NOTES
TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2020
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Healthcare
Integrated Technologies, Inc. and its subsidiaries (collectively the “Company,” “we,” “our”
or “us”) is a healthcare technology company based in Knoxville, Tennessee. We are creating a diversified spectrum
of healthcare technology solutions to integrate and automate the continuing care, home care and professional healthcare spaces.
Our
initial product, SafeSpace, is an ambient fall detection solution designed for continuing care communities and at home use. SafeSpace
includes wall mounted devices utilizing radar technology and state of the art software to effectively monitor a person remotely.
In continuing care communities, SafeSpace detects resident falls and generates alerts to a centralized, intelligent dashboard
without the use of wearable devices or any action by the resident. In the home, SafeSpace detects falls and sends alerts directly
to designated individuals.
In
addition to SafeSpace, we are creating a home concierge healthcare service application to provide a virtual assisted living experience
for seniors, recently released postoperative patients and others. The concierge application will enable the consumer to obtain
home healthcare services and health and safety monitoring equipment to improve quality of life. We are also working to develop
a fully integrated solution for the professional healthcare community that integrates electronic health records, remote patient
monitoring, telehealth, and other items where integration is beneficial.
Basis
of Presentation
The
accompanying interim consolidated financial statements include those of Healthcare Integrated Technologies, Inc. and its subsidiaries,
after elimination of all intercompany accounts and transactions. We have prepared the accompanying interim consolidated financial
statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
and pursuant to the rules and regulations of the United States Securities and Exchange Commission. Accordingly, they do not contain
all information and footnotes required by accounting principles generally accepted in the United States of America for annual
financial statements. In the opinion of the Company’s management, the accompanying unaudited interim consolidated financial
statements contain all of the adjustments necessary (consisting only of normal recurring accruals) to present the financial position
of the Company as of October 31, 2020 and the results of operations and cash flows for the periods presented. The results of operations
for the three months ended October 31, 2020 are not necessarily indicative of the operating results for the full fiscal year or
any future period. These unaudited interim consolidated financial statements should be read in conjunction with the financial
statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2020
filed with the SEC on October 16, 2020.
Reclassifications
Certain
prior period amounts have been reclassified to conform to current period presentation. On the interim consolidated statements
of operations for the three months ended October 31, 2019, we reclassified $1,095 in loss from discontinued operations to selling,
general and administrative expense and interest expense.
Risk
and Uncertainties
Factors
that could affect our future operating results and cause actual results to vary materially from management’s expectation
include, but are not limited to: our ability to maintain and secure adequate capital to fully develop our product(s) and operations;
our ability to source strong opportunities with sufficient risk adjusted returns; acceptance of the terms and conditions of our
licenses and/or the acceptance of our royalties and fees; the nature and extent of competition from other companies that may reduce
market share and create pressure on pricing and investment return expectations; changes in the projects in which we plan to invest
which result from factors beyond our control, including, but not limited to, a change in circumstances, capacity and economic
impacts; changes in laws, regulations, accounting, taxation, and other requirements affecting our operations and business. Negative
developments in these or other risk factors could have a significant adverse effect on our financial position, results of operations
and cash flows.
On
January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain
of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community
as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic,
based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date
of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s future financial
condition, liquidity, and results of operations. Management is actively monitoring the impact of the global situation on its financial
condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the
global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of
operations, financial condition, or liquidity for fiscal year 2021.
Use
of Estimates
The
preparation of interim consolidated financial statements in conformity with U.S. GAAP 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 interim consolidated financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. We base our estimates on experience and various other assumptions that
are believed to be reasonable under the circumstances. We evaluate our estimates and assumptions on a regular basis and actual
results may differ from those estimates.
Concentration
of Credit Risk
Financial
instruments that potentially expose the Company to credit risk consist of demand deposits with a financial institution.
The Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institution to
the extent account balances exceed the amount insured by the FDIC, which is $250,000.
Cash
and Cash Equivalents
We
consider all highly liquid short-term investments with a maturity of three months or less at the time of purchase to be cash equivalents.
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial
institution. The balance at times may exceed federally insured limits.
Accounts
Receivable
Accounts
receivable are stated at their historical carrying amount net of write-offs and allowance for uncollectible accounts. We routinely
assess the recoverability of all customer and other receivables to determine their collectability and record a reserve when, based
on the judgement of management, it is probably that a receivable will not be collected and the amount of the reserve may be reasonably
estimated. When collection is no longer pursued, we charge uncollectable accounts receivable against the reserve.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures for major additions and improvements are capitalized
while minor replacements and maintenance and repairs, which do not improve or extend the life of such assets, are charged to operations
as incurred. Disposals are removed at cost less accumulated depreciation, and any resulting gain or loss is reflected in the consolidated
statement of operations. Depreciation is calculated using the straight-line method which depreciates the assets over the estimated
useful lives of the depreciable assets ranging from five to seven years.
Impairment
of Long-Lived Assets
Long-lived
assets such as property, equipment and identifiable intangibles are reviewed for impairment at least annually or whenever facts
and circumstances indicate that the carrying value may not be recoverable. When required, impairment losses on assets to be held
and used are recognized based on the fair value of the asset. The fair value is determined based on estimates of future cash flows,
market value of similar assets, if available, or independent appraisals, if required. If the carrying amount of the long-lived
asset is not recoverable, an impairment loss is recognized for the difference between the carrying amount and fair value of the
asset. The Company did not recognize any impairment losses for any periods presented.
Intangible
Assets
Intangible
assets consist of patents, our website and the costs of software developed for internal use. Certain payroll and stock-based compensation
costs incurred are allocated to the intangible assets. We determine the amount of costs to be capitalized based on the time spent
by employees or outside contractors on the projects. Intangible assets are amortized over their expected useful life on a straight-line
basis. We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances
occur that could impact the recoverability of these assets. If the estimate of an intangible asset’s remaining life is changed,
the remaining carrying value of the intangible asset is amortized prospectively over the revised remaining useful life. We did
not recognize any impairment losses during any of the periods presented.
Fair
Value of Financial Instruments
Fair
value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction
between market participants. A fair value hierarchy has been established for valuation inputs that gives the highest priority
to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair
value hierarchy is as follows:
Level
1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access
at the measurement date.
Level
2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly
or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical
or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset
or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally
from or corroborated by market data by correlation or other means.
Level
3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions
about the assumptions that market participants would use in pricing the assets or liabilities.
Financial
instruments consist of cash and cash equivalents, accounts receivable, accounts payable and borrowings. The fair value of current
financial assets and current financial liabilities approximates their carrying value because of the short-term maturity of these
financial instruments.
Revenue
Recognition
Revenue
is recognized under Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”
using the modified retrospective method. Under this method, the Company follows the five-step model provided by ASC Topic 606
in order to recognize revenue in the following manner: 1) Identify the contract; 2) Identify the performance obligations of the
contract; 3) Determine the transaction price of the contract; 4) Allocate the transaction price to the performance obligations;
and 5) Recognize revenue. An entity recognizes revenue for the transfer of promised goods or services to customers in an amount
that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. The Company’s
revenue recognition policies remained substantially unchanged as a result of the adoption of ASC 606, and there were no significant
changes in business processes or systems.
Advertising
Advertising
costs are expensed as incurred in accordance with ASC 720-35, “Advertising Costs.” We incurred advertising
costs of $1,975 and $5,300 for the three months ended October 31, 2020 and 2019, respectively, which are included in selling,
general and administrative expenses on the interim consolidated financial statements.
Net
Loss Per Common Share
We
determine basic income (loss) per share and diluted income (loss) per share in accordance with the provisions of ASC 260, “Earnings
Per Share.” Basic loss per share excludes dilution and is computed by dividing earnings available to common stockholders
by the weighted-average number of common shares outstanding for the period. The calculation of diluted income (loss) per share
is similar to that of basic earnings per share, except the denominator is increased, if the earnings are positive, to include
the number of additional common shares that would have been outstanding if all potentially dilutive common shares had been exercised.
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation”
(“ASC 718”) which establishes financial accounting and reporting standards for stock-based employee compensation.
It defines a fair value-based method of accounting for an employee stock option or similar equity instrument. The Company accounts
for compensation cost for stock option plans, if any, in accordance with ASC 718.
Share-based
payments, excluding restricted stock, are valued using a Black-Scholes option pricing model. Grants of share-based payment awards
issued to non-employees for services rendered have been recorded at the fair value of the share-based payment, which is the more
readily determinable value. The grants are amortized on a straight-line basis over the requisite service periods, which is generally
the vesting period. If an award is granted, but vesting does not occur, any previously recognized compensation cost is reversed
in the period related to the termination of service. Stock-based compensation expenses are included in cost of goods sold or selling,
general and administrative expenses, depending on the nature of the services provided, in the consolidated statements of operations.
Share-based payments issued to placement agents are classified as a direct cost of a stock offering and are recorded as a reduction
in additional paid in capital.
The
Company recognizes all forms of share-based payments, including stock option grants, warrants and restricted stock grants, at
their fair value on the grant date, which are based on the estimated number of awards that are ultimately expected to vest. See
Note 11.
Business
Combinations
We
account for business combinations under the acquisition method of accounting. The acquisition method requires that the acquired
assets and liabilities, including contingencies, be recorded at fair value determined on the acquisition date and that changes
thereafter be reflected in income (loss). The estimation of fair values of the assets and liabilities assumed involves several
estimates and assumptions that could differ materially from the actual amounts recorded. The results of the acquired businesses
are included in our results from operations beginning from the day of acquisition.
Income
Taxes
We
use the asset and liability method of accounting for income taxes in accordance with Accounting Standards Codification (“ASC”)
Topic 740, “Income Taxes”. Under this method, income tax expense is recognized for the amount of: (i) taxes
payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters
that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results
of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets
reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all
of the deferred tax assets will not be realized.
ASC
Topic 740-10-30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements
and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. ASC Topic 740-10-40 provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions
for any of the reporting periods presented.
In
response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was
signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act
of 2017 (“2017 Tax Act”). Corporate taxpayers may carryback net operating losses (NOLs) originating between
2018 and 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the
80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in
2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest
income (30% limit under the 2017 Tax Act) for 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits
to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period
of years, as originally enacted by the 2017 Tax Act.
In
addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement
property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act did not result
in any material adjustments to our income tax provision for the reporting periods presented.
Recently
Adopted Accounting Pronouncements
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to
the Disclosure Requirements for Fair Value Measurement”. This update is to improve the effectiveness of disclosures
in the notes to the financial statements by facilitating clear communication of the information required by U.S. GAAP that is
most important to users of each entity’s financial statements. The amendments in this update apply to all entities that
are required, under existing U.S. GAAP, to make disclosures about recurring or nonrecurring fair value measurements. The amendments
in this update are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years. The Company adopted this guidance and the adoption of this update did not have a material impact on the Company’s
consolidated financial statements.
In
March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference
Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions to account for contracts,
hedging relationships and other transactions that reference LIBOR or another reference rate if certain criteria are met. The amendments
of ASU No. 2020-04 are effective immediately, as of March 12, 2020, and may be applied prospectively to contract modifications
made and hedging relationships entered into on or before December 31, 2022. The Company adopted this guidance and the adoption
of this update did not have a material impact on the Company’s consolidated financial statements.
Recent
Accounting Pronouncements
In
December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes (ASU 2019-12, “Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes”). This guidance eliminates certain exceptions
to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting
for income taxes. This guidance is effective for annual periods after December 15, 2020, including interim periods within those
annual periods. The Company is currently evaluating the potential impact of this guidance on its consolidated financial statements.
In
August 2020, the FASB issued ASU 2020-06 Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts
in an Entity’s Own Equity. The amendments in Update No. 2020-06 simplify the complexity associated with applying U.S.
GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus
on the guidance for convertible instruments and derivative scope exception for contracts in an entity’s own equity. Update
No. 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.
Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within
those fiscal years. The Company is currently in the process of determining the effect that the adoption will have on its financial
position and results of operations.
Management
has evaluated all recent accounting pronouncements as issued by the FASB in the form of Accounting Standards Updates (“ASU”)
through the date these financial statements were available to be issued and found no recent accounting pronouncements issued,
but not yet effective accounting pronouncements, when adopted, will have a material impact on the interim consolidated financial
statements of the Company.
NOTE
2 - GOING CONCERN
The
accompanying interim consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplates continuation
of the Company as a going concern. The Company had a net loss of $326,843 for its most recent period ended October 31, 2020. As
of October 31, 2020, the Company has minimal cash and a significant working capital deficit. We have a history of losses,
an accumulated deficit, have negative working capital and have not generated cash from our operations to support a meaningful
and ongoing business plan. It is management’s opinion that these conditions raise substantial doubt about the Company’s
ability to continue as a going concern.
In
view of these matters, our ability to continue as a going concern is dependent upon the development, marketing and sales of a
viable product to achieve a level of profitability. We intend on financing our future development activities and our working capital
needs largely from the sale of private and public equity securities with additional funding from other traditional financing sources,
including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. Although
the Company believes in the viability of management’s strategy to generate sufficient revenue, control costs and the ability
to raise additional funds if necessary, there can be no assurances to that effect. Therefore, the accompanying interim consolidated
financial statements have been prepared assuming that the Company will continue as a going concern. The interim consolidated financial
statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts
and classifications of liabilities that might be necessary should we be unable to continue as a going concern.
NOTE
3 - PROPERTY AND EQUIPMENT
Property
and equipment, net consisted of the following at October 31, 2020 and July 31, 2020:
|
|
October 31, 2020
|
|
|
July 31, 2020
|
|
Equipment
|
|
$
|
8,923
|
|
|
$
|
8,923
|
|
Less: accumulated depreciation
|
|
|
(7,026
|
)
|
|
|
(6,470
|
)
|
Total property and equipment, net
|
|
$
|
1,897
|
|
|
$
|
2,453
|
|
Depreciation
expense for the three months ended October 31, 2020 and 2019 was $556 and $4,769, respectively.
NOTE
4 – INTANGIBLES
Intangibles, net consisted of the following
at October 31, 2020 and July 31, 2020:
|
|
October 31, 2020
|
|
|
July 31, 2020
|
|
Intangible assets under development
|
|
|
63,629
|
|
|
|
33,958
|
|
Capitalized costs of patents
|
|
|
49,939
|
|
|
|
-
|
|
Capitalized costs of website
|
|
|
8,785
|
|
|
|
-
|
|
Less: accumulated amortization
|
|
|
(1,183
|
)
|
|
|
-
|
|
Total intangibles, net
|
|
$
|
121,170
|
|
|
$
|
33,958
|
|
Amortization
expense for the three months ended October 31, 2020 was $1,183. We incurred no amortization expense for the fiscal year ended
July 31, 2020.
NOTE
5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consisted of the following at October 31, 2020 and July 31, 2020:
|
|
October 31, 2020
|
|
|
July 31, 2020
|
|
Accounts payable
|
|
$
|
156,110
|
|
|
$
|
155,211
|
|
Accrued interest expense
|
|
|
76,088
|
|
|
|
73,903
|
|
Accounts payable and accrued expenses
|
|
|
232,198
|
|
|
|
229,114
|
|
Accounts payable, related party
|
|
|
201,790
|
|
|
|
271,819
|
|
Total accounts payable and accrued expenses
|
|
$
|
433,988
|
|
|
$
|
500,933
|
|
NOTE
6 - PAYROLL RELATED LIABILITIES
Payroll
related liabilities consisted of the following at October 31, 2020 and July 31, 2020:
|
|
October 31, 2020
|
|
|
July 31, 2020
|
|
Accrued officers’ payroll
|
|
$
|
986,692
|
|
|
$
|
858,154
|
|
Payroll taxes payable
|
|
|
6,468
|
|
|
|
2,865
|
|
Total payroll related liabilities
|
|
$
|
993,160
|
|
|
$
|
861,019
|
|
NOTE
7 - DEBT
We
had the following debt obligations reflected at their respective carrying values on our consolidated balance sheets as of October
31, 2020 and July 31, 2020:
|
|
October 31, 2020
|
|
|
July 31, 2020
|
|
5% Convertible promissory notes
|
|
$
|
550,000
|
|
|
$
|
600,000
|
|
Paycheck Protection Program loan
|
|
|
41,667
|
|
|
|
41,667
|
|
Note payable to Acorn Management Partners, LLC
|
|
|
50,000
|
|
|
|
-
|
|
Total debt obligations
|
|
|
641,667
|
|
|
|
641,667
|
|
Less current portion
|
|
|
(627,639
|
)
|
|
|
(620,651
|
)
|
Long-term debt
|
|
$
|
14,028
|
|
|
$
|
21,016
|
|
5%
Convertible Promissory Notes
On
various dates during the month of March 2018 we issued a series of 5% Convertible Promissory Notes (collectively, the “5%
Notes”) totaling $750,000 in net proceeds. We incurred no costs related to the issuance of the 5% Notes. The 5% Notes bear
interest at the rate of five percent (5%) per annum, compounded annually and matured one-year from the date of issuance. At October
31, 2020 and July 31, 2020, accrued but unpaid interest on the 5% Notes was $75,419 and $73,903, respectively, which is included
in “accounts payable and accrued expenses” on our consolidated balance sheets.
The
5% Notes are convertible into common shares of the Company at a fixed ratio of two shares of common stock per dollar amount of
the face value of the note. The principal terms under which the 5% Notes may be converted into common stock of the Company are
as follows:
|
●
|
At
the option of the holder, the outstanding principal amount of the note, and any accrued but unpaid interest due, may be converted
into the Company’s common stock at any time prior to the maturity date of the note.
|
|
●
|
The
outstanding principal amount of the note, and any accrued but unpaid interest due, will automatically be converted into the
Company’s common stock if at any time prior to the maturity date of the note, the Company concludes a sale of equity
securities in a private offering resulting in gross proceeds to the Company of at least $1,000,000.
|
5%
Notes with a face amount of $50,000 and accrued interest expense of $6,312 were converted, at the option of the holder, into 112,624
shares of our common stock during the three months ended October 31, 2020. On October 31, 2020, 5% Notes with a face amount of
$225,000 and related accrued interest expense of $30,853, which matured on various dates during March 2019, are currently in default
and are not convertible under the conversion terms. 5% Notes with a face amount of $325,000 and related accrued interest expense
of $44,566 mature on March 31, 2021 and are convertible under the conversion terms. Management continues to negotiate amendments
to the remaining notes in default to extend the maturity dates of such notes and to encourage note conversions.
Paycheck
Protection Program Loan
On
March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted and included a
provision for the Small Business Administration (“SBA”) to implement its Paycheck Protection Program (“PPP”).
The PPP provides small businesses with funds to pay up to eight (8) weeks of payroll costs, including benefits. Funds received
under the PPP may also be used to pay interest on mortgages, rent, and utilities. Subject to certain criteria being met, all or
a portion of the loan may be forgiven. The loans bear interest at an annual rate of one percent (1%), are due two (2) years from
the date of issuance, and all payments are deferred for the first six (6) months of the loan. Any unforgiven balance of loan principal
and accrued interest at the end of the six (6) month loan deferral period is amortized in equal monthly instalments over
the remaining 18-months of the loan term. On April 30, 2020, we closed a $41,667 SBA guaranteed PPP loan with Mountain Commerce
Bank. We used the loan proceeds as permitted and will apply for forgiveness for the entire loan amount. As of October 31, 2020,
the SBA had issued its final rules for forgiveness of the loan balance and we will soon be submitting our application for
forgiveness.
Note
Payable to Acorn Management Partners, LLC
On
August 11, 2020 we agreed to repurchase 1,000,000 shares of our common stock from Acorn Management Partners, LLC (“AMP”).
As consideration for the share repurchase, we issued a $50,000 promissory note bearing interest a 6.0% per annum and due one-year
from the date of issuance (the “Note”). In the event we default under the terms of the Note, we are required to deliver
1,000,000 shares of our common stock back to AMP in full satisfaction of the obligation. The purchased shares were delivered by
AMP directly to the transfer agent on September 8, 2020 and immediately cancelled. At October 31, 2020, accrued but unpaid interest
on the Note was $669, which is included in “accounts payable and accrued expenses” on our interim consolidated
balance sheets.
NOTE
8 - INCOME TAXES
A
reconciliation of the provision for income taxes as reported, and the amount computed by multiplying net loss by the federal statutory
rate of 21% as of October 31, 2020 and July 31, 2020 are as follows:
|
|
October 31, 2020
|
|
|
July 31, 2020
|
|
Federal income tax benefit computed at the statutory rate
|
|
$
|
(68,637
|
)
|
|
$
|
(222,198
|
)
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit
|
|
|
-
|
|
|
|
(1,088
|
)
|
Stock-based compensation
|
|
|
35,792
|
|
|
|
89,933
|
|
Valuation allowance
|
|
|
32,743
|
|
|
|
133,113
|
|
Other
|
|
|
102
|
|
|
|
240
|
|
Income tax benefit, as reported
|
|
$
|
-
|
|
|
$
|
-
|
|
The
components of the net deferred tax asset as of October 31, 2020 and July 31, 2020 are as follows:
|
|
October 31, 2020
|
|
|
July 31, 2020
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryovers
|
|
$
|
570,507
|
|
|
$
|
537,764
|
|
Valuation allowance
|
|
|
(570,507
|
)
|
|
|
(537,764
|
)
|
Net deferred tax asset, as reported
|
|
$
|
-
|
|
|
$
|
-
|
|
In
assessing the realizable value of deferred tax assets, management considers whether it is more likely than not that some portion
or all the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generation
of future taxable income during the periods in which these temporary differences become tax deductible. Based on management’s
assessment of objective and subjective evidence, we have concluded at this time it is more likely than not that all of our deferred
tax asset will not be realized and we have provided a valuation allowance for the entire amount of the deferred tax asset. At
October 31, 2020, we have approximately $2.62 million in federal and state net operating loss carryovers that begin expiring in
fiscal 2037.
We
conduct business solely in the United States and file income tax returns in the United States federal jurisdiction as well as
in the states of Tennessee and Colorado. The taxable years ended July 31, 2020, 2019 and 2018 remain open to examination by the
taxing jurisdictions to which we are subject.
The
Company evaluated the provisions of ASC 740 related to the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements. ASC 740 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain
positions that the Company has taken or expects to take in its tax return. For those benefits to be recognized, a tax position
must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between tax positions taken or
expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to
as “unrecognized benefits.” A liability is recognized (or amount of net operating loss carry forward or amount of
tax refundable is reduced) for unrecognized tax benefit because it represents an enterprise’s potential future obligation
to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.
If
applicable, interest costs related to the unrecognized tax benefits are required to be calculated and would be classified as “Other
expenses – Interest expense” in the consolidated statements of operations. Penalties would be recognized as a component
of “General and administrative.”
No
material interest or penalties on unpaid tax were recorded during the three months ended October 31, 2020 and 2019. As of October
31, 2020 and July 31, 2020, no liability for unrecognized tax benefits was required to be reported. The Company does not expect
any significant changes in its unrecognized tax benefits in the next year.
NOTE
9 - RELATED PARTY TRANSACTIONS
To
continue operations and meet operating cash requirements, we have periodically relied on advances from related parties, primarily
shareholders, until such time as our cash flow from operations meets our cash requirements or we are able to obtain adequate financing
through sales of our equity securities and/or traditional debt financing. There is no formal written commitment for continued
support by shareholders. Amounts advanced primarily relate to amounts paid to vendors. The advances are considered temporary in
nature and have not been formalized by any written agreement. As of October 31, 2020 and July 31, 2020, related parties have advanced
the Company $201,790 and $271,819, respectively. The advances are payable on demand and carry no interest.
The
amounts and terms of the related party transactions may not necessarily be indicative of the amounts and terms that would have
been incurred had comparable transactions been entered into with independent third parties.
NOTE
10 - COMMON STOCK
At
October 31, 2020 and July 31, 2020, we had 36,637,235 and 36,474,611 shares of common stock outstanding, respectively. We issued
1,162,624 shares of common stock during the three months ended October 31, 2020, of which 1,050,000 shares were issued for cash
and 112,624 shares were issued upon conversion of debt and related accrued interest. In addition, we purchased and immediately
cancelled 1,000,000 shares of our common stock. During the year ended July 31, 2020 we issued 3,987,111 shares of common
stock, of which 2,950,000 shares were issued for cash, 500,000 shares were issued for services, 337,111 shares were issued upon
conversion of debt and related accrued interest, and 200,000 shares were issued for the vesting of an employee stock grant.
On
August 11, 2020, we agreed to repurchase 1,000,000 shares of our common stock from Acorn Management Partners, LLC (“AMP”).
The purchased shares were delivered by AMP directly to the transfer agent on September 8, 2020 and immediately cancelled. See
Note 7.
On
August 15, 2020, we issued 112,624 shares of common stock to the holder of a $50,000 5% Convertible Promissory Note (the “Note”)
in exchange for the Note plus accrued interest of $6,312 through the conversion date. Under the terms of the Note, the shares
were issued at a conversion price of $0.50 per share.
On
October 13, 2020, we completed two (2) private placement transactions totaling 1,050,000 shares of our common stock, each at a
price of $0.10 per share, resulting in net proceeds to the Company of $105,000. We incurred no cost related to the private placements.
NOTE
11 - STOCK-BASED COMPENSATION
Our
stock-based compensation programs are long-term retention awards that are intended to attract, retain, and provide incentives
for employees, officers and directors, and to align stockholder and employee interest. We utilize grants of both stock options
and warrants and restricted stock to achieve those goals.
Summary
of Stock Options and Warrants
During
the three months ended October 31, 2020, we recorded $134,737 of compensation expense, net of capitalized expense of $19,658,
related to stock options and warrants. During the three months ended October 31, 2019, we recorded $75,194 of compensation expense
related to stock options and warrants. The grant date fair value of stock options and warrants issued during the three months
ended October 31, 2020 and 2019 was $241,433 and $72,071, respectively. We estimated the grant date fair value of stock options
and warrants using the Black-Scholes pricing model with the following weighted average range of assumptions for the periods presented:
|
|
October 31, 2020
|
|
|
October 31, 2019
|
|
Expected volatility
|
|
|
271.61
|
%
|
|
|
255.85
|
%
|
Expected term (in years)
|
|
|
3.25
|
|
|
|
3.25
|
|
Risk-free interest rate
|
|
|
0.20
|
%
|
|
|
1.38
|
%
|
Dividend yield
|
|
|
None
|
|
|
|
None
|
|
Expected
Volatility
Due
to the fact we do not consider historical volatility is the best indicator of future volatility, we use implied volatility of
our options to estimate future volatility.
Expected
Term
Where
possible, we use the simplified method to estimate the expected term of employee stock options. Where we are unable to use the
simplified method due to the terms of a stock option, we may use a modified simplified method to estimate the expected term. We
do not have adequate historical exercise data to provide a reasonable basis for estimating the expected term for the current share
options granted. The simplified method assumes that employees will exercise share options evenly between the period when the share
options are vested and ending on the date when the options would expire.
Risk-Free
Interest Rate
The
risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve at the date of grant.
Dividend
Yield
We
have not estimated any dividend yield as we currently do not pay a dividend and do not anticipate paying a dividend over the expected
term.
The
following table summarizes our options and warrant activity for the three months ended October 31, 2020 and fiscal year ended
July 31, 2020:
|
|
October 31, 2020
|
|
|
July 31, 2020
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
Options and
|
|
|
Average
|
|
|
Options and
|
|
|
Average
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Warrants
|
|
|
Exercise Price
|
|
Balance at beginning of year
|
|
|
6,350,000
|
|
|
$
|
1.34
|
|
|
|
2,500,000
|
|
|
$
|
3.00
|
|
Granted
|
|
|
1,000,000
|
|
|
|
0.40
|
|
|
|
3,850,000
|
|
|
|
0.25
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance at end of period
|
|
|
7,350,000
|
|
|
$
|
1.21
|
|
|
|
6,350,000
|
|
|
$
|
1.34
|
|
Options and warrants exercisable
|
|
|
2,450,000
|
|
|
$
|
1.60
|
|
|
|
2,150,000
|
|
|
$
|
1.85
|
|
Summary
of Restricted Stock Grants
During
the three months ended October 31, 2020 and 2019, we recorded compensation expense of $16,042 and $-0-, respectively, related
to restricted stock grants. There were no restricted stock grants during the three months ended October 31, 2020 and 2019.
The
following table summarizes our restricted stock activity for the three months ended October 31, 2020 and fiscal year ended July
31, 2020:
|
|
October 31, 2020
|
|
|
July 31, 2019
|
|
Balance at beginning of year
|
|
|
300,000
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
500,000
|
|
Released
|
|
|
-
|
|
|
|
(200,000
|
)
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Balance at end of period
|
|
|
300,000
|
|
|
|
300,000
|
|
NOTE
12 – COMMITMENTS AND CONTINGENCIES
On
March 13, 2018, in connection with the appointment of Scott M. Boruff as Chief Executive Officer of the Company, the Company and
Mr. Boruff entered into an employment agreement (the “Boruff Employment Agreement”) with an initial term of three
(3) years. As compensation for his services, the Company shall pay Mr. Boruff an annual base salary of $300,000. In the event
Mr. Boruff’s employment with the Company is terminated without cause, Mr. Boruff shall be entitled to a severance payment
equal to his base salary for one (1) full year. If Mr. Boruff is terminated without cause within two (2) years of a change in
control upon request of the acquiror, Mr. Boruff shall be entitled to a severance payment in an amount equal to 2.99 times the
annualized base salary he is then earning. In addition, Mr. Boruff is eligible for equity awards as approved by the Board of Directors
as defined in the agreement.
On
October 8, 2019, in connection with the appointment of Charles B. Lobetti, III as Chief Financial Officer of the Company, the
Company and Mr. Lobetti entered into an employment agreement (the “Lobetti Employment Agreement”) ”) with
an initial term of three (3) years. Pursuant to a modification of the Lobetti Employment Agreement effective May 1, 2020, the
Company shall pay Mr. Lobetti an annual base salary of $104,000 per year as compensation for his services. In the event Mr.
Lobetti’s employment with the Company is terminated without cause, Mr. Lobetti shall be entitled to a severance payment
equal to his base salary for one (1) full year. If Mr. Lobetti is terminated without cause within two (2) years of a change
in control upon request of the acquiror, Mr. Lobetti shall be entitled to a severance payment in an amount equal to 2.99
times the annualized base salary he is then earning. In addition, Mr. Lobetti is eligible for equity awards as approved by
the Board of Directors as defined in the agreement.
On
June 15, 2020, in connection with the appointment of Kenneth M. Greenwood as Chief Technology Officer of the Company, the
Company and Mr. Greenwood entered into an employment agreement (the “Greenwood Employment Agreement”) with an
initial term of three (3) years. As compensation for his services, the Company shall pay Mr. Greenwood an annual base salary
of $257,000. The base salary shall be accrued until the Company obtains funding of $1,000,000 in excess of funding used for
inventory purchases, or has $1,000,000 in revenue, whichever occurs first. In the event Mr. Greenwood’s employment with
the Company is terminated without cause, Mr. Greenwood shall be entitled to a severance payment equal to his base salary for
one (1) full year. If Mr. Greenwood is terminated without cause within two (2) years of a change in control upon request of
the acquiror, Mr. Greenwood shall be entitled to a severance payment in an amount equal to 2.99 times the annualized base
salary he is then earning. In addition, Mr. Greenwood is eligible for equity awards as approved by the Board of Directors as
defined in the agreement.
On
September 1, 2020, in connection with the appointment of Susan A. Reyes, M.D. as Chief Medical Officer of the Company, the
Company and Dr. Reyes entered into an employment agreement (the “Reyes Employment Agreement”) with an initial
term of three (3) years. As compensation for her services, the Company shall pay Dr. Reyes an annual base salary of $52,000.
The base salary shall be accrued until the Company obtains funding of at least $1,000,000, or has reported $10,000,000 in
revenue, whichever occurs first. In the event Dr. Reyes’ employment with the Company is terminated without cause, Dr.
Reyes shall be entitled to a severance payment equal to her base salary for one (1) full year. If Dr. Reyes is terminated
without cause within two (2) years of a change in control upon request of the acquiror, Dr. Reyes shall be entitled to a
severance payment in an amount equal to 2.99 times the annualized base salary she is then earning. In addition, Dr. Reyes is
eligible for equity awards as approved by the Board of Directors as defined in the agreement.
NOTE
13 - SUBSEQUENT EVENTS
On December 2, 2020, we completed a private
placement of 1,500,000 shares of our common stock at a price of $0.10 per share resulting in net proceeds to the Company
of $150,000. We incurred no cost related to the private placement.