock market may be volatile and sporadic, which could depress the market price of our common stock and make it difficult for our stockholders to resell their shares.
Our common stock is quoted on the OTC Pink Sheets stock market operated by the OTC Markets Group with the trading symbol “UPDC”. Trading in stock quoted on OTC Pink Sheets is often characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, trading of securities on OTC Pink Sheets is often more sporadic than the trading of securities listed on a stock exchange like the NASDAQ or the NYSE. Accordingly, stockholders may have difficulty reselling any of our shares.
Our shares of common stock may be very thinly traded, or not at all, the price may not reflect our values and there can be no assurance that there will be an active market for our shares of common stock either now or in the futures.
Shares of our common stock may be very thinly traded in the future, and the price, if traded, may not reflect our value. There can be no assurance that there will be an active market for our shares of common stock either now or in the future. The market liquidity will be dependent on the perception of our operating business and any steps that our management might take to bring us to the awareness of investors. There can be no assurance given that there will be any awareness generated. Consequently, investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of the business. If a more active market should develop, the price may be highly volatile. Because there may be a low price for our shares of common stock, many brokerage firms may not be willing to effect transactions in the securities. Even if an investor finds a broker willing to affect a transaction in the shares of our common stock, the combination of brokerage commissions, transfer fees, taxes, if any, and any other selling costs may exceed the selling price. Further, many lending institutions will not permit the use of such shares of common stock as collateral for any loans.
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Sales of our currently issued and outstanding stock may become freely tradeable pursuant to Rule 144 and may dilute the market for your shares and have a depressive effect on the price of the shares of our common stock.
Certain of our issued and outstanding shares of common stock are “restricted securities” within the meaning of Rule 144 under the Securities Act. As restricted shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under the Securities Act and as required under applicable state securities laws. Rule 144 provides in essence that an “affiliated” person, such as our management, who have held our restricted securities for a period of at least one year from the date of this Form 8-K filing, may, under certain conditions, sell every three months in brokerage transactions, a number of shares that does not exceed the greater of 1% of a company’s outstanding shares of common stock. There is no limit on the amount of restricted securities that may be sold by a non-affiliate after the restricted securities have been held by the owner for a period of one year from the date of this Form 8-K filing. A sale under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant to subsequent registrations of our shares of common stock, may have a depressive effect upon the price of our shares of common stock in any active market that may develop.
The market for penny stocks has experienced numerous frauds and abuses which could adversely impact investors in our stock.
We believe that the market for penny stocks has suffered from patterns of fraud and abuse. Such patterns include:
| · | Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; |
| · | Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; |
| · | “Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced salespersons; |
| · | Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and |
| · | Wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses. |
We believe that many of these abuses have occurred with respect to the promotion of low-priced stock companies that lacked experienced management, adequate financial resources, an adequate business plan and/or marketable and successful business or product.
A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our ability to continue operations, and we may go out of business.
A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because we plan to acquire a significant portion of the funds, we need in order to conduct our planned operations through the sale of equity securities, a decline in the price of our common stock could be detrimental to our liquidity and our operations because the decline may cause investors not to choose to invest in our stock. If we are unable to raise the funds, we require for all our planned operations, we may be forced to reallocate funds from other planned uses and may suffer a significant negative effect on our business plan and operations, including our ability to develop new products and continue our current operations. As a result, our business may suffer, and not be successful and we may go out of business. We also might not be able to meet our financial obligations if we cannot raise enough funds through the sale of our equity securities and we may be forced to go out of business.
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Our stock is a penny stock. Trading of our stock may be restricted by the SEC’s penny stock regulations, which may limit a stockholder’s ability to buy and sell our stock.
Our stock is a penny stock. The Securities and Exchange Commission (“SEC”) has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined in Rule 15g-9) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
FINRA sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules promulgated by the SEC, the Financial Industry Regulatory Authority (“FINRA”) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock.
We do not intend to pay any cash dividends on our shares of common stock in the near future, and our stockholders will not be able to receive a return on their shares unless they sell them.
We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of operations, cash flows and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them.
We may incur significant costs to ensure compliance with United States corporate governance and accounting requirements.
We may incur significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the Securities and Exchange Commission. We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our Board of Directors or as executive officers. We are currently evaluating and monitoring developments with respect to these newly applicable rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
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We may not be able to meet the accelerated filing and internal control reporting requirements imposed by the Securities and Exchange Commission resulting in a possible decline in the price of our common stock and our inability to obtain future financing.
As directed by Section 404 of the Sarbanes-Oxley Act, the Securities and Exchange Commission adopted rules requiring each public company to include a report of management on the company’s internal controls over financial reporting in its annual reports. In addition, the independent registered public accounting firm auditing a company’s financial statements must also attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting as well as the operating effectiveness of the company’s internal controls.
While we expect to expend significant resources in developing the necessary documentation and testing procedures required by Section 404 of the Sarbanes-Oxley Act, there is a risk that we may not be able to comply timely with all of the requirements imposed by this rule. In the event that we are unable to receive a positive attestation from our independent registered public accounting firm with respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements and our stock price and ability to obtain equity or debt financing as needed could suffer.
In addition, in the event that our independent registered public accounting firm is unable to rely on our internal controls in connection with its audit of our financial statements, and in the further event that it is unable to devise alternative procedures in order to satisfy itself as to the material accuracy of our financial statements and related disclosures, it is possible that we would be unable to file our Annual Report on Form 10-K with the Securities and Exchange Commission, which could also adversely affect the market price of our common stock and our ability to secure additional financing as needed.
Our articles of incorporation provide for indemnification of officers and directors at our expense and limit their liability which may result in a major cost to us and hurt the interests of our shareholders because corporate resources may be expended for the benefit of officers and/or directors.
Our articles of incorporation and applicable Nevada law provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney’s fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on our behalf. We will also bear the expenses of such litigation for any of our directors, officers, employees, or agents, upon such person’s written promise to repay us if it is ultimately determined that any such person shall not have been entitled to indemnification. This indemnification policy could result in substantial expenditures by us which we will be unable to recoup.
We have been advised that, in the opinion of the SEC, indemnification for liabilities arising under federal securities laws is against public policy as expressed in the Securities Act of 1933 (the “Securities Act”) and is, therefore, unenforceable. In the event that a claim for indemnification for liabilities arising under federal securities laws, other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding, is asserted by a director, officer or controlling person in connection with the securities being registered, we will (unless in the opinion of our counsel, the matter has been settled by controlling precedent) submit to a court of appropriate jurisdiction, the question whether indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The legal process relating to this matter if it were to occur is likely to be very costly and may result in us receiving negative publicity, either of which factors is likely to materially reduce the market and price for our shares, if such a market ever develops.
Our board of directors has the authority, without stockholder approval, to issue shares of “blank check” preferred stock with terms that may not be viewed as beneficial to common stockholders, and which may adversely affect common stockholders.
Our articles of incorporation allow us to issue shares of preferred stock without any vote by our stockholders. Our Board of Directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our Board of Directors also has the authority to issue preferred stock without further stockholder approval. As a result, our Board of Directors could authorize the issuance of preferred stock that would grant to holders the preferred right to vote on decisions submitted for a vote of the stockholders, to a priority on distribution of our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock, and similar rights and priorities over our common stock.
| 44 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There are no recent sales of unregistered equity securities that were not previously disclosed.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits listed below are filed herewith.
| Exhibit Number |
Description | |
| 31.1* | Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1* | Certification of President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2* | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS* | XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.** | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document.** | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document.** | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document.** | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document.** | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document.** | |
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
_________________
* Filed herewith.
**In accordance with Rule 406T of Regulation S-T, this information is deemed not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
| 45 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UPD HOLDING CORP.
| Dated: November 22, 2021 | By: | /s/ Mark W. Conte | |
| Mark W. Conte | |||
| President and Chief Executive Officer | |||
| (Principal Executive Officer) | |||
| Dated: November 22, 2021 | By: | /s/ Mark W. Conte | |
| Mark W. Conte | |||
| Chief Financial Officer | |||
| (Principal Financial and Accounting Officer) | |||
| Dated: November 22, 2021 | By: | /s/ Patrick E. Ogle | |
| Patrick E. Ogle | |||
| Chief Operating Officer |
46
EXHIBIT 31.1
RULE 13a-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Mark W. Conte, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of UPD HOLDING CORP.; |
| 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 Exchange 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. |
| Date: November 22, 2021 | ||
| By: | /s/ Mark W. Conte | |
| Mark W. Conte | ||
| President and Chief Executive Officer |
EXHIBIT 31.2
RULE 13a-14(a) CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Mark W. Conte, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of UPD HOLDING CORP.; |
| 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 Exchange 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. |
| Date: November 22, 2021 | ||
| By: | /s/ Mark W. Conte | |
| Mark W. Conte | ||
| Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of UPD HOLDING CORP. (the “Company”) on Form 10-Q for the quarter ended September 30, 2021, filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officers of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in material respects, the financial condition and results of operations of the Company, as of, and for the periods presented in the Report. |
| Date: November 22, 2021 | |
| /s/ Mark W. Conte | |
|
Mark W. Conte Chief Executive Officer |
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of UPD HOLDING CORP. (the “Company”) on Form 10-Q for the quarter ended September 30, 2021, filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officers of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in material respects, the financial condition and results of operations of the Company, as of, and for the periods presented in the Report. |
| Date: November 22, 2021 | |
| /s/ Mark W. Conte | |
|
Mark W. Conte Chief Financial Officer |
Consolidated Balance Sheets (Unaudited) (Parenthetical) - $ / shares |
Sep. 30, 2021 |
Jun. 30, 2021 |
|---|---|---|
| Statement of Financial Position [Abstract] | ||
| Preferred stock, par value (in dollars per share) | $ 0.01 | $ 0.01 |
| Preferred stock, authorized | 10,000,000 | 10,000,000 |
| Preferred stock, issued | 0 | 0 |
| Preferred stock, outstanding | 0 | 0 |
| Common stock, par value (in dollars per share) | $ 0.005 | $ 0.005 |
| Common stock, authorized | 200,000,000 | 200,000,000 |
| Common stock, issued | 194,750,907 | 194,750,907 |
| Common stock, outstanding | 194,750,907 | 194,750,907 |
Consolidated Statements of Operations (Unaudited) - USD ($) |
3 Months Ended | |
|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Revenues: | ||
| Net revenue | ||
| Operating costs and expenses: | ||
| Professional fees | 57,817 | 45,616 |
| General and administrative | 240,161 | 2,480 |
| Total operating costs and expenses | 297,978 | 48,096 |
| Operating loss | (297,978) | (48,096) |
| Interest expense, net | (27,659) | (5,859) |
| Loss on change in fair value of derivative liability | (38,943) | |
| Loss from continuing operations, before income taxes | (364,580) | (53,955) |
| Provision for income taxes | ||
| Net loss | (364,580) | (53,955) |
| Less: net loss attributable to non-controlling interest | (4,766) | |
| Net loss attributable to UPD Holding Corp. | $ (359,814) | $ (53,955) |
| Basic and diluted loss per share from: | $ (0.00) | $ (0.00) |
| Weighted average shares outstanding | ||
| Basic and diluted | 194,750,907 | 172,450,907 |
Consolidated Statements of Changes in Stockholders' Deficit (Unaudited) - USD ($) |
Preferred Stock [Member] |
Common Stock [Member] |
Additional Paid-in Capital [Member] |
Stock Payable [Member] |
Retained Earnings [Member] |
Upd Holding Corp Stockholders Equity Deficit [Member] |
Noncontrolling Interest [Member] |
Total |
|---|---|---|---|---|---|---|---|---|
| Beginning balance, value at Jun. 30, 2020 | $ 862,255 | $ 1,872,632 | $ (3,319,009) | $ (584,122) | $ (584,122) | |||
| Shares, Issued, Beginning Balance, shares at Jun. 30, 2020 | 172,450.907 | |||||||
| Net loss | (53,955) | (53,955) | (53,955) | |||||
| Ending balance, value at Sep. 30, 2020 | $ 862,255 | 1,872,632 | (3,372,964) | (638,077) | (638,077) | |||
| Shares, Issued, Closing Ending balance, shares at Sep. 30, 2020 | 172,450,907 | |||||||
| Beginning balance, value at Jun. 30, 2021 | $ 973,755 | 2,558,162 | (3,804,474) | (272,557) | (5,904) | (278,461) | ||
| Shares, Issued, Beginning Balance, shares at Jun. 30, 2021 | 194,750,907 | |||||||
| Beneficial conversion feature for convertible debt | 24,200 | 24,200 | 24,200 | |||||
| Fair value of warrants issued with debt | 66,000 | 66,000 | 66,000 | |||||
| Debt settlement of liabilities | 16,210 | 16,210 | 16,210 | |||||
| Net loss | (359,814) | (359,814) | (4,766) | (364,580) | ||||
| Ending balance, value at Sep. 30, 2021 | $ 973,755 | $ 2,648,362 | $ 16,210 | $ (4,164,288) | $ (525,961) | $ (10,670) | $ (536,631) | |
| Shares, Issued, Closing Ending balance, shares at Sep. 30, 2021 | 194,750,907 |
BUSINESS AND ORGANIZATION |
3 Months Ended |
|---|---|
Sep. 30, 2021 | |
| Accounting Policies [Abstract] | |
| BUSINESS AND ORGANIZATION | NOTE 1 – BUSINESS AND ORGANIZATION
UPD Holding Corp. (“UPD”, “Company”), incorporated in the State of Nevada, is a holding Company seeking to acquire assets and businesses to provide a competitive advantage through cost-sharing and other synergies. The Company is pursuing business development opportunities in the rehabilitation services industry.
On February 16, 2021, UPD completed its acquisition of Vital Behavioral Health, Inc., which intends to operate U.S. facilities focusing on substance abuse treatment and offer various programs that help provide a continuum of care to its patients.
The Company previously operated in the food and beverage industry through Record Street Brewing (“RSB”), which was sold as of December 31, 2020. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
3 Months Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 | ||||||||||||||||
| Accounting Policies [Abstract] | ||||||||||||||||
| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The Company consolidates the assets, liabilities, and operating results of its wholly owned and majority-owned subsidiaries: (i) iMetabolic Corp, a Nevada corporation; (ii) United Product Development Corp., a Nevada corporation; (iii) Vital Behavioral Health, Inc., a Nevada corporation (since February 16, 2021); (iv) VBH Frankfort LLC, a Nevada limited liability company (since February 16, 2021); (v) VSL Frankfort LLC, a Nevada limited liability company (since February 16, 2021); (vi) VBH Garden Grove Inc. (since February 17, 2021); (vii) VBH Kentucky Inc., a Nevada corporation (since March 16, 2021); and (viii) Record Street Brewing Co., a Nevada corporation (through December 31, 2020). All intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with original maturities of 90 days of less at the date of purchase. The Company is exposed to credit risk in the event of default by the financial institutions or the issuers of these investments to the extent the amounts on deposit or invested are in excess of amounts that are insured. As of September 30, 2021 and June 30, 2021 the Company did not have any cash equivalents or cash deposits in excess of the federally insured limits.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from these estimates.
Fair Value of Financial Instruments The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the party’s own credit risk.
Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3: Unobservable inputs that are not corroborated by market data.
The Company's financial instruments consist primarily of cash and cash equivalents, restricted cash, accounts payable and convertible and other notes payable. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments.
The fair value of the Company’s derivative liabilities are estimated using a Black-Scholes option pricing model with Level 3 unobservable inputs. Prior to the fiscal year ended June 30, 2021 the Company did not have any instruments valued within Level 3 of the fair value hierarchy.
The Company presents both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net loss by the weighted average number of shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period under the treasury stock method using the if-converted method. Due to the incurrence of net losses, the Company did not include outstanding instruments convertible into common stock that would be anti-dilutive.
Business Combinations
Business combinations are accounted for at fair value. Acquisition costs are expensed as incurred and recorded in general and administrative expenses. Measurement period adjustments are made in the period in which the amounts are determined, and the current period income effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition date. All changes that do not qualify as measurement period adjustments are also included in current period earnings. The accounting for business combinations requires estimates and judgment as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair value for assets acquired and liabilities assumed. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the financial statements could result in a possible impairment of goodwill, require acceleration of the amortization expense of finite-lived intangible assets, or the recognition of additional consideration which would be expensed.
Lease Accounting
The Company leases office space and outpatient clinical space under a lease arrangement. These properties are generally leased under non-cancelable agreements that contain lease terms in excess of twelve months on the date of entry as well as renewal options for additional periods. The agreements, which have been classified as operating leases, generally provide for base minimum rental payment, as well non-lease components including insurance, taxes, maintenance, and other common area costs.
At the lease commencement date, the Company recognizes a right-of-use asset and a lease liability for all leases, except short-term leases with an original term of twelve months or less. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any prepayments to the lessor and initial direct costs such as brokerage commissions, less any lease incentives received. All right-of-use assets are periodically reviewed for impairment in accordance with standards that apply to long-lived assets. The lease liability is initially measured at the present value of the lease payments, discounted using the rate implicit in the contract if available or an estimate of our incremental borrowing rate for a collateralized loan with the same term as the underlying lease. The discount rates used for the initial measurement of lease liabilities as of the date of entry were based on the original lease terms.
Lease payments included in the measurement of lease liabilities consist of (i) fixed lease payments for the non-cancelable lease term, (ii) fixed lease payments for optional renewal periods where it is reasonably certain the renewal option will be exercised, and (iii) variable lease payments that depend on an underlying index or rate, based on the index or rate in effect at lease commencement. Certain real estate lease agreements require payments for non-lease costs such as utilities and common area maintenance. The Company has elected an accounting policy to not separate implicit components of the contract that may be considered non-lease related.
Lease expense for operating leases consists of the fixed lease payments recognized on a straight-line basis over the lease term plus variable lease payments as incurred. The lease payments are allocated between a reduction of the lease liability and interest expense. Depreciation of the right-of-use asset for operating leases reflects the use of the asset on straight-line basis over the expected term of the lease.
Property and Equipment
Property and Equipment are stated at cost less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred and additions and improvements that significantly extend the lives of assets are capitalized. Upon sale or other retirement of depreciable property, the cost and accumulated depreciation are removed from the related accounts and any gain or loss is reflected in operations. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The useful lives of tenant improvements are the lesser of the estimated useful life of the asset or the term of the lease (2 years for current lease); furniture and fixtures are to years; operating lease right of use assets over the expected term of the operating lease; and office and computer equipment are to years.
The Company periodically reviews property and equipment when events or changes in circumstances indicate that their carrying amounts may not be recoverable or their depreciation or amortization periods should be accelerated. Recoverability is assessed based on several factors, including the intention with respect to maintaining facilities and projected discounted cash flows from operations. An impairment loss would be recognized for the amount by which the carrying amount of the assets exceeds their fair value, as approximated by the present value of their projected discounted cash flows.
Goodwill
Goodwill represents the excess of fair value over identifiable tangible and intangible net assets acquired in business combinations. Goodwill is not amortized, instead goodwill is reviewed for impairment at least annually, or on an interim basis between annual tests when events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value.
Advertising Expense
The Company recognizing advertising expense in the period in which it is incurred. For the three months ended September 30, 2021 the Company incurred advertising expense of $1,160 included in general and administrative expense in the accompanying consolidated statements of operations. The Company did not incur advertising expenses during the three months ended September 30, 2020.
Revenue Recognition
The Company previously licensed its beer and beverage products to its customers. The royalties earned from these licensing agreements represent revenue earned under contracts in which the Company bills and collects from its licensee in arrears. The Company determines the measurement of revenue and the timing of revenue recognition utilizing the following core principles:
Revenues from licensing royalties are recognized when the Company’s performance obligations are satisfied upon its licensee’s sales to its customers. The Company primarily invoices its licensee on a quarterly basis, net of returns. The Company did not realize material revenues in the current period through the disposition date on December 31, 2020.
The Company’s expected rehab service and facility revenue will be recognized in accordance with the same five core principles after meeting the applicable licensing requirements.
Income Taxes
The Company recognizes deferred tax liabilities and assets using the liability method. Under this method, deferred tax liabilities and assets are determined based on the temporary differences between the financial statements carrying values and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. In determining the future tax consequences of events that have been recognized in the financial statements or tax returns, judgment and interpretation of statutes is required. Judgments and interpretation of statutes are inherent in this process. Future income tax assets are recorded in the financial statements if realization is considered more likely than not.
For previously taken tax positions considered to be uncertain, the Company prescribes a recognition threshold and measurement attribute. In the event certain tax positions do not meet the appropriate recognition threshold, de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions is required.
The Company files income tax returns in the U.S. federal jurisdiction.
Debt Issuance Costs
Debt issuance costs incurred in connection with the issuance of long-term debt are capitalized, netted against debt principal for balance sheet purposes, and amortized to interest expense over the terms of the related debt agreements using the effective interest method.
Derivative Liabilities
The Company classifies all of its embedded debt conversion features, and other derivative financial instruments as equity if the contracts (1) require physical settlement or net-share settlement or (2) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (1) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), (2) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement), or (3) contracts that contain reset provisions. The Company assesses classification of its equity-linked instruments at each reporting date to determine whether a change in classification between equity and liabilities (assets) is required. As of June 30, 2021, the Company did not have enough authorized and unissued shares to settle all outstanding equity-linked instruments resulting in the reclassification of certain instruments to liability. The Company reclassifies outstanding instruments based on allocating the unissued shares to contracts with the earliest inception date resulting in the contracts with the latest inception date being recognized as liabilities first.
The Company accounts for contracts convertible into common stock in excess of its authorized capital as derivative as liabilities. The derivative liabilities are re-measured at fair value with the changes in the value reported as a component of other income (expense) in the accompanying results of operations. The derivative liabilities are measured at fair value using a Black Scholes option pricing Model. The model is based on assumptions including quoted market prices and estimated volatility factors based on historical quoted market prices for the Company’s common stock and are classified within Level 3 of the fair value hierarchy as established by US GAAP. As of September 30, 2021, all derivative liability contracts are convertible into a fixed number of shares of common stock.
Going Concern
The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and allow it to continue as a going concern, has reoccurring net losses and net capital deficiency. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plans to obtain such resources for the Company include (i) obtaining capital from management and significant stockholders sufficient to meet its minimal operating expenses; (ii) obtaining funding from outside sources through the sale of its debt and/or equity securities; and (iii) completing a merger with or acquisition of an existing operating company. Management provides no assurances that the Company will be successful in accomplishing any of its plans.
|
DISCONTINUED OPERATIONS |
3 Months Ended |
|---|---|
Sep. 30, 2021 | |
| Discontinued Operations and Disposal Groups [Abstract] | |
| DISCONTINUED OPERATIONS | NOTE 3- DISCONTINUED OPERATIONS
On December 31, 2020, the Company discontinued its RSB operations pursuant to the Assumption Agreement of the same date whereby 100% of the issued and outstanding common stock of RSB was assigned to RSB’s co-founder and a significant shareholder of the Company. As part of the disposition, the purchaser agreed to assume outstanding liabilities of RSB totaling $251,164 and acquired the rights to all royalties associated with the intellectual property licensing previously held by the Company.
During the three months ended September 30, 2021, and the year ended June 30, 2021 , RSB did not engage in material operations or generate material revenues. The Company did not allocate any interest expense to discontinued operations apart from interest accrued on the obligations that were assumed. |
ACQUISITIONS |
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| Business Combination and Asset Acquisition [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ACQUISITIONS | NOTE 4 – ACQUISITIONS
In February 2021, through a Stock Exchange Agreement (“Exchange Agreement”) in which 100% of the outstanding shares of Vital Behavioral Health Inc. (“Vital”) were acquired via the issuance of 16,840,000 shares of restricted common stock, the Company acquired the assets and assumed the liabilities of Vital and its two wholly owned subsidiaries: VBH Frankfort LLC (“VBHF”) and VSL Frankfort LLC (“VSLF”). The Company did not incur material acquisition costs associated with the Exchange Agreement.
The following table represents the fair value of the consideration paid allocated to the assets and liabilities acquired in applying the acquisition method for the completion of the Vital business combination:
Through the Vital acquisition, the Company intends to operate multiple facilities in the U.S. that will focus on substance abuse treatment and offer various programs that help provide a continuum of care to its patients. VBHF is intended to operate as an out-patient substance abuse treatment facility in Frankfort, Kentucky. VSLF is intended to offer sober-designated living quarters for individuals who are in recovery. Each of Vital, VBHF, and VSLF are in the early development stage and have not received any operational licenses or permits through the date of this report. |
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PROPERTY AND EQUIPMENT |
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| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PROPERTY AND EQUIPMENT | NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Depreciation during the three months ended September 30, 2021, and the year ended June 30, 2021, was $9,017 and 6,702, respectively. |
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NOTES AND CONVERTIBLE NOTES PAYABLE |
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| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NOTES AND CONVERTIBLE NOTES PAYABLE | NOTE 6 – NOTES AND CONVERTIBLE NOTES PAYABLE
The Company’s notes payable consists of the following:
Throughout the fiscal year ended June 30, 2021, the Company did not have the financial resources to make current payments on these notes payable. All of the outstanding notes payable are due to officers of the Company who have informally agreed to defer payment until such time as the Company’s liquidity improves, however, they are under no formal obligation to continue to do so and may demand payment. The Company has not incurred significant penalties associated with the current defaults.
In August 2021, the Company entered into a promissory note with a lender in which the Company received cash proceeds totaling $500,000. The promissory note matures in August 2022 and carries an interest rate of 12% per annum. The Company is required to make monthly interest payments with outstanding principal and interest due on the maturity date. The Company issued the lender 1,000,000 warrants convertible into restricted shares of common stock at an exercise price of $0.005 per share for a period of five years. The Company recorded the fair value of the 1,000,000 warrants issued with debt at approximately $66,000 as a discount.
The Company’s convertible notes payable consist of the following:
The principal and interest of the Company’s outstanding convertible notes, with the exception of the related party notes totaling $65,000 that matured in April 2018, automatically convert to shares of common stock at $0.05 or $ per share upon maturity if not paid in full prior to maturity. The Company did not make any monthly interest payments on its outstanding convertible notes payable.
During the year ended June 30, 2021, a note holder became a related party through the acquisition (in a private transaction not involving the Company) of shares of outstanding common stock in excess of 5%. In October 2020, the Company issued the related party a note payable for total cash proceeds of $100,000. In February 2021, the Company acquired the entity, Vital Behavioral Health, Inc., the previous holder of the note.
In December 2020, the Company settled related party convertible notes payable and accrued interest totaling approximately $69,000 via the issuance of 3,900,000 shares of common stock. As part of the settlement, the Company recognized a loss of approximately $23,000 associated with the estimated fair value of the stock issued being in excess of the carrying value of the debt.
In July 2021, the Company entered into a total of $41,000 12% convertible promissory notes (3 notes total) with three investors. The convertible notes automatically convert at maturity in July 2022 at a conversion price of $0.05.
As of September 30, 2020, the Company did not have enough authorized and unissued shares of common stock to settle all its convertible debt obligations. As a result, the Company recognized obligations to issue a total of shares of common stock upon convertible debt conversion to derivative liabilities in the accompanying consolidated balance sheets. The Company measures the changes in the fair value of its derivative obligations using a Black-Scholes option pricing model with a volatility assumption of 125.98%; an expected term equal to the remaining term of the contract on the reclassification date (between eight to twelve months for fiscal 2021); a risk-free rate of approximately 1%; and conversion prices of $0.10 (160,500 shares), $0.05 (2,976,400 shares), and $0.025 (1,230,907 shares). For the three months ended September 30, 2021, the Company recognized a loss on the change in the fair value of derivative liabilities of $38,943 in other income (loss) in the accompanying consolidated statements of operations. The Company had derivative liability obligations of $237,963 as of June 30, 2021.
During the three months ended September 30, 2021, and the year ended June 30, 2021, the Company received $544,000 and $265,000, respectively, from funding on new notes and convertible notes and paid $5,000 and $0 of interest on the outstanding notes and convertible notes payable.
During the three months ended September 30, 2021, and the year ended June 30, 2021, the Company made no payments on the outstanding notes and convertible notes payable, and recorded $11,092 and $20,911, respectively of interest expense and $16,567 and $7,548, respectively of debt discount amortization expense. As of September 30, 2021, and June 30, 2021, the Company had approximately $89,817 and $83,799, respectively of accrued interest. As of September 30, 2021, and June 30, 2021, the principal balance of outstanding notes and convertible notes payable was $838,560 and $294,560, respectively. |
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RELATED PARTY TRANSACTIONS |
3 Months Ended |
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Sep. 30, 2021 | |
| Related Party Transactions [Abstract] | |
| RELATED PARTY TRANSACTIONS | NOTE 7 – RELATED PARTY TRANSACTIONS
During the fiscal year ended June 30, 2021, the Company’s Chief Executive Officer (“CEO”) provided the Company $30,000 in exchange for short-term 6% notes payable to meet the Company’s on-going operating expense obligations. As of September 30, 2021, and June 30, 2021, the Company had outstanding notes payable due to the CEO inclusive of accrued interest totaling $44,855 and $41,225, respectively. Additionally, our CEO provided cash proceeds, totaling $15,000 in September 2016 under a convertible note arrangement. The note matured in 2018 and remains outstanding. As of September 30, 2021, and June 30, 2021, the principal and interest due under the convertible note approximated $31,000 and $31,000, respectively. The note, along with accrued interest, is convertible into restricted common stock at rate of $0.0125 per share at the option of the Company’s CEO. By the terms of the convertible note, no additional interest was accrued during the three months ended September 30, 2021, and the fiscal year ended June 30, 2021.
As noted in Note 4, the Company acquired a 100% interest in Vital Behavioral Health, Inc. (“Vital”). As of the date of acquisition in February 2021, the Company was indebted to Vital totaling approximately $100,000 under a 6% promissory note payable arrangement. Upon consummation of the merger, the promissory note and related accrued interest were effectively eliminated. The Company did not make any cash payments under the promissory note arrangement through September 30, 2021. As of September 30, 2021, the balance of the inter-company note payable was eliminated in the consolidation.
The Company sold an individual a 4.67% non-controlling interest in VBH Kentucky, Inc. in April 2021 for cash proceeds totaling $100,000. The non-controlling interest holder also entered into a $100,000 12% convertible note payable with the Company in March 2021. The convertible note matures in March 2022 and is convertible into restricted common stock at $0.05 per share.
Effective December 31, 2020, Dr. George D. Shoenberger was appointed as a Board member of the Company. As of the date of the appointment and through September 30, 2021, Dr. Shoenberger held a convertible note payable issued in 2016 with an initial principal balance of $50,000. As of September 30, 2021, and June 30, 2021, the outstanding principal and accrued interest balance due under the convertible note agreement totaled $100,000 and $100,000, respectively. The note, along with accrued interest, is convertible at the option of Dr. Shoenberger into restricted common stock of the Company at a conversion rate of $0.025 per share. The Company did not make any settlement arrangement to cure the default of the convertible note payable during the three months ended September 30, 2021, and the fiscal year ended June 30, 2021.
In May 2020, the Company entered into a 12% convertible note arrangement with a shareholder in which the Company received total cash proceeds of $50,000. The noteholder was a previous 59% owner of Vital prior the Company’s acquisition. As of June 30, 2021, the Company converted the previously outstanding convertible note payable and accrued interest into shares of restricted common stock. Upon consummation of the Vital acquisition, the noteholder was issued shares of restricted common stock in exchange for the equity interest in Vital. In addition, the significant shareholder provided working capital advances totaling approximately $58,000 during the fiscal year ended June 30, 2021, of which approximately $51,000 was due and payable as of June 30, 2021. There were no outstanding payables due to the aforementioned significant shareholder as of September 30, 2021.
Throughout several of the most recent fiscal years, the Company received working capital advances from a significant shareholder. In December 2020, the Company settled the then outstanding obligations due to the shareholder totaling approximately $69,000 via the issuance of 3,900,000 shares restricted common stock. As a result of the settlement, the Company recognized a fiscal 2021 loss of approximately $23,000 measured as the difference between the re-acquisition price of the debt (as measured by the estimated fair value of the restricted common stock issued) and the carrying cost of the debt on the date of settlement. The significant shareholder is the lessor of the Company’s operating lease as of June 30, 2021. As of June 30, 2021, the Company owed the significant shareholder/lessor approximately $23,000 related to tenant improvement payments made on behalf of the Company. There were no outstanding payables due to the aforementioned significant shareholder as of September 30, 2021.
During the previous periods the Company’s Chief Operating Officer (“COO”) and Director made working capital advances to the Company that were converted to a promissory note payable. The notes accrue interest at a rate of 6% per annum. The Company owed the COO approximately $88,000 and $87,000, respectively.
During the fiscal year ended June 30, 2021, certain previously outstanding shareholder advances totaling approximately $72,000 were assumed by a third party as part of the RSB disposition as discussed in Note 3. |
STOCKHOLDERS EQUITY |
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| Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| STOCKHOLDERS EQUITY | NOTE 8 – STOCKHOLDERS EQUITY
In June 2021, the Company issued a related party fully vested shares of restricted common stock for the settlement of convertible notes payable and accrued interest totaling approximately $56,000.
In April 2021, the Company issued an investor a 4.67% non-controlling interest in its previously wholly owned subsidiary VBH Kentucky, Inc. for cash proceeds totaling $100,000.
In February 2021, the Company issued fully vested shares of restricted common stock for total consideration of approximately $522,000 for the acquisition of Vital Behavioral Health, Inc.
In February 2021, the Company issued a consultant fully vested shares of restricted common stock for total consideration of approximately $16,000.
In December 2020, the Company issued a related party fully vested shares of restricted common stock for the settlement of convertible notes payable and accrued interest totaling approximately $68,000. As part of the settlement, the Company recognized an additional loss of approximately $23,000 as a result of the difference between the fair value of the re-acquisition consideration and the carrying cost of the debt on the date of settlement.
In December 2020, the Company issued a consultant fully vested shares of common stock for total consideration of approximately $11,000.
Stock Payable
On September 2, 2021, the Company entered into certain Mutual Release and Settlement Agreement with Athens Common, LLC to extinguish $31,310 of payables held by Athens Common, LLC. All parties agreed to a total exchange of shares of common Stock of the Company, par value $ per share, as payment for the settlement along with $15,000 in cash. The shares were valued using the stock price $ on the date of the agreement resulting in $16,210 recorded in equity as stock payable.
Warrants
In August 2021, the Company issued the lender 1,000,000 warrants convertible into restricted shares of common stock at an exercise price of $0.005 per share for a period of five years. The Company recorded the fair value of the 1,000,000 warrants issued with debt at approximately $66,000 as a discount.
Warrants granted in the three months ended September 30, 2021, were valued using the Black Scholes Model with the risk-free interest rate of 0.78%, expected life , expected dividend rate of % and expected volatility of %. |
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OPERATING LEASES |
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| OPERATING LEASES | NOTE 9 – OPERATING LEASES
As of September 30, 2021, the Company, through its Vital subsidiaries, has the following a non-cancelable lease arrangement:
The following table summarizes the Company’s undiscounted cash payment obligations for its non-cancelable lease liabilities through the end of the expected term of the lease:
The weighted average remaining term of the Company’s non-cancelable operating leases as of September 30, 2021, was approximately .
On January 14, 2021, our wholly owned subsidiary, United Product Development Corporation (the “Subsidiary”), a Nevada corporation, entered into a commercial lease (the “Lexington Lease”) with Athens Commons, LLC, a Kentucky limited liability company, for the lease of a 88,740 square foot building at 5532 Athens Boonsboro Road, Lexington, Kentucky. The Lexington Lease is for a term with options to renew for 2 additional 5-year terms. The effective beginning date of the Lexington Lease term was January 14, 2021. The Lexington Lease provides for minimum monthly rent of $50,000 for the first lease year and a 3% rental increase for each succeeding lease year. The Company was only obligated to pay $20,000 per month for up to the first six month until the property was re-zoned and licensed for the Company’s planned rehabilitation operations. The Company also has an option to cancel the lease during the first six months if it is unable to obtain re-zoning approval and applicable regulatory licensing. On May 20, 2021, the Company terminated the Lexington Lease to zoning and licensing challenges associated with the facility.
The total lease expense incurred during the year ended June 30, 2021, inclusive of the cancelled Lexington Lease, was $91,825.
On September 2, 2021, the Company entered into certain Mutual Release and Settlement Agreement with Athens Common, LLC to extinguish $31,310 of payables held by Athens Common, LLC. All parties agreed to a total exchange of 231,572 shares of common Stock of the Corporation, par value $0.001 per share, as payment for the settlement along with $15,000 in cash. The shares were valued using the stock price $0.07 on the date of the agreement resulting in $16,210 recorded in equity as stock payable. |
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SUBSEQUENT EVENTS |
3 Months Ended |
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Sep. 30, 2021 | |
| Subsequent Events [Abstract] | |
| SUBSEQUENT EVENTS | NOTE 10 – SUBSEQUENT EVENTS
On October 8, 2021, International Metabolic Institute, LLC, a Nevada Limited Liability Company (as the Licensor), completed a Mutual Termination of License Agreement with our wholly owned subsidiary, iMetabolic, Inc. (as the Licensee). The termination agreement terminated the Licensor’s licensing to our subsidiary, iMetabolic, Inc., the Licensee, to commercialize consumer products pursuant to the trademarked brand, “iMetabolic” in exchange for the Licensee’s payment of certain compensation to the Licensor. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
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| Accounting Policies [Abstract] | ||||||||||||||||
| Principles of Consolidation | Principles of Consolidation
The Company consolidates the assets, liabilities, and operating results of its wholly owned and majority-owned subsidiaries: (i) iMetabolic Corp, a Nevada corporation; (ii) United Product Development Corp., a Nevada corporation; (iii) Vital Behavioral Health, Inc., a Nevada corporation (since February 16, 2021); (iv) VBH Frankfort LLC, a Nevada limited liability company (since February 16, 2021); (v) VSL Frankfort LLC, a Nevada limited liability company (since February 16, 2021); (vi) VBH Garden Grove Inc. (since February 17, 2021); (vii) VBH Kentucky Inc., a Nevada corporation (since March 16, 2021); and (viii) Record Street Brewing Co., a Nevada corporation (through December 31, 2020). All intercompany accounts and transactions have been eliminated in consolidation. |
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| Cash and Cash Equivalents | Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with original maturities of 90 days of less at the date of purchase. The Company is exposed to credit risk in the event of default by the financial institutions or the issuers of these investments to the extent the amounts on deposit or invested are in excess of amounts that are insured. As of September 30, 2021 and June 30, 2021 the Company did not have any cash equivalents or cash deposits in excess of the federally insured limits. |
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| Use of Estimates | Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from these estimates. |
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| Fair Value of Financial Instruments | Fair Value of Financial Instruments The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the party’s own credit risk.
Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3: Unobservable inputs that are not corroborated by market data.
The Company's financial instruments consist primarily of cash and cash equivalents, restricted cash, accounts payable and convertible and other notes payable. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments.
The fair value of the Company’s derivative liabilities are estimated using a Black-Scholes option pricing model with Level 3 unobservable inputs. Prior to the fiscal year ended June 30, 2021 the Company did not have any instruments valued within Level 3 of the fair value hierarchy. |
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| Net Income (Loss) Per Share |
The Company presents both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net loss by the weighted average number of shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period under the treasury stock method using the if-converted method. Due to the incurrence of net losses, the Company did not include outstanding instruments convertible into common stock that would be anti-dilutive. |
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| Business Combinations | Business Combinations
Business combinations are accounted for at fair value. Acquisition costs are expensed as incurred and recorded in general and administrative expenses. Measurement period adjustments are made in the period in which the amounts are determined, and the current period income effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition date. All changes that do not qualify as measurement period adjustments are also included in current period earnings. The accounting for business combinations requires estimates and judgment as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair value for assets acquired and liabilities assumed. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the financial statements could result in a possible impairment of goodwill, require acceleration of the amortization expense of finite-lived intangible assets, or the recognition of additional consideration which would be expensed. |
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| Lease Accounting | Lease Accounting
The Company leases office space and outpatient clinical space under a lease arrangement. These properties are generally leased under non-cancelable agreements that contain lease terms in excess of twelve months on the date of entry as well as renewal options for additional periods. The agreements, which have been classified as operating leases, generally provide for base minimum rental payment, as well non-lease components including insurance, taxes, maintenance, and other common area costs.
At the lease commencement date, the Company recognizes a right-of-use asset and a lease liability for all leases, except short-term leases with an original term of twelve months or less. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any prepayments to the lessor and initial direct costs such as brokerage commissions, less any lease incentives received. All right-of-use assets are periodically reviewed for impairment in accordance with standards that apply to long-lived assets. The lease liability is initially measured at the present value of the lease payments, discounted using the rate implicit in the contract if available or an estimate of our incremental borrowing rate for a collateralized loan with the same term as the underlying lease. The discount rates used for the initial measurement of lease liabilities as of the date of entry were based on the original lease terms.
Lease payments included in the measurement of lease liabilities consist of (i) fixed lease payments for the non-cancelable lease term, (ii) fixed lease payments for optional renewal periods where it is reasonably certain the renewal option will be exercised, and (iii) variable lease payments that depend on an underlying index or rate, based on the index or rate in effect at lease commencement. Certain real estate lease agreements require payments for non-lease costs such as utilities and common area maintenance. The Company has elected an accounting policy to not separate implicit components of the contract that may be considered non-lease related.
Lease expense for operating leases consists of the fixed lease payments recognized on a straight-line basis over the lease term plus variable lease payments as incurred. The lease payments are allocated between a reduction of the lease liability and interest expense. Depreciation of the right-of-use asset for operating leases reflects the use of the asset on straight-line basis over the expected term of the lease. |
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| Property and Equipment | Property and Equipment
Property and Equipment are stated at cost less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred and additions and improvements that significantly extend the lives of assets are capitalized. Upon sale or other retirement of depreciable property, the cost and accumulated depreciation are removed from the related accounts and any gain or loss is reflected in operations. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The useful lives of tenant improvements are the lesser of the estimated useful life of the asset or the term of the lease (2 years for current lease); furniture and fixtures are to years; operating lease right of use assets over the expected term of the operating lease; and office and computer equipment are to years.
The Company periodically reviews property and equipment when events or changes in circumstances indicate that their carrying amounts may not be recoverable or their depreciation or amortization periods should be accelerated. Recoverability is assessed based on several factors, including the intention with respect to maintaining facilities and projected discounted cash flows from operations. An impairment loss would be recognized for the amount by which the carrying amount of the assets exceeds their fair value, as approximated by the present value of their projected discounted cash flows. |
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| Goodwill | Goodwill
Goodwill represents the excess of fair value over identifiable tangible and intangible net assets acquired in business combinations. Goodwill is not amortized, instead goodwill is reviewed for impairment at least annually, or on an interim basis between annual tests when events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. |
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| Advertising Expense | Advertising Expense
The Company recognizing advertising expense in the period in which it is incurred. For the three months ended September 30, 2021 the Company incurred advertising expense of $1,160 included in general and administrative expense in the accompanying consolidated statements of operations. The Company did not incur advertising expenses during the three months ended September 30, 2020. |
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| Revenue Recognition | Revenue Recognition
The Company previously licensed its beer and beverage products to its customers. The royalties earned from these licensing agreements represent revenue earned under contracts in which the Company bills and collects from its licensee in arrears. The Company determines the measurement of revenue and the timing of revenue recognition utilizing the following core principles:
Revenues from licensing royalties are recognized when the Company’s performance obligations are satisfied upon its licensee’s sales to its customers. The Company primarily invoices its licensee on a quarterly basis, net of returns. The Company did not realize material revenues in the current period through the disposition date on December 31, 2020.
The Company’s expected rehab service and facility revenue will be recognized in accordance with the same five core principles after meeting the applicable licensing requirements. |
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| Income Taxes | Income Taxes
The Company recognizes deferred tax liabilities and assets using the liability method. Under this method, deferred tax liabilities and assets are determined based on the temporary differences between the financial statements carrying values and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. In determining the future tax consequences of events that have been recognized in the financial statements or tax returns, judgment and interpretation of statutes is required. Judgments and interpretation of statutes are inherent in this process. Future income tax assets are recorded in the financial statements if realization is considered more likely than not.
For previously taken tax positions considered to be uncertain, the Company prescribes a recognition threshold and measurement attribute. In the event certain tax positions do not meet the appropriate recognition threshold, de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions is required.
The Company files income tax returns in the U.S. federal jurisdiction. |
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| Debt Issuance Costs | Debt Issuance Costs
Debt issuance costs incurred in connection with the issuance of long-term debt are capitalized, netted against debt principal for balance sheet purposes, and amortized to interest expense over the terms of the related debt agreements using the effective interest method. |
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| Derivative Liabilities | Derivative Liabilities
The Company classifies all of its embedded debt conversion features, and other derivative financial instruments as equity if the contracts (1) require physical settlement or net-share settlement or (2) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (1) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), (2) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement), or (3) contracts that contain reset provisions. The Company assesses classification of its equity-linked instruments at each reporting date to determine whether a change in classification between equity and liabilities (assets) is required. As of June 30, 2021, the Company did not have enough authorized and unissued shares to settle all outstanding equity-linked instruments resulting in the reclassification of certain instruments to liability. The Company reclassifies outstanding instruments based on allocating the unissued shares to contracts with the earliest inception date resulting in the contracts with the latest inception date being recognized as liabilities first.
The Company accounts for contracts convertible into common stock in excess of its authorized capital as derivative as liabilities. The derivative liabilities are re-measured at fair value with the changes in the value reported as a component of other income (expense) in the accompanying results of operations. The derivative liabilities are measured at fair value using a Black Scholes option pricing Model. The model is based on assumptions including quoted market prices and estimated volatility factors based on historical quoted market prices for the Company’s common stock and are classified within Level 3 of the fair value hierarchy as established by US GAAP. As of September 30, 2021, all derivative liability contracts are convertible into a fixed number of shares of common stock. |
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| Going Concern | Going Concern
The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and allow it to continue as a going concern, has reoccurring net losses and net capital deficiency. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plans to obtain such resources for the Company include (i) obtaining capital from management and significant stockholders sufficient to meet its minimal operating expenses; (ii) obtaining funding from outside sources through the sale of its debt and/or equity securities; and (iii) completing a merger with or acquisition of an existing operating company. Management provides no assurances that the Company will be successful in accomplishing any of its plans. |
ACQUISITIONS (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Business Combination and Asset Acquisition [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The following table represents the fair value of the consideration paid allocated to the assets and liabilities acquired in applying the acquisition method for the completion of the Vital business combination: | The following table represents the fair value of the consideration paid allocated to the assets and liabilities acquired in applying the acquisition method for the completion of the Vital business combination:
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PROPERTY AND EQUIPMENT (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property and equipment consist of the following: | Property and equipment consist of the following:
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NOTES AND CONVERTIBLE NOTES PAYABLE (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The Company’s notes payable consists of the following | The Company’s notes payable consists of the following:
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| The Company’s convertible notes payable consist of the following | The Company’s convertible notes payable consist of the following:
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STOCKHOLDERS EQUITY (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The following table summarizes the Company's warrant transactions during the three months ended September 30, 2021, and year ended June 30, 2021: |
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OPERATING LEASES (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Operating Leases | ||||||||||||||||||||||||||||||||||||||||||||||
| The following table summarizes the Company’s undiscounted cash payment obligations for its non-cancelable lease liabilities through the end of the expected term of the lease: | The following table summarizes the Company’s undiscounted cash payment obligations for its non-cancelable lease liabilities through the end of the expected term of the lease:
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) |
3 Months Ended |
|---|---|
|
Sep. 30, 2021
USD ($)
| |
| Property, Plant and Equipment [Line Items] | |
| Advertising expense | $ 1,160 |
| Furniture and Fixtures [Member] | Minimum [Member] | |
| Property, Plant and Equipment [Line Items] | |
| Useful lives | 5 years |
| Furniture and Fixtures [Member] | Maximum [Member] | |
| Property, Plant and Equipment [Line Items] | |
| Useful lives | 7 years |
| Office Equipment [Member] | Minimum [Member] | |
| Property, Plant and Equipment [Line Items] | |
| Useful lives | 3 years |
| Office Equipment [Member] | Maximum [Member] | |
| Property, Plant and Equipment [Line Items] | |
| Useful lives | 5 years |
DISCONTINUED OPERATIONS (Details Narrative) - Discontinued Operations [Member] |
Dec. 31, 2020
USD ($)
|
|---|---|
| Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items] | |
| Discontinued Operation, Name | RSB operations |
| [custom:PercentageOfIssuedAndOutstandingStock] | 10000.00% |
| [custom:OutstandingLiabilities-0] | $ 251,164 |
The following table represents the fair value of the consideration paid allocated to the assets and liabilities acquired in applying the acquisition method for the completion of the Vital business combination: (Details) - USD ($) |
Feb. 16, 2021 |
Sep. 30, 2021 |
Jun. 30, 2021 |
|---|---|---|---|
| Business Acquisition [Line Items] | |||
| Goodwill | $ 416,981 | $ 416,981 | |
| Vital Behavioral Health Inc [Member] | |||
| Business Acquisition [Line Items] | |||
| Fair value of 16,840,000 shares of restricted common stock | $ 522,040 | ||
| Lease liabilities | 52,787 | ||
| Other current liabilities | 27,475 | ||
| Notes payable forgiven | (122,250) | ||
| Total consideration | 480,052 | ||
| Cash | 10,284 | ||
| Right of use assets | 52,787 | ||
| Goodwill | 416,981 | ||
| Total assets acquired | $ 480,052 |
ACQUISITIONS (Details Narrative) - shares |
1 Months Ended | |
|---|---|---|
Feb. 28, 2021 |
Sep. 30, 2021 |
|
| Business Acquisition [Line Items] | ||
| Percentage of acquired outstanding shares | 10000.00% | |
| Vital Behavioral Health Inc [Member] | ||
| Business Acquisition [Line Items] | ||
| Percentage of acquired outstanding shares | 100.00% | 10000.00% |
| Number of issuance restricted common stock | 16,840,000 |
Property and equipment consist of the following: (Details) - USD ($) |
Sep. 30, 2021 |
Jun. 30, 2021 |
|---|---|---|
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment | $ 103,552 | $ 46,745 |
| Accumulated Depreciation, Depletion and Amortization, Property, Plant, and Equipment | (15,719) | (6,702) |
| Property, Plant and Equipment, Net | 87,833 | 40,043 |
| Furniture and Fixtures [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment | 7,426 | 5,304 |
| Computer Equipment [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment | 18,465 | 18,465 |
| Leaseholds and Leasehold Improvements [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment | $ 77,660 | $ 22,976 |
PROPERTY AND EQUIPMENT (Details Narrative) - USD ($) |
3 Months Ended | 12 Months Ended |
|---|---|---|
Sep. 30, 2021 |
Jun. 30, 2021 |
|
| Property, Plant and Equipment [Abstract] | ||
| Depreciation | $ 9,017 | $ 6,702 |
The Company’s notes payable consists of the following (Details) - USD ($) |
Sep. 30, 2021 |
Jun. 30, 2021 |
|---|---|---|
| Short-term Debt [Line Items] | ||
| Total Notes payable | $ 617,560 | $ 114,560 |
| Unamortized discount | (60,500) | |
| Notes payable, net | 557,060 | 114,560 |
| Accrued interest | 14,496 | 13,199 |
| Total notes payable, net | 572,006 | 127,759 |
| 6% Related party Notes payble Due in october 2020 [Member] | ||
| Short-term Debt [Line Items] | ||
| Total Notes payable | 117,560 | 114,560 |
| 12% Notes payble Due in March 2018 [Member] | ||
| Short-term Debt [Line Items] | ||
| Total Notes payable | $ 500,000 |
The Company’s convertible notes payable consist of the following (Details) - USD ($) |
Sep. 30, 2021 |
Jun. 30, 2020 |
|---|---|---|
| Short-term Debt [Line Items] | ||
| Total Convertible notes payable | $ 221,000 | $ 180,000 |
| Unamortized discount | (30,585) | (17,452) |
| Convertible notes payable, net | 190,415 | 162,548 |
| Accrued interest | 74,870 | 70,600 |
| Total convertible notes payable, net | 265,285 | 233,148 |
| Convertible Notes Payable [Member] | ||
| Short-term Debt [Line Items] | ||
| Total Convertible notes payable | 65,000 | 65,000 |
| Convertible Notes Payable Three [Member] | ||
| Short-term Debt [Line Items] | ||
| Total Convertible notes payable | 100,000 | 100,000 |
| Convertible Notes Payable Four [Member] | ||
| Short-term Debt [Line Items] | ||
| Total Convertible notes payable | 15,000 | 15,000 |
| Convertible Notes Payable Five [Member] | ||
| Short-term Debt [Line Items] | ||
| Total Convertible notes payable | $ 41,000 |
The following table summarizes the Company's warrant transactions during the three months ended September 30, 2021, and year ended June 30, 2021: (Details) - $ / shares |
3 Months Ended | 12 Months Ended |
|---|---|---|
Sep. 30, 2021 |
Jun. 30, 2021 |
|
| Equity [Abstract] | ||
| Number of waarrants beginning balance | (0) | (0) |
| Weighted average exercise price beginning balance | $ (0) | $ (0) |
| Number of warrants granted | 1,000,000 | (0) |
| Weighted average exercise price granted | $ 0.005 | $ (0) |
| Number of waarrants end balance | 1,000,000 | (0) |
| Weighted average exercise price end balance | $ 0.005 | $ (0) |
The following table summarizes the Company’s undiscounted cash payment obligations for its non-cancelable lease liabilities through the end of the expected term of the lease: (Details) |
Sep. 30, 2021
USD ($)
|
|---|---|
| Operating Leases | |
| 2022 | $ 141,138 |
| 2023 | 112,171 |
| 2024 | |
| 2025 | |
| 2026 | |
| Total undiscounted cash payments | 253,309 |
| Less interest | (11,833) |
| Present value of payments | $ 241,476 |