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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2021

 

OR

 

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from          to        

 Commission file number: 001-13621

 

UPD HOLDING CORP.

(Exact name of Registrant as specified in its charter)

 

Nevada 13-3465289
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

 

75 Pringle Way, 8th Floor, Suite 804

Reno, Nevada 89502

(Address of principal executive offices, including zip code)

 

775-829-7999 x112

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x

 

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).     Yes ¨ No x

 

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 ¨ Accelerated filer ¨
Non-accelerated filer x Smaller reporting company x  
  Emerging growth company ¨

 

   
 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report).     ¨ Yes x No

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

 

As of February 14, 2022, the issuer had 194,750,907 shares of Common Stock outstanding, par value $.005 per share.

 

 

 

   
 

 

UPD HOLDING CORP.

 

TABLE OF CONTENTS

 

 

 

    Page No.
PART I.    FINANCIAL INFORMATION  
     
Item 1. Consolidated Balance Sheets as of December 31, 2021 (unaudited) and June 30, 2021 5
  Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2021 and 2020 (unaudited) 6
  Consolidated Statements of Stockholders’ Deficit for the Three and Six Months December 31, 2021 and 2020 (unaudited) 7
  Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2021 and 2020 (unaudited) 9
  Notes to Condensed Consolidated Financial Statements 10
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Item 4. Controls and Procedures 32
     
PART II.   OTHER INFORMATION  
     
Item 1. Legal Proceedings 33
Item 1A.  Risk Factors 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Mine Safety Disclosures 33
Item 5. Other Information 33
Item 6. Exhibits 33

 

   
 

 

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.

 

   
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

UPD Holding Corp.

Consolidated Balance Sheets

 

 

   December 31,   June 30, 
   2021   2021 
   (Unaudited)     
ASSETS        
Current assets:        
Cash and cash equivalents  $147,458   $16,414 
Total current assets  147,458   16,414 
           
Property and equipment, net   77,102    40,043 
Right of use asset, net   197,837    42,447 
Other assets   26,275    2,365 
Goodwill   416,981    416,981 
Total assets  $865,653   $518,250 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
Current liabilities:          
Accounts payable  $174,418   $155,394 
Accrued interest   101,170    83,799 
Convertible notes payable, net of discount   202,715    162,548 
Derivative liability   38,509    237,963 
Notes payable, net   468,833    - 
Related party notes payable   117,560    114,560 
Lease liability   182,421    26,206 
Total current liabilities   1,285,626    780,470 
Lease liability, net of current portion   16,082    16,241 
Total liabilities   1,301,708    796,711 
           
Commitments and Contingencies          
Stockholders' deficit          

Preferred stock, $0.01 par value; 10,000,000 authorized and  none

issued and outstanding

   -    - 

Common stock, $0.005 par value; 200,000,000 shares authorized

and 194,750,907 issued and outstanding at December 31, 2021 and

June 30, 2021, respectively

   973,755    973,755 
Additional paid-in-capital   2,898,362    2,558,162 
Stock payable   16,210    - 
Accumulated deficit   (4,307,656)   (3,804,474)
Total UPD Holding Corp. stockholders' deficit   (419,329)   (272,557)
Non-controlling interest   (16,726)   (5,904)
Total stockholders' deficit   (436,055)   (278,461)
Total liabilities and stockholders' deficit  $865,653   $518,250 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 5 

 

UPD Holding Corp.

Consolidated Statements of Operations

(Unaudited)

 

 

                             
   For the Three Months Ended   For the Six Months Ended 
   December 31,   December 31,   December 31,   December 31, 
   2021   2020   2021   2020 
Revenues:                
Net revenue  $—   $—   $—   $— 
                     
Operating costs and expenses:                    
Professional fees   69,028    21,570    126,845    67,186 
General and administrative   268,547    2,712    508,708    5,192 

Total operating costs and

expenses

   337,575    24,282    635,553    72,378 
Operating loss   (337,575)   (24,282)   (635,553)   (72,378)
                     
Interest expense, net   (50,246)   (3,990)   (77,905)   (9,849)
Gain on change in fair value of derivative liability   238,397    —    199,454    — 
Other expense, net   —    (23,402)   —    (23,402)

Loss from continuing

operations, before income taxes

   (149,424)   (51,674)   (514,004)   (105,629)
Benefit from income taxes   —    10,852    —    10,852 

Loss from continuing

operations

   (149,424)   (40,822)   (514,004)   (94,777)
                     
Discontinued operations:                    
Gain on sale of discontinued operations, net of tax   —    240,312    —    240,312 

Income from discontinued

operations, net of tax

   —    240,312    —    240,312 
Net income (loss)  $(149,424)  $199,490   $(514,004)  $145,535 

Less: net loss attributable to

non-controlling interest

   (6,056)   —    (10,822)   — 

Net income (loss) attributable

to UPD Holding Corp.

  $(143,368)  $199,490   $(503,182)  $145,535 
                     
Basic and diluted earnings (loss) per share from:                    
Continuing operations  $(0.00)  $(0.00)  $(0.00)  $(0.00)
Discontinued operations   (0.00)   (0.00)   (0.00)   (0.00) 

Basic and diluted earnings (loss) per

share from:

  $(0.00)  $(0.00)  $(0.00)  $(0.00)
                     
Weighted average shares outstanding                    
Basic and diluted   194,750,907    172,450,907    194,750,907    172,450,907 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 6 

 

UPD Holding Corp.

Consolidated Statements of Changes in Stockholders’ Deficit

For the Three and Six Months Ended December 31, 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   -    $-    194,750,907   $973,755   $2,558,162   $-   $(3,804,474)  $(272,557)  $(5,904)  $(278,461)

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   -     -    -    -    -    16,210    -    16,210    -   16,210
Net loss   -     -    -    -    -    -    (359,814)   (359,814)   (4,766)  (364,580)
Balance, September 30, 2021   -     -    194,750,907    973,755    2,648,362    16,210    (4,164,288)   (525,961)   (10,670)  (536,631)
Sale of non-controlling interest   -     -    -    -    250,000    -    -    250,000    -   250,000
Net loss   -     -    -    -    -    -    (143,368)   (143,368)   (6,056)  (149,424)
Balance, December 31, 2021   -    $-    194,750,507   $973,755   $2,898,362   $16,210   $(4,307,656)  $(419,329)  $(16,726)  $(436,055)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 7 

 

UPD Holding Corp.

Consolidated Statements of Changes in Stockholders’ Deficit

For the Three and Six Months Ended December 31, 2020

(Unaudited)

 

                                       
   Preferred Stock   Common Stock   Additional Paid In    Accumulated    Total Stockholders’ 
   Shares   Amount   Shares   Amount   Capital    Deficit    Deficit 
Balance, June 30, 2020   -   $-    172,450,907   $862,255   $1,872,632    $(3,319,009)   $(584,122)
Net loss   -    -    -    -    -     (53,955)    (53,955)
Balance, September 30, 2020   -    -    172,450,907    862,255    1,872,632     (3,372,964)    (638,077)
Issuance of common stock for
conversion of related party debt
and interest		   -    -    3,900,000    19,500    71,370     -     90,870 
Stock based compensation   -    -    500,000    2,500    9,150     -     11,650 
Net income   -    -    -    -    -     199,490     199,490 
Balance, December 31, 2020   -   $-    176,850,907   $884,255   $1,953,152    $(3,173,474)   $(336,067)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 8 

 

UPD Holding Corp.

Consolidated Statements of Cash Flows 

(Unaudited)

 

 

               
   For the Six Months Ended 
   December 31,   December 31, 
   2021   2020 
Cash flows from operating activities:          
Net income (loss)  $(514,004)  $145,535 
Gain on sale of discontinued operations   —    (240,312)
Adjustments to reconcile net income (loss) to net cash used in operating activities:          
Depreciation   20,558    — 
Stock-based compensation   —    11,650 
Loss on settlement of debt   —    23,402 
Gain on change in fair value of derivative liability   (199,454)   — 
Non-cash warrant amortization   22,000    — 
Amortization of debt discount   23,367    — 
Changes in operating assets and liabilities:          
Other assets   (23,910)   755 
Accrued interest   32,461    9,849 
Accounts payable and other liabilities   35,900    (9,602)
Net cash used in operating activities-continued operations   (603,082)   (58,723)
Net cash used in operating activities-discontinued operations   —    (11,667)
Net cash used in operating activities   (603,082)   (70,390)
           
Cash flows from investing activities:          
Purchase of property and equipment   (57,617)   — 
Net cash used in investing activities   (57,617)   — 
           
Cash flows from financing activities:          
Proceeds from related party notes payable   3,000    — 
Proceeds from issuance of convertible notes payable   41,000    — 
Proceeds from issuance notes payable   514,000    110,000 
Payments on notes payable   (16,257)   — 
Proceeds from sale of non-controlling interest   250,000    — 
Net cash provided by financing activities   791,743    110,000 
           
Net increase in cash and cash equivalents   131,044    39,610 
Cash and cash equivalents at beginning of period   16,414    20,718 
Cash and cash equivalents at end of period  $147,458   $60,328 
           
Cash paid for income taxes  $—   $— 
Cash paid for interest  $16,257   $— 
           
Non-Cash Supplemental Disclosures          
Debt settlement with stock payable  $16,210   $90,870 
Debt discount on convertible notes  $24,200   $— 
Warrant discount issued on debt  $66,000   $— 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

 9 

 

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 Co. (“RSB”), which was sold as of December 31, 2020. 

 

On January, 5, 2022, VBH Garden Grove Inc., a Nevada corporation, changed its name to VBH Georgia Inc.

 

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., a Nevada corporation (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 December 31, 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.

 

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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.

 

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.

 

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.

 

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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 5 to 7 years; operating lease right of use assets over the expected term of the operating lease; and office and computer equipment are 3 to 5 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 six months ended December 31, 2021, the Company incurred advertising expense of $1,956 included in general and administrative expense in the accompanying consolidated statements of operations. The Company did not incur advertising expenses during the six months ended December 31, 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:

 

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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, 2021.

 

The Company’s expected rehabilitation service and facility revenue will be recognized in accordance with the same five core principles stated above after meeting 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 December 31, 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.

 

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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 December 31, 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 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. The Company reclassified $250,167 of RSB liabilities outstanding as of June 30, 2020, to liabilities related to assets sold in the accompanying consolidated balance sheets.

 

During the six months ended December 31, 2021 and the fiscal 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 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:

 

Description 

As of

February 16,

2021

 
 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 

 

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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:

 

  

December 31,

2021

  

June 30,

2021

 
         
 Furniture and fixtures  $8,236   $5,304 
 Computer equipment and software   18,466    18,465 
 Leasehold improvements   77,660    22,976 
 Property and equipment   104,362    46,745 
 Accumulated depreciation   (27,260)   (6,702)
 Property and equipment, net  $77,102   $40,043 

 

Depreciation for the six months ended December 31, 2021 and December 31, 2020 was $20,558 and $0, respectively.

 

NOTE 6 – NOTES AND CONVERTIBLE NOTES PAYABLE

 

The Company’s notes payable consists of the following:

 

Note Description  December 31,
2021		   June 30,
2021		 
Notes payable:        
Related party notes payable due October 2020 a nominal interest
rate of 6%		  $117,560   $114,560 
Notes payable due August 2022 a nominal interest rate of 12%   500,000    - 
Notes payable due November 2022 a nominal interest rate of 7.95%   12,833    - 
 Total notes payable  $630,393   $114,560 
Unamortized discount   (44,000)   - 
Notes payable, net   586,393    - 
Accrued interest   16,709    13,199 
Total notes payable, net  $603,102   $127,759 

 

 

During the six months ended December 31, 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.

 

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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.

 

In December 2021, the Company entered into a promissory note with a lender in which the Company received two separate cash payments totaling $10,000 and $4,000. The promissory notes mature in November 2022 and each carries an interest rate of 7.95% per annum. The Company is required to make monthly interest payments with outstanding principal and interest due on the maturity date.

 

 

 

The Company’s convertible notes payable consist of the following:

 

Convertible Note Description  December 31,
2021		   June 30,
2020		 
         
Notes payable convertible into common stock at $0.025 per share;        
nominal interest rate of 12%; and matured in April 2018 (related        
party)  $65,000   $65,000 
Notes payable convertible into common stock at $0.05 per share;
nominal interest rate of 12%; and matures in March 2022		   100,000    100,000 
Notes payable convertible into common stock at $0.10 per share;
nominal interest rate of 12%; and matures in February 2022		   15,000    15,000 
Notes payable convertible into common stock at $0.05 per share;
nominal interest rate of 12%; and matures in July 2022		   41,000    - 
Total convertible notes payable  $221,000   $180,000 
Unamortized discount   (18,285)   (17,452)
Convertible notes payable, net   202,715    162,548 
Accrued interest   79,461    70,600 
Total convertible notes payable, net  $282,176   $233,148 

 

 

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 $0.10 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 Vital., 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.

 

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As of December 31, 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 4,456,907 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 122.73%; 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 (165,000 shares), $0.05 (3,061,000 shares), and $0.025 (1,230,907 shares). The value of the derivative liability moves in parallel with the movement of the market value of the shares of the Company. Due to the decline in share price from $0.1009 per share in June 30, 2021 to $0.300 in December 31, 2021, the value of the derivative liability has decreased significantly. For the six months ended December 31, 2021, the Company recognized a gain on the change in the fair value of derivative liabilities of $199,454 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 compared to $38,509 as of December 31, 2021.

 

During the six months ended December 31, 2021, and the year ended June 30, 2021, the Company received $558,000 and $265,000, respectively, from funding on new notes and convertible notes. The Company made $21,257 and $0, respectively of payments on the outstanding notes, convertible notes payable and accrued interest, and recorded $17,538 and $20,911, respectively of interest expense and $45,367 and $7,548, respectively of debt discount amortization expense. As of December 31, 2021, and June 30, 2021, the Company had approximately $96,170 and $83,799, respectively of accrued interest. As of December 31, 2021, and June 30, 2021, the principal balance of outstanding notes and convertible notes payable was $851,393 and $294,560, respectively.

  

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 December 31, 2021, and June 30, 2021, the Company had outstanding notes payable due to the CEO inclusive of accrued interest totaling $45,500 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 December 31, 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 and six months ended December 31, 2021, and during the fiscal year ended June 30, 2021.

 

As noted in Note 4, the Company acquired a 100% interest in 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 June 30, 2021. As of June 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. In December 2021, the Company sold the same investor a 8.93% non-controlling interest in its wholly owned subsidiary VBH Garden Grove Inc. for cash proceeds totaling $100,000.

 

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 December 31, 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 and six months ended December 31, 2021, and during the fiscal year ended June 30, 2021.

 

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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 to the Company’s acquisition. As of June 30, 2021, the Company converted the previously outstanding convertible note payable and accrued interest into 560,000 shares of restricted common stock. Upon consummation of the Vital acquisition, the noteholder was issued 10,000,000 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 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 December 31, 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 December 31, 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 further discussed in Note 3.

 

Included in accounts payable is $88,663 and $74,375 of payables to related parties as of December 31, 2021 and June 30, 2021, respectively.

   

NOTE 8 – STOCKHOLDERS EQUITY

 

In December 2020, the Company issued a related party 3,900,000 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 500,000 fully vested shares of common stock for total consideration of $11,650.

 

In December 2021, the Company sold to an investor 750 shares equivalent to 8.93% non-controlling interest in its wholly owned subsidiary, VBH Garden Grove Inc., for cash proceeds totaling $100,000.

  

In December 2021, the Company sold to an investor 500 shares equivalent to 12.30% non-controlling interest in its wholly owned subsidiary, VBH Kentucky, Inc., for cash proceeds totaling $150,000.

  

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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 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.

 

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.

 

The following table summarizes the Company's warrant transactions during the six months ended December 31, 2021, and year ended June 30, 2021:

 

    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    1,000,000    0.005 
Exercised    -    - 
Expired    -    - 
Outstanding at six months ended December 31, 2021    1,000,000   $0.005 

 

 

Warrants granted in the six months ended December 31, 2021, were valued using the Black Scholes Model with the risk-free interest rate of 0.78%, expected life 5 years, expected dividend rate of 0% and expected volatility of 420.52%.

 

 

 

NOTE 9 – OPERATING LEASES

 

As of December 31, 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 twenty-four months with no explicit extension options. The base monthly payment of the term of the Frankfort Lease is $2,365. The Company estimated the lease liability associated with the facility using a discount rate of 7.7%. The discount rate is based on an estimate of the Company’s incremental borrowing rate for a term similar to the lease term on the commencement date. The Frankfort Lease commenced on February 1, 2021.

 

 

·Vital leased a facility in Fayetteville, Georgia with an initial base rent of $13,617 per month for an initial term of 18 months with a 5-year extension option. The facility is intended be used for in-patient services upon the receipt of regulatory approval. The Company estimated the lease liability associated with the facility using a discount rate of 7.7%. The discount rate is based on an estimate of the Company’s incremental borrowing rate for a term similar to the lease term on the commencement date. The Frankfort Lease commenced on August 1, 2021.

 

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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   $94,902 
2023    112,171 
2024    - 
2025    - 
2026    - 
Total undiscounted cash payments    207,073 
Less interest    (8,570)
Present value of payments   $198,503 

 

The weighted average remaining term of the Company’s non-cancelable operating leases as of December 31, 2021, was approximately 13 months.

 

On January 14, 2021, the Company’s 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 5-year 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 due 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.

 

NOTE 10 – SUBSEQUENT EVENTS

 

On January, 5, 2022 VBH Garden Grove Inc., a Nevada corporation changed its name to VBH Georgia Inc.

 

 

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.

 

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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.

 

Our Business

 

Incorporation

 

We were incorporated in the state of Nevada on June 6, 1988.

 

Our Subsidiaries 

 

Our wholly owned subsidiaries consist of the following

·United Project Development Corporation (“United Project”), incorporated in Nevada on June 12, 2015.
·Vital Behavioral Health, Inc. (“Vital”) incorporated in Nevada on October 1, 2020.
·iMetabolic Corp (“iMetabolic”) incorporated in Nevada on July 1, 2013.

 

Vital’s subsidiaries consist of:

·VBH Frankfort, LLC (“VBHF”)
·VSL Frankfort LLC (“VSLF”)

 

The Vital Acquisition

 

On February 16, 2021, we completed a Stock Exchange Agreement with Vital and each of its shareholders, providing for:

·Our acquisition of 100% of Vital’s outstanding shares via our issuance of 16,840,000 shares to Vital in exchange for 100% of Vital’s outstanding shares, at which time Vital became our wholly-owned subsidiary.
·Our acquiring Vital’s assets and assuming Vital’s liabilities and its 2 wholly owned subsidiaries, VBHF and VSLF.

 

Pursuant to the Vital acquisition, we adopted our new business plan of providing inpatient and outpatient substance use treatment services for individuals with drug addiction, alcohol addiction, and co-occurring mental/behavioral health issues through facilities that we will operate.

  

On February 17, 2021, Vital formed the following 2 new Nevada incorporated entities, which became Vital’s wholly owned subsidiaries:

·VBH Kentucky, Inc. (“VVHK”) 
·VBH Garden Grove, Inc. (“VBH Garden”)

 

VBH Kentucky, Inc.

 

VBH Kentucky has succeeded to all of the preexisting and intended operations of VBH Frankfort (a wholly-owned predecessor entity of Vital), which substantially concluded all of its material operations as of May 3, 2021. VBH Kentucky will operate an outpatient substance abuse treatment facility in Frankfort, Kentucky, for which we have secured a lease as disclosed below. On August 26, 2021, we received a license to operate a non-hospital based alcohol and other drug treatment facility from the Kentucky Cabinet for Health and Family Services Office of the Inspector General.

 

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VSL Frankfurt, LLC

 

VSL Frankfort will offer sober-designated living quarters for individuals who are in recovery in conjunction with the Frankfort, Kentucky facility operated by VBH Kentucky. We anticipate hiring 4 full time and 3 part time employees at our Frankfurt facility, including a full time Clinical Director.

 

VBH Garden Grove, Inc.

 

VBH Garden intends to identify substance use disorder treatment facilities located in California to provide a West Coast patient solution that is able to economically accept select insurance payors that facilitate a broader national patient base for Vital. VBH Garden 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 December 31, 2021 and there are no assurances that any such transaction will be completed in the future.

 

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 December 31, 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.

 

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.

 

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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.

 

·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.

 

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·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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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

 

Results of Operations for the Three Months Ended December 31, 2021, and 2020.

 

Below is a summary of the results of operations for the three months ended December 31, 2021, and 2020.

 

   For the Three Months Ended December 31, 
   2021   2020   $ Change   % Change 
Revenue:                
Net revenue  $-   $-   $-    0.00%
                     
Operating expenses                    
Professional fees   69,028    21,570    47,458    220.02%
General and administrative   268,547    2,712    265,835    9802.18%
Total operating costs and expenses   337,575    24,282    313,293    1290.23%
 Operating loss   (337,575)   (24,282)   (313,293)   1290.23%
                     
Interest expense, net   (50,246)   (3,990)   (46,256)   1159.30%
Gain on change in fair value of derivative liability   238,397    -    238,397    0.00%
Other income (expense), net   -    (23,402)   23,402    -100.00%
Net loss, before income taxes   (149,424)   (51,674)   (97,750)   -189.17%
Benefit from income taxes   -    10,852    (10,852)   -100.00%
Loss from continuing operations   (149,424)   (40,822)   (108,602)   266.04%
                     
Discontinued operations:                    
Gain on sale of discontinued operations, net of tax   -    240,312    (240,312)   -100.00%
Income from discontinued operations, net of tax   -    240,312    (240,312)   -100.00%
Net income (loss)  $(149,424)  $199,490   $(348,914)   -174.90%
Less: net loss attributable to non-controlling interest   (6,056)   -    (6,056)   0.00%
Net income (loss) attributable to UPD Holding Corp.  $(143,368)  $199,490   $(342,858)   -171.87%

 

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Revenue and Cost of Revenue

 

We generated no revenue for the three months ended December 31, 2021, and December 30, 2020.  

 

Professional Fees

 

We incurred professional fees of $69,028 and $21,570 for the three months ended December 31, 2021, and December 31, 2020, respectively. Our professional fees increased by $47,458 for the three months ended December 31, 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.

  

General and Administrative Expenses

 

For the three months ended December 31, 2021, and December 31, 2020, we incurred general and administrative expenses of $268,547 and $2,712, respectively, representing an increase of $265,835 for the three months ended December 31, 2021, compared to the same period in 2020. The $265,835 increase in general and administrative expenses is primarily attributable to our acquisition of VBH, Vital, and VSL consisting of the following: rent expense and related facilities costs totaling approximately $93,675; approximately $81,400 in payroll expenses; approximately $11,266 in insurance expense and approximately $71,191 in consulting fees, none of which were incurred during the three months ended December 31, 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 $50,246 and $3,990 for the three months ended December 31, 2021, and December 31, 2020, respectively, representing an increase of $46,256. 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 December 31, 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 4,456,907 shares of common stock upon convertible debt conversion to derivative liabilities in the accompanying consolidated balance sheets. The value of the derivative liability moves in parallel with the movement of the market value of the shares of the Company. Due to the decline in share price from $0.0999 per share in September 30, 2021 to $0.300 in December 31, 2021, the value of the derivative liability has decreased significantly. For the three months ended December 31, 2021, the Company recognized a gain on the change in the fair value of derivative liabilities of $238,397. The Company had derivative liability obligations of $276,906 as of September 30, 2021 compared to $38,509 as of December 31, 2021.

 

Discontinued Operations

 

On December 31, 2020, we completed the disposition of our prior Record Street Brewing Operations. The primary consideration in the disposal was the purchaser’s assumption of liabilities totaling approximately $251,000. As a result of the assets acquired not having any book value, we recognized a gain on disposal of approximately $240,000, net of tax of approximately $11,000.

 

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Results of Operations for the Six Months Ended December 31, 2021, and 2020.

 

Below is a summary of the results of operations for the six months ended December 31, 2021, and 2020.

 

   For the Six Months Ended December 31, 
   2021   2020   $ Change   % Change 
Revenue:                
Net revenue  $-   $-   $-    0.00%
                     
Operating expenses                    
Professional fees   126,845    67,186    59,659    88.80%
General and administrative   508,708    5,192    503,516    9697.92%
Total operating costs and expenses   635,553    72,378    563,175    778.10%
 Operating loss   (635,553)   (72,378)   (563,175)   778.10%
                     
Interest expense, net   (77,905)   (9,849)   (68,056)   690.99%
Gain on change in fair value of derivative liability   199,454    -    199,454    0.00%
Other income (expense), net   -    (23,402)   23,402    -100.00%
Net loss, before income taxes   (514,004)   (105,629)   (408,375)   -386.61%
Benefit from income taxes   -    10,852    (10,852)   -100.00%
Loss from continuing operations   (514,004)   (94,777)   (419,227)   442.33%
                     
Discontinued operations:                    
Gain on sale of discontinued operations, net of tax   -    240,312    (240,312)   -100.00%
Income from discontinued operations, net of tax   -    240,312    (240,312)   -100.00%
Net income (loss)  $(514,004)  $145,535   $(659,539)   -453.18%
Less: net loss attributable to non-controlling interest   (10,822)   -    (10,822)   0.00%
Net income (loss) attributable to UPD Holding Corp.  $(503,182)  $145,535   $(648,717)   -445.75%

 

Revenue and Cost of Revenue

 

We generated no revenue for the three months ended December 31, 2021, and December 30, 2020.  

 

Professional Fees

 

We incurred professional fees of $126,845 and $67,186 for the six months ended December 31, 2021, and December 31, 2020, respectively. Our professional fees increased by $59,659 for the six months ended December 31, 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.

  

General and Administrative Expenses

 

For the six months ended December 31, 2021, and December 31, 2020, we incurred general and administrative expenses of $508,708 and $5,192, respectively, representing an increase of $503,516 for the six months ended December 31, 2021, compared to the same period in 2020. The $503,516 increase in general and administrative expenses is primarily attributable to our acquisition of VBH, Vital, and VSL consisting of the following: rent expense and related facilities costs totaling approximately $163,259; approximately $133,186 in payroll expenses; approximately $22,634 in insurance expense and approximately $157,781 in consulting fees, none of which were incurred during the six months ended December 31, 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.

 

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Interest Expense

  

Interest expense was $77,905 and $9,849 for the six months ended December 31, 2021, and December 31, 2020, respectively, representing an increase of $68,056. 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 December 31, 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 4,456,907 shares of common stock upon convertible debt conversion to derivative liabilities in the accompanying consolidated balance sheets. The value of the derivative liability moves in parallel with the movement of the market value of the shares of the Company. Due to the decline in share price from $0.1009 per share in June 30, 2021 to $0.300 in December 31, 2021, the value of the derivative liability has decreased significantly. For the six months ended December 31, 2021, the Company recognized a gain on the change in the fair value of derivative liabilities of $199,454. The Company had derivative liability obligations of $237,963 as of June 30, 2021 compared to $38,509 as of December 31, 2021.

 

Discontinued Operations

 

On December 31, 2020, we completed the disposition of our prior Record Street Brewing Operations. The primary consideration in the disposal was the purchaser’s assumption of liabilities totaling approximately $251,000. As a result of the assets acquired not having any book value, we recognized a gain on disposal of approximately $240,000, net of tax of approximately $11,000.

 

Liquidity and Capital Resources

 

As of December 31, 2021, we had a working capital deficit of approximately $1,138,168. 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 six months ended December 31, 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 $598,084 during the six months ended December 31, 2021 and consisted of a net loss of $514,004 and net change in operating assets and liabilities of $49,451, which was offset by non-cash items of $133,531. The primary non-cash items for the six months ended December 31, 2021, consisted of amortization of debt discount of $23,367 and non-cash warrant amortization of $22,000 offset by change in derivative liabilities of $199,454. The significant change in operating assets and liabilities was a gain in the fair value of derivative liabilities. We expect these operational cash uses to increase as we begin our operations in the first half of fiscal 2022.

 

Our investing activities consisted of acquiring property and equipment totaling approximately $57,615. We expect to make additional capital expenditures as our rehabilitation facilities increase operations.

 

During the six months ended December 31, 2021, we generated $786,743 of net cash from financing activities through the issuance of convertible debt and notes payable of $558,000 and proceeds from sale of non-controlling interest of $250,000, which was offset by a $21,257 payments on notes payable and accrued interest. We expect to continue our financing efforts throughout fiscal 2022.

 

 30 

 

Off-Balance Sheet Arrangements

 

During the six months ended December 31, 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.

 

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 December 31, 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.

 

 31 

 

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 December 31, 2021, all derivative liability contracts are convertible into a fixed number of shares of common stock.

 

 
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.

 

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 December 31, 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 six months ended December 31, 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.

 

 32 

 

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 set forth in the "Risk Factors" section of our Form 10-K for our fiscal year ended June 30, 2021 are available for your review at: sec.gov

 

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**
101.CAL*  XBRL Extension Calculation Linkbase Document**
101.SCH*  XBRL Extension Schema Document**
101.DEF*  XBRL Extension Definition Linkbase Document**
101.LAB*  XBRL Extension Labels Linkbase Document**
101.PRE*  XBRL Extension Presentation Linkbase Document**

 

 

_________________

* 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.

 

 33 

 

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:  February 16, 2022 By: /s/ Mark W. Conte
    Mark W. Conte
    President and Chief Executive Officer
    (Principal Executive Officer)
     
     
Dated:  February 16, 2022 By: /s/ Mark W. Conte
    Mark W. Conte
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

 

34

 

 

 

 

 

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