UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended October 31, 2020

 

OR

 

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

 

For the transition period from ________ to ________

 

Commission file number: 001-36564

 

ICON  DESCRIPTION AUTOMATICALLY GENERATED

 

Healthcare Integrated Technologies, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Nevada   85-1173741

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

1462 Rudder Lane

Knoxville, TN 37919

(Address of Principal Executive Offices)

 

Registrant’s telephone number, including area code: (865) 719-8160

 

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

 

Securities registered pursuant to section 12(g) of the Act:

 

Common Stock, $0.001 par value

(Title of class)

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [  ] No [X]

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes [  ] No [X]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-Q or any amendment to this Form 10-Q. [  ]

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 [  ] Smaller reporting company [X]
(Do not check if a smaller reporting company) Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. [  ]

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of December 11, 2020, there were 38,137,235 shares of common stock of the Registrant outstanding.

 

Documents Incorporated by Reference: None.

 

 

 

 

 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION 4
Item 1. Financial Statements (Unaudited). 4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 5
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 9
Item 4. Controls and Procedures. 9
PART II - OTHER INFORMATION 10
Item 1. Legal Proceedings. 10
Item 1A. Risk Factors. 10
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 10
Item 3. Defaults Upon Senior Securities. 10
Item 4. Mine Safety Disclosures. 10
Item 5. Other Information. 10
Item 6. Exhibits. 11
SIGNATURES 12

 

2

 

 

Unless the context clearly indicates otherwise, when used in this report “we,” “us,” “our,” “Healthcare Integrated Technologies,” “Company,” or “our Company” refers to Healthcare Integrated Technologies, Inc. and our subsidiary IndeLiving Holdings, Inc. (“Inde” or “IndeLiving”).

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of the Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue”, negatives thereof or similar expressions. These forward-looking statements are found at various places throughout this Report and include information concerning: possible or assumed future results of our operations; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future operations, future cash needs, business plans and future financial results; and any other statements that are not historical facts.

 

From time to time, forward-looking statements also are included in our other periodic reports on Form 8-K, in our press releases, in our presentations, on our website and in other materials released to the public. Any or all the forward-looking statements included in this Report and in any other reports or public statements made by us are not guarantees of future performance and may turn out to be inaccurate. These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. Considering these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.

 

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

 

For discussion of factors that we believe could cause our actual results to differ materially from expected and historical results see “Item 1A - Risk Factors” below.

 

3

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS.

 

Index to Financial Statements

 

  Page
Quarterly Period Ended October 31, 2020  
   
Interim Consolidated Balance Sheets F-1
   
Interim Consolidated Statements of Operations (Unaudited) F-2
   
Interim Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) F-3
   
Interim Consolidated Statements of Cash Flows (Unaudited) F-4
   
Notes to Interim Consolidated Financial Statements (Unaudited) F-5

 

4

 

 

HEALTHCARE INTEGRATED TECHNOLOGIES, INC.

INTERIM CONSOLIDATED BALANCE SHEETS

 

    October 31, 2020     July 31, 2020  
    (Unaudited)        
ASSETS                
                 
CURRENT ASSETS                
Cash and cash equivalents   $ 14,948     $ 78,072  
Prepaid expenses     43,508       46,938  
Total current assets     58,456       125,010  
                 
OTHER ASSETS:                
Property and equipment, net     1,897       2,453  
Intangibles, net     121,170       33,958  
Total assets   $ 181,523     $ 161,421  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
CURRENT LIABILITIES:                
Accounts payable and accrued expenses   $ 232,198     $ 229,114  
Accounts payable, related party     201,790       271,819  
Payroll related liabilities     993,160       861,019  
Notes payable     50,000       -  
Convertible notes     550,000       600,000  
Current portion of long-term debt     27,639       20,651  
Total current liabilities     2,054,787       1,982,603  
                 
OTHER LIABILITIES:                
Long-term debt     14,028       21,016  
Total liabilities     2,068,815       2,003,619  
                 
STOCKHOLDERS’ DEFICIT:                
Common stock par value $0.001; 200,000,000 shares authorized; 36,637,235 and 36,474,661 shares issued and outstanding as of October 31, 2020 and July 31, 2020, respectively     36,638       36,475  
Additional paid-in capital     9,896,575       9,564,989  
Accumulated deficit     (11,820,505 )     (11,443,662 )
Total stockholders’ deficit     (1,887,292 )     (1,842,198 )
Total liabilities and stockholders’ deficit   $ 181,523     $ 161,421  

 

See accompanying notes to the interim consolidated financial statements.

 

F- 1

 

 

HEALTHCARE INTEGRATED TECHNOLOGIES, INC.

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   

For the Three Months Ended

October 31,

 
    2020     2019  
             
OPERATING EXPENSES:                
Selling, general and administrative     318,346       176,264  
Total operating expense     318,346       176,264  
                 
OPERATING LOSS     (318,346 )     (176,264 )
                 
OTHER EXPENSE:                
Interest expense     (8,497 )     (10,645 )
Total other expense     (8,497 )     (10,645 )
                 
NET LOSS   $ (326,843 )   $ (186,909 )
                 
NET LOSS PER COMMON SHARE                
Basic and diluted   $ (0.01 )   $ (0.01 )
                 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING                
Basic and diluted     36,313,741       32,487,500  

 

See accompanying notes to the interim consolidated financial statements.

 

F- 2

 

 

HEALTHCARE INTEGRATED TECHNOLOGIES, INC.

INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(Unaudited)

 

    Three-Month Period Ended October 31, 2020  
          Additional           Total  
    Common Stock     Paid-In     Accumulated     Stockholders’  
    Shares     Amount     Capital     Deficit     Deficit  
                               
Balances at July 31, 2020     36,474,611     $ 36,475     $ 9,564,989     $ (11,443,662 )   $      (1,842,198 )
                                         
Net loss                             (326,843 )     (326,843 )
Issuance of common stock     1,050,000       1,050       103,950               105,000  
Purchase and cancellation of shares     (1,000,000 )     (1,000 )     1,000       (50,000 )     (50,000 )
Issuance of shares of common stock upon conversion of debt and related accrued interest     112,624       113       56,199               56,312  
Stock-based compensation                     170,437               170,437  
                                         
Balances at October 31, 2020     36,637,235     $ 36,638     $ 9,896,575     $ (11,820,505 )   $ (1,887,292 )

 

    Three-Month Period Ended October 31, 2019  
          Additional           Total  
    Common Stock     Paid-In     Accumulated     Stockholders’  
    Shares     Amount     Capital     Deficit     Deficit  
                               
Balances at July 31, 2019     32,487,500     $ 32,488     $ 8,582,166     $ (10,385,575 )   $      (1,770,921 )
                                         
Net loss                             (186,909 )     (186,909 )
Stock-based compensation                     75,194               75,194  
                                         
Balances at October 31, 2019     32,487,500     $ 32,488     $ 8,657,360     $ (10,572,484 )   $ (1,882,636 )

 

See accompanying notes to the interim consolidated financial statements.

 

F- 3

 

 

HEALTHCARE INTEGRATED TECHNOLOGIES, INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

For the Three Months Ended

October 31,

 
    2020     2019  
             
CASH FLOWS FROM OPERATING ACTIVITIES                
Net loss   $ (326,843 )   $ (186,909 )
Adjustments to reconcile loss to net cash used in operating activities:                
Depreciation and amortization     1,739       1,829  
Stock-based compensation     150,779       75,194  
Changes in operating assets and liabilities:                
Prepaid expenses and other current assets     3,430       -  
Accounts payable and accrued expenses     9,396       9,867  
Accounts payable, related party     -       5,050  
Payroll related liabilities     66,434       85,322  
NET CASH USED BY OPERATING ACTIVITIES     (95,065 )     (9,646 )
                 
CASH FLOW FROM INVESTING ACTIVITIES                
Cash paid for development of intangible assets     (3,030 )     -  
NET CASH USED BY INVESTING ACTIVITIES     (3,030 )     -  
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from sale of common stock     105,000       -  
Proceeds from related party advances     -       9,307  
Payments of amounts owed to related parties     (70,029 )     -  
NET CASH PROVIDED BY FINANCING ACTIVITIES     34,971     9,307  
                 
Net change in cash and cash equivalents     (63,124 )     (339 )
                 
Cash and cash equivalents, beginning of period     78,072       725  
                 
Cash and cash equivalents, end of period   $ 14,948     $ 386  
                 
SUPPLEMENTAL CASH FLOW INFORMATION                
Cash paid for interest   $ -     $ 8,262  
                 
SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES                
Capital expenditures included in payroll related liabilities   $ 65,707     $ -  
Capital expenditures from non-cash compensation   $ 19,658     $ -  
Issuance of common stock for payment of accrued interest included in accounts payable and accrued expenses   $ 6,312     $ -  
Issuance of common stock for conversion of convertible debt   $ 50,000     $ -  
Issuance of debt for purchase and cancellation of shares   $ 50,000     $ -  

 

See accompanying notes to the interim consolidated financial statements.

 

F- 4

 

 

HEALTHCARE INTEGRATED TECHNOLOGIES, INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2020

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Healthcare Integrated Technologies, Inc. and its subsidiaries (collectively the “Company,” “we,” “our” or “us”) is a healthcare technology company based in Knoxville, Tennessee. We are creating a diversified spectrum of healthcare technology solutions to integrate and automate the continuing care, home care and professional healthcare spaces.

 

Our initial product, SafeSpace, is an ambient fall detection solution designed for continuing care communities and at home use. SafeSpace includes wall mounted devices utilizing radar technology and state of the art software to effectively monitor a person remotely. In continuing care communities, SafeSpace detects resident falls and generates alerts to a centralized, intelligent dashboard without the use of wearable devices or any action by the resident. In the home, SafeSpace detects falls and sends alerts directly to designated individuals.

 

In addition to SafeSpace, we are creating a home concierge healthcare service application to provide a virtual assisted living experience for seniors, recently released postoperative patients and others. The concierge application will enable the consumer to obtain home healthcare services and health and safety monitoring equipment to improve quality of life. We are also working to develop a fully integrated solution for the professional healthcare community that integrates electronic health records, remote patient monitoring, telehealth, and other items where integration is beneficial.

 

Basis of Presentation

 

The accompanying interim consolidated financial statements include those of Healthcare Integrated Technologies, Inc. and its subsidiaries, after elimination of all intercompany accounts and transactions. We have prepared the accompanying interim consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission. Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited interim consolidated financial statements contain all of the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of October 31, 2020 and the results of operations and cash flows for the periods presented. The results of operations for the three months ended October 31, 2020 are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited interim consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2020 filed with the SEC on October 16, 2020.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to current period presentation. On the interim consolidated statements of operations for the three months ended October 31, 2019, we reclassified $1,095 in loss from discontinued operations to selling, general and administrative expense and interest expense.

 

Risk and Uncertainties

 

Factors that could affect our future operating results and cause actual results to vary materially from management’s expectation include, but are not limited to: our ability to maintain and secure adequate capital to fully develop our product(s) and operations; our ability to source strong opportunities with sufficient risk adjusted returns; acceptance of the terms and conditions of our licenses and/or the acceptance of our royalties and fees; the nature and extent of competition from other companies that may reduce market share and create pressure on pricing and investment return expectations; changes in the projects in which we plan to invest which result from factors beyond our control, including, but not limited to, a change in circumstances, capacity and economic impacts; changes in laws, regulations, accounting, taxation, and other requirements affecting our operations and business. Negative developments in these or other risk factors could have a significant adverse effect on our financial position, results of operations and cash flows.

 

F- 5

 

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s future financial condition, liquidity, and results of operations. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2021.

 

Use of Estimates

 

The preparation of interim consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We base our estimates on experience and various other assumptions that are believed to be reasonable under the circumstances. We evaluate our estimates and assumptions on a regular basis and actual results may differ from those estimates.

 

Concentration of Credit Risk

 

Financial instruments that potentially expose the Company to credit risk consist of demand deposits with a financial institution. The Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institution to the extent account balances exceed the amount insured by the FDIC, which is $250,000.

 

Cash and Cash Equivalents

 

We consider all highly liquid short-term investments with a maturity of three months or less at the time of purchase to be cash equivalents. The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits.

 

Accounts Receivable

 

Accounts receivable are stated at their historical carrying amount net of write-offs and allowance for uncollectible accounts. We routinely assess the recoverability of all customer and other receivables to determine their collectability and record a reserve when, based on the judgement of management, it is probably that a receivable will not be collected and the amount of the reserve may be reasonably estimated. When collection is no longer pursued, we charge uncollectable accounts receivable against the reserve.

 

Property and Equipment

 

Property and equipment are stated at cost, net of accumulated depreciation. Expenditures for major additions and improvements are capitalized while minor replacements and maintenance and repairs, which do not improve or extend the life of such assets, are charged to operations as incurred. Disposals are removed at cost less accumulated depreciation, and any resulting gain or loss is reflected in the consolidated statement of operations. Depreciation is calculated using the straight-line method which depreciates the assets over the estimated useful lives of the depreciable assets ranging from five to seven years.

 

F- 6

 

  

Impairment of Long-Lived Assets

 

Long-lived assets such as property, equipment and identifiable intangibles are reviewed for impairment at least annually or whenever facts and circumstances indicate that the carrying value may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset. The fair value is determined based on estimates of future cash flows, market value of similar assets, if available, or independent appraisals, if required. If the carrying amount of the long-lived asset is not recoverable, an impairment loss is recognized for the difference between the carrying amount and fair value of the asset. The Company did not recognize any impairment losses for any periods presented.

 

Intangible Assets

 

Intangible assets consist of patents, our website and the costs of software developed for internal use. Certain payroll and stock-based compensation costs incurred are allocated to the intangible assets. We determine the amount of costs to be capitalized based on the time spent by employees or outside contractors on the projects. Intangible assets are amortized over their expected useful life on a straight-line basis. We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. If the estimate of an intangible asset’s remaining life is changed, the remaining carrying value of the intangible asset is amortized prospectively over the revised remaining useful life. We did not recognize any impairment losses during any of the periods presented.

 

Fair Value of Financial Instruments

 

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. A fair value hierarchy has been established for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

 

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

 

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

 

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

 

Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and borrowings. The fair value of current financial assets and current financial liabilities approximates their carrying value because of the short-term maturity of these financial instruments.

 

Revenue Recognition

 

Revenue is recognized under Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” using the modified retrospective method. Under this method, the Company follows the five-step model provided by ASC Topic 606 in order to recognize revenue in the following manner: 1) Identify the contract; 2) Identify the performance obligations of the contract; 3) Determine the transaction price of the contract; 4) Allocate the transaction price to the performance obligations; and 5) Recognize revenue. An entity recognizes revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. The Company’s revenue recognition policies remained substantially unchanged as a result of the adoption of ASC 606, and there were no significant changes in business processes or systems.

 

F- 7

 

 

Advertising

 

Advertising costs are expensed as incurred in accordance with ASC 720-35, “Advertising Costs.” We incurred advertising costs of $1,975 and $5,300 for the three months ended October 31, 2020 and 2019, respectively, which are included in selling, general and administrative expenses on the interim consolidated financial statements.

 

Net Loss Per Common Share

 

We determine basic income (loss) per share and diluted income (loss) per share in accordance with the provisions of ASC 260, “Earnings Per Share.” Basic loss per share excludes dilution and is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. The calculation of diluted income (loss) per share is similar to that of basic earnings per share, except the denominator is increased, if the earnings are positive, to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares had been exercised.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation” (“ASC 718”) which establishes financial accounting and reporting standards for stock-based employee compensation. It defines a fair value-based method of accounting for an employee stock option or similar equity instrument. The Company accounts for compensation cost for stock option plans, if any, in accordance with ASC 718.

 

Share-based payments, excluding restricted stock, are valued using a Black-Scholes option pricing model. Grants of share-based payment awards issued to non-employees for services rendered have been recorded at the fair value of the share-based payment, which is the more readily determinable value. The grants are amortized on a straight-line basis over the requisite service periods, which is generally the vesting period. If an award is granted, but vesting does not occur, any previously recognized compensation cost is reversed in the period related to the termination of service. Stock-based compensation expenses are included in cost of goods sold or selling, general and administrative expenses, depending on the nature of the services provided, in the consolidated statements of operations. Share-based payments issued to placement agents are classified as a direct cost of a stock offering and are recorded as a reduction in additional paid in capital.

 

The Company recognizes all forms of share-based payments, including stock option grants, warrants and restricted stock grants, at their fair value on the grant date, which are based on the estimated number of awards that are ultimately expected to vest. See Note 11.

 

Business Combinations

 

We account for business combinations under the acquisition method of accounting. The acquisition method requires that the acquired assets and liabilities, including contingencies, be recorded at fair value determined on the acquisition date and that changes thereafter be reflected in income (loss). The estimation of fair values of the assets and liabilities assumed involves several estimates and assumptions that could differ materially from the actual amounts recorded. The results of the acquired businesses are included in our results from operations beginning from the day of acquisition.

 

Income Taxes

 

We use the asset and liability method of accounting for income taxes in accordance with Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes”. Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.

 

F- 8

 

 

ASC Topic 740-10-30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740-10-40 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented.

 

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”). Corporate taxpayers may carryback net operating losses (NOLs) originating between 2018 and 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.

 

In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the reporting periods presented.

 

Recently Adopted Accounting Pronouncements

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”. This update is to improve the effectiveness of disclosures in the notes to the financial statements by facilitating clear communication of the information required by U.S. GAAP that is most important to users of each entity’s financial statements. The amendments in this update apply to all entities that are required, under existing U.S. GAAP, to make disclosures about recurring or nonrecurring fair value measurements. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted this guidance and the adoption of this update did not have a material impact on the Company’s consolidated financial statements.

 

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions to account for contracts, hedging relationships and other transactions that reference LIBOR or another reference rate if certain criteria are met. The amendments of ASU No. 2020-04 are effective immediately, as of March 12, 2020, and may be applied prospectively to contract modifications made and hedging relationships entered into on or before December 31, 2022. The Company adopted this guidance and the adoption of this update did not have a material impact on the Company’s consolidated financial statements.

 

Recent Accounting Pronouncements

 

In December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes (ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”). This guidance eliminates certain exceptions to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes. This guidance is effective for annual periods after December 15, 2020, including interim periods within those annual periods. The Company is currently evaluating the potential impact of this guidance on its consolidated financial statements.

 

F- 9

 

 

In August 2020, the FASB issued ASU 2020-06 Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in Update No. 2020-06 simplify the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exception for contracts in an entity’s own equity. Update No. 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently in the process of determining the effect that the adoption will have on its financial position and results of operations.

 

Management has evaluated all recent accounting pronouncements as issued by the FASB in the form of Accounting Standards Updates (“ASU”) through the date these financial statements were available to be issued and found no recent accounting pronouncements issued, but not yet effective accounting pronouncements, when adopted, will have a material impact on the interim consolidated financial statements of the Company.

 

NOTE 2 - GOING CONCERN

 

The accompanying interim consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplates continuation of the Company as a going concern. The Company had a net loss of $326,843 for its most recent period ended October 31, 2020. As of October 31, 2020, the Company has minimal cash and a significant working capital deficit. We have a history of losses, an accumulated deficit, have negative working capital and have not generated cash from our operations to support a meaningful and ongoing business plan. It is management’s opinion that these conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

In view of these matters, our ability to continue as a going concern is dependent upon the development, marketing and sales of a viable product to achieve a level of profitability. We intend on financing our future development activities and our working capital needs largely from the sale of private and public equity securities with additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. Although the Company believes in the viability of management’s strategy to generate sufficient revenue, control costs and the ability to raise additional funds if necessary, there can be no assurances to that effect. Therefore, the accompanying interim consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The interim consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should we be unable to continue as a going concern.

 

NOTE 3 - PROPERTY AND EQUIPMENT

 

Property and equipment, net consisted of the following at October 31, 2020 and July 31, 2020:

 

    October 31, 2020     July 31, 2020  
Equipment   $ 8,923     $ 8,923  
Less: accumulated depreciation     (7,026 )     (6,470 )
Total property and equipment, net   $ 1,897     $ 2,453  

 

Depreciation expense for the three months ended October 31, 2020 and 2019 was $556 and $4,769, respectively.

 

NOTE 4 – INTANGIBLES

 

Intangibles, net consisted of the following at October 31, 2020 and July 31, 2020:

 

    October 31, 2020     July 31, 2020  
Intangible assets under development     63,629       33,958  
Capitalized costs of patents     49,939       -  
Capitalized costs of website     8,785       -  
Less: accumulated amortization     (1,183 )     -  
Total intangibles, net   $ 121,170     $ 33,958  

 

Amortization expense for the three months ended October 31, 2020 was $1,183. We incurred no amortization expense for the fiscal year ended July 31, 2020.

 

F- 10
 

 

NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following at October 31, 2020 and July 31, 2020:

 

    October 31, 2020     July 31, 2020  
Accounts payable   $ 156,110     $ 155,211  
Accrued interest expense     76,088       73,903  
Accounts payable and accrued expenses     232,198       229,114  
Accounts payable, related party     201,790       271,819  
Total accounts payable and accrued expenses   $ 433,988     $ 500,933  

 

NOTE 6 - PAYROLL RELATED LIABILITIES

 

Payroll related liabilities consisted of the following at October 31, 2020 and July 31, 2020:

 

    October 31, 2020     July 31, 2020  
Accrued officers’ payroll   $ 986,692     $ 858,154  
Payroll taxes payable     6,468       2,865  
Total payroll related liabilities   $ 993,160     $ 861,019  

 

NOTE 7 - DEBT

 

We had the following debt obligations reflected at their respective carrying values on our consolidated balance sheets as of October 31, 2020 and July 31, 2020:

 

    October 31, 2020     July 31, 2020  
5% Convertible promissory notes   $ 550,000     $ 600,000  
Paycheck Protection Program loan     41,667       41,667  
Note payable to Acorn Management Partners, LLC     50,000       -  
Total debt obligations     641,667       641,667  
Less current portion     (627,639 )     (620,651 )
Long-term debt   $ 14,028     $ 21,016  

 

5% Convertible Promissory Notes

 

On various dates during the month of March 2018 we issued a series of 5% Convertible Promissory Notes (collectively, the “5% Notes”) totaling $750,000 in net proceeds. We incurred no costs related to the issuance of the 5% Notes. The 5% Notes bear interest at the rate of five percent (5%) per annum, compounded annually and matured one-year from the date of issuance. At October 31, 2020 and July 31, 2020, accrued but unpaid interest on the 5% Notes was $75,419 and $73,903, respectively, which is included in “accounts payable and accrued expenses” on our consolidated balance sheets.

 

The 5% Notes are convertible into common shares of the Company at a fixed ratio of two shares of common stock per dollar amount of the face value of the note. The principal terms under which the 5% Notes may be converted into common stock of the Company are as follows:

 

  At the option of the holder, the outstanding principal amount of the note, and any accrued but unpaid interest due, may be converted into the Company’s common stock at any time prior to the maturity date of the note.

 

F- 11
 

 

  The outstanding principal amount of the note, and any accrued but unpaid interest due, will automatically be converted into the Company’s common stock if at any time prior to the maturity date of the note, the Company concludes a sale of equity securities in a private offering resulting in gross proceeds to the Company of at least $1,000,000.

 

5% Notes with a face amount of $50,000 and accrued interest expense of $6,312 were converted, at the option of the holder, into 112,624 shares of our common stock during the three months ended October 31, 2020. On October 31, 2020, 5% Notes with a face amount of $225,000 and related accrued interest expense of $30,853, which matured on various dates during March 2019, are currently in default and are not convertible under the conversion terms. 5% Notes with a face amount of $325,000 and related accrued interest expense of $44,566 mature on March 31, 2021 and are convertible under the conversion terms. Management continues to negotiate amendments to the remaining notes in default to extend the maturity dates of such notes and to encourage note conversions.

 

Paycheck Protection Program Loan

 

On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted and included a provision for the Small Business Administration (“SBA”) to implement its Paycheck Protection Program (“PPP”). The PPP provides small businesses with funds to pay up to eight (8) weeks of payroll costs, including benefits. Funds received under the PPP may also be used to pay interest on mortgages, rent, and utilities. Subject to certain criteria being met, all or a portion of the loan may be forgiven. The loans bear interest at an annual rate of one percent (1%), are due two (2) years from the date of issuance, and all payments are deferred for the first six (6) months of the loan. Any unforgiven balance of loan principal and accrued interest at the end of the six (6) month loan deferral period is amortized in equal monthly instalments over the remaining 18-months of the loan term. On April 30, 2020, we closed a $41,667 SBA guaranteed PPP loan with Mountain Commerce Bank. We used the loan proceeds as permitted and will apply for forgiveness for the entire loan amount. As of October 31, 2020, the SBA had issued its final rules for forgiveness of the loan balance and we will soon be submitting our application for forgiveness.

 

Note Payable to Acorn Management Partners, LLC

 

On August 11, 2020 we agreed to repurchase 1,000,000 shares of our common stock from Acorn Management Partners, LLC (“AMP”). As consideration for the share repurchase, we issued a $50,000 promissory note bearing interest a 6.0% per annum and due one-year from the date of issuance (the “Note”). In the event we default under the terms of the Note, we are required to deliver 1,000,000 shares of our common stock back to AMP in full satisfaction of the obligation. The purchased shares were delivered by AMP directly to the transfer agent on September 8, 2020 and immediately cancelled. At October 31, 2020, accrued but unpaid interest on the Note was $669, which is included in “accounts payable and accrued expenses” on our interim consolidated balance sheets.

 

NOTE 8 - INCOME TAXES

 

A reconciliation of the provision for income taxes as reported, and the amount computed by multiplying net loss by the federal statutory rate of 21% as of October 31, 2020 and July 31, 2020 are as follows:

 

    October 31, 2020     July 31, 2020  
Federal income tax benefit computed at the statutory rate   $ (68,637 )   $ (222,198 )
Increase (decrease) resulting from:                
State income taxes, net of federal benefit     -       (1,088 )
Stock-based compensation     35,792       89,933  
Valuation allowance     32,743       133,113  
Other     102       240  
Income tax benefit, as reported   $ -     $ -  

 

The components of the net deferred tax asset as of October 31, 2020 and July 31, 2020 are as follows:

 

    October 31, 2020     July 31, 2020  
Deferred tax assets:                
Net operating loss carryovers   $ 570,507     $ 537,764  
Valuation allowance     (570,507 )     (537,764 )
Net deferred tax asset, as reported   $ -     $ -  

 

F- 12
 

 

In assessing the realizable value of deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which these temporary differences become tax deductible. Based on management’s assessment of objective and subjective evidence, we have concluded at this time it is more likely than not that all of our deferred tax asset will not be realized and we have provided a valuation allowance for the entire amount of the deferred tax asset. At October 31, 2020, we have approximately $2.62 million in federal and state net operating loss carryovers that begin expiring in fiscal 2037.

 

We conduct business solely in the United States and file income tax returns in the United States federal jurisdiction as well as in the states of Tennessee and Colorado. The taxable years ended July 31, 2020, 2019 and 2018 remain open to examination by the taxing jurisdictions to which we are subject.

 

The Company evaluated the provisions of ASC 740 related to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain positions that the Company has taken or expects to take in its tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.” A liability is recognized (or amount of net operating loss carry forward or amount of tax refundable is reduced) for unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.

 

If applicable, interest costs related to the unrecognized tax benefits are required to be calculated and would be classified as “Other expenses – Interest expense” in the consolidated statements of operations. Penalties would be recognized as a component of “General and administrative.”

 

No material interest or penalties on unpaid tax were recorded during the three months ended October 31, 2020 and 2019. As of October 31, 2020 and July 31, 2020, no liability for unrecognized tax benefits was required to be reported. The Company does not expect any significant changes in its unrecognized tax benefits in the next year.

 

NOTE 9 - RELATED PARTY TRANSACTIONS

 

To continue operations and meet operating cash requirements, we have periodically relied on advances from related parties, primarily shareholders, until such time as our cash flow from operations meets our cash requirements or we are able to obtain adequate financing through sales of our equity securities and/or traditional debt financing. There is no formal written commitment for continued support by shareholders. Amounts advanced primarily relate to amounts paid to vendors. The advances are considered temporary in nature and have not been formalized by any written agreement. As of October 31, 2020 and July 31, 2020, related parties have advanced the Company $201,790 and $271,819, respectively. The advances are payable on demand and carry no interest.

 

The amounts and terms of the related party transactions may not necessarily be indicative of the amounts and terms that would have been incurred had comparable transactions been entered into with independent third parties.

 

NOTE 10 - COMMON STOCK

 

At October 31, 2020 and July 31, 2020, we had 36,637,235 and 36,474,611 shares of common stock outstanding, respectively. We issued 1,162,624 shares of common stock during the three months ended October 31, 2020, of which 1,050,000 shares were issued for cash and 112,624 shares were issued upon conversion of debt and related accrued interest. In addition, we purchased and immediately cancelled 1,000,000 shares of our common stock. During the year ended July 31, 2020 we issued 3,987,111 shares of common stock, of which 2,950,000 shares were issued for cash, 500,000 shares were issued for services, 337,111 shares were issued upon conversion of debt and related accrued interest, and 200,000 shares were issued for the vesting of an employee stock grant.

 

F- 13
 

 

On August 11, 2020, we agreed to repurchase 1,000,000 shares of our common stock from Acorn Management Partners, LLC (“AMP”). The purchased shares were delivered by AMP directly to the transfer agent on September 8, 2020 and immediately cancelled. See Note 7.

 

On August 15, 2020, we issued 112,624 shares of common stock to the holder of a $50,000 5% Convertible Promissory Note (the “Note”) in exchange for the Note plus accrued interest of $6,312 through the conversion date. Under the terms of the Note, the shares were issued at a conversion price of $0.50 per share.

 

On October 13, 2020, we completed two (2) private placement transactions totaling 1,050,000 shares of our common stock, each at a price of $0.10 per share, resulting in net proceeds to the Company of $105,000. We incurred no cost related to the private placements.

 

NOTE 11 - STOCK-BASED COMPENSATION

 

Our stock-based compensation programs are long-term retention awards that are intended to attract, retain, and provide incentives for employees, officers and directors, and to align stockholder and employee interest. We utilize grants of both stock options and warrants and restricted stock to achieve those goals.

 

Summary of Stock Options and Warrants

 

During the three months ended October 31, 2020, we recorded $134,737 of compensation expense, net of capitalized expense of $19,658, related to stock options and warrants. During the three months ended October 31, 2019, we recorded $75,194 of compensation expense related to stock options and warrants. The grant date fair value of stock options and warrants issued during the three months ended October 31, 2020 and 2019 was $241,433 and $72,071, respectively. We estimated the grant date fair value of stock options and warrants using the Black-Scholes pricing model with the following weighted average range of assumptions for the periods presented:

 

    October 31, 2020     October 31, 2019  
Expected volatility     271.61 %     255.85 %
Expected term (in years)     3.25       3.25  
Risk-free interest rate     0.20 %     1.38 %
Dividend yield     None        None  

 

Expected Volatility

 

Due to the fact we do not consider historical volatility is the best indicator of future volatility, we use implied volatility of our options to estimate future volatility.

 

Expected Term

 

Where possible, we use the simplified method to estimate the expected term of employee stock options. Where we are unable to use the simplified method due to the terms of a stock option, we may use a modified simplified method to estimate the expected term. We do not have adequate historical exercise data to provide a reasonable basis for estimating the expected term for the current share options granted. The simplified method assumes that employees will exercise share options evenly between the period when the share options are vested and ending on the date when the options would expire.

 

Risk-Free Interest Rate

 

The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve at the date of grant.

 

Dividend Yield

 

We have not estimated any dividend yield as we currently do not pay a dividend and do not anticipate paying a dividend over the expected term.

 

F- 14
 

 

The following table summarizes our options and warrant activity for the three months ended October 31, 2020 and fiscal year ended July 31, 2020:

 

    October 31, 2020     July 31, 2020  
    Number of     Weighted     Number of     Weighted  
    Options and     Average     Options and     Average  
    Warrants     Exercise Price     Warrants     Exercise Price  
Balance at beginning of year     6,350,000     $ 1.34       2,500,000     $ 3.00  
Granted     1,000,000       0.40       3,850,000       0.25  
Exercised     -       -       -       -  
Balance at end of period     7,350,000     $ 1.21       6,350,000     $ 1.34  
Options and warrants exercisable     2,450,000     $ 1.60       2,150,000     $ 1.85  

 

Summary of Restricted Stock Grants

 

During the three months ended October 31, 2020 and 2019, we recorded compensation expense of $16,042 and $-0-, respectively, related to restricted stock grants. There were no restricted stock grants during the three months ended October 31, 2020 and 2019.

 

The following table summarizes our restricted stock activity for the three months ended October 31, 2020 and fiscal year ended July 31, 2020:

 

    October 31, 2020     July 31, 2019  
Balance at beginning of year     300,000       -  
Granted     -       500,000  
Released     -       (200,000 )
Forfeited     -       -  
Balance at end of period     300,000       300,000  

 

NOTE 12 – COMMITMENTS AND CONTINGENCIES

 

On March 13, 2018, in connection with the appointment of Scott M. Boruff as Chief Executive Officer of the Company, the Company and Mr. Boruff entered into an employment agreement (the “Boruff Employment Agreement”) with an initial term of three (3) years. As compensation for his services, the Company shall pay Mr. Boruff an annual base salary of $300,000. In the event Mr. Boruff’s employment with the Company is terminated without cause, Mr. Boruff shall be entitled to a severance payment equal to his base salary for one (1) full year. If Mr. Boruff is terminated without cause within two (2) years of a change in control upon request of the acquiror, Mr. Boruff shall be entitled to a severance payment in an amount equal to 2.99 times the annualized base salary he is then earning. In addition, Mr. Boruff is eligible for equity awards as approved by the Board of Directors as defined in the agreement.

 

On October 8, 2019, in connection with the appointment of Charles B. Lobetti, III as Chief Financial Officer of the Company, the Company and Mr. Lobetti entered into an employment agreement (the “Lobetti Employment Agreement”) ”) with an initial term of three (3) years. Pursuant to a modification of the Lobetti Employment Agreement effective May 1, 2020, the Company shall pay Mr. Lobetti an annual base salary of $104,000 per year as compensation for his services. In the event Mr. Lobetti’s employment with the Company is terminated without cause, Mr. Lobetti shall be entitled to a severance payment equal to his base salary for one (1) full year. If Mr. Lobetti is terminated without cause within two (2) years of a change in control upon request of the acquiror, Mr. Lobetti shall be entitled to a severance payment in an amount equal to 2.99 times the annualized base salary he is then earning. In addition, Mr. Lobetti is eligible for equity awards as approved by the Board of Directors as defined in the agreement.

 

F- 15
 

 

On June 15, 2020, in connection with the appointment of Kenneth M. Greenwood as Chief Technology Officer of the Company, the Company and Mr. Greenwood entered into an employment agreement (the “Greenwood Employment Agreement”) with an initial term of three (3) years. As compensation for his services, the Company shall pay Mr. Greenwood an annual base salary of $257,000. The base salary shall be accrued until the Company obtains funding of $1,000,000 in excess of funding used for inventory purchases, or has $1,000,000 in revenue, whichever occurs first. In the event Mr. Greenwood’s employment with the Company is terminated without cause, Mr. Greenwood shall be entitled to a severance payment equal to his base salary for one (1) full year. If Mr. Greenwood is terminated without cause within two (2) years of a change in control upon request of the acquiror, Mr. Greenwood shall be entitled to a severance payment in an amount equal to 2.99 times the annualized base salary he is then earning. In addition, Mr. Greenwood is eligible for equity awards as approved by the Board of Directors as defined in the agreement.

 

On September 1, 2020, in connection with the appointment of Susan A. Reyes, M.D. as Chief Medical Officer of the Company, the Company and Dr. Reyes entered into an employment agreement (the “Reyes Employment Agreement”) with an initial term of three (3) years. As compensation for her services, the Company shall pay Dr. Reyes an annual base salary of $52,000. The base salary shall be accrued until the Company obtains funding of at least $1,000,000, or has reported $10,000,000 in revenue, whichever occurs first. In the event Dr. Reyes’ employment with the Company is terminated without cause, Dr. Reyes shall be entitled to a severance payment equal to her base salary for one (1) full year. If Dr. Reyes is terminated without cause within two (2) years of a change in control upon request of the acquiror, Dr. Reyes shall be entitled to a severance payment in an amount equal to 2.99 times the annualized base salary she is then earning. In addition, Dr. Reyes is eligible for equity awards as approved by the Board of Directors as defined in the agreement.

 

NOTE 13 - SUBSEQUENT EVENTS

 

On December 2, 2020, we completed a private placement of 1,500,000 shares of our common stock at a price of $0.10 per share resulting in net proceeds to the Company of $150,000. We incurred no cost related to the private placement.

 

F- 16
 

 

Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

THE FOLLOWING DISCUSSION OF OUR PLAN OF OPERATION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES TO THE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. THESE RISKS AND OTHER FACTORS INCLUDE, AMONG OTHERS, THOSE LISTED UNDER “FORWARD-LOOKING STATEMENTS” AND “RISK FACTORS” AND THOSE INCLUDED ELSEWHERE IN THIS REPORT.

 

This following discussion summarizes the significant factors affecting the interim consolidated financial statements, financial condition, liquidity, and cash flows of Healthcare Integrated Technologies, Inc, for the three months ended October 31, 2020 and 2019. The discussion and analysis should be read in conjunction with the consolidated financial statements and notes included in our most recent Annual Report on Form 10-K for the year ended July 31, 2020 filed with the SEC on October 16, 2020.

 

Executive Overview

 

We are a healthcare technology company based in Knoxville, Tennessee. Our business is creating a diversified spectrum of healthcare technology solutions to integrate and automate the continuing care, home care and professional healthcare spaces.

 

Our initial product, SafeSpace, is an ambient fall detection solution designed for continuing care communities and at home use. SafeSpace includes wall mounted devices utilizing radar technology and state of the art software to effectively monitor a person remotely. In continuing care communities, SafeSpace detects resident falls and generates alerts to a centralized, intelligent dashboard without the use of wearable devices or any action by the resident. In the home, SafeSpace detects falls and sends alerts directly to designated individuals.

 

In addition to SafeSpace, we are creating a home concierge healthcare service application to provide a virtual assisted living experience for seniors, recently released postoperative patients and others. The concierge application will enable the consumer to obtain home healthcare services and health and safety monitoring equipment to improve quality of life. We are also working to develop a fully integrated solution for the professional healthcare community that integrates electronic health records, remote patient monitoring, telehealth, and other items where integration is beneficial.

 

Strategy

 

Our mission is to grow a profitable healthcare technology company by focusing on our core product, continuing the development of our proprietary software and developing new uses and product lines for our technology. Our management team is focused on maintaining the financial flexibility and assembling the right complement of personnel and outside consultants required to successfully execute our mission.

 

Financial and Operating Results

 

Highlights for three months ended October 31, 2020 include:

 

  On August 11, 2020 we agreed to repurchase 1,000,000 shares of our common stock from Acorn Management Partners, LLC (“AMP”). The purchased shares were delivered by AMP directly to the transfer agent on September 8, 2020 and immediately cancelled.

 

5
 

 

  On August 15, 2020, we issued 112,624 shares of common stock to the holder of a $50,000 5% Convertible Promissory Note (the “Note”) in exchange for the Note plus accrued interest of $6,312 through the conversion date. Under the terms of the Note, the shares were issued at a conversion price of $0.50 per share.
     
  On September 1, 2020, Susan A. Reyes, M.D. was appointed Chief Medical Officer and entered into a three-year employment agreement with the Company. The employment agreement provides for a base salary of $52,000 per annum (on a part-time basis) and 1,000,000 options to purchase the Company’s common stock at an exercise price of $0.40 per share, with 25% immediately vested and exercisable on the grant date and the remaining options vesting equally over a period of three (3) years from the grant date. The value of the options on the grant date was estimated using the Black-Scholes pricing model and is being recognized as an expense over the vesting term.
     
  On October 13, 2020, we completed two (2) private placement transactions totaling 1,050,000 shares of our common stock, each at a price of $0.10 per share, resulting in net proceeds to the Company of $105,000. We incurred no cost related to the private placements.

 

Results of Operations

 

Three Months Ended October 31, 2020 Compared to the Three Months Ended October 31, 2019

 

Revenues

 

Our healthcare technology business is not currently producing revenue as we continue to develop, refine and test our products both internally and in independent senior living facilities through our Pilot Program.

 

Selling, General and Administrative Expenses

 

The table below presents a comparison of our selling, general and administrative expenses for the three months ended October 31, 2020 and 2019:

 

   

For the Three Months Ended

October 31,

       
    2020     2019     $ Variance     %Variance  
                         
Officer’s salaries   $ 121,608     $ 86,187     $ 35,421       41 %
Stock-based compensation     150,779       75,194       75,585       101 %
Advertising and marketing     1,975       5,300       (3,325 )     (63 )%
Professional fees     40,505       7,365       33,140       450 %
Other     3,479       2,218       1,261       (6 )%
Total   $ 318,346     $ 176,264     $ 142,082       81 %

 

Officer’s Salaries – Officer’s salaries, net of capitalized amounts, increased $35,421 over 2019, or 41%. The increase is attributable to the uncapitalized portion of our new CTO’s salary for the entire period, two months of salary for our new CMO, and our CFO’s salary for the full period at an increased rate. In 2019, Officer’s salaries only included the salaries for our CEO and our CFO’s salary, at the starting rate, for less than one month.

 

Stock-Based Compensation – Stock-based compensation expense increased $75,585, or 101%, over the same period in the prior year. The increase results from amortization of the grant date fair value of additional employee stock options granted to our CTO and CMO, as well as a restricted stock grant to our CFO.

 

Advertising and Marketing – Advertising and marketing costs decreased $3,325 over 2019. We incurred minimal advertising and marketing costs in both periods.

 

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Professional Fees – Professional fees increased $33,140 from over 2019. The increase was primarily related to the increased accounting, legal and filing fees associated with the filing of our July 31, 2020 Form 10-K. Our Comprehensive Form 10-K, filed in March 2020, included the July 31, 2019 Form 10-K and the expense of filing this report was incurred after the three months ended October 31, 2019.

 

Interest Expense

 

Interest expense decreased $2,148 over the same period in the prior year. The decrease is primarily due to a $200,000 reduction in outstanding 5% convertible notes for most of 2020. The decrease was partially offset by increases in interest expense related to the compounding effect of the accrued interest on the outstanding 5% convertible notes and the issuance of a new note payable in August 2020.

 

Liquidity and Capital Resources

 

Working Capital

 

The following table summarizes our working capital for the interim period ended October 31, 2020 and fiscal year ended July 31, 2020:

 

    October 30, 2020     July 31, 2020  
Current assets   $ 58,456     $ 125,010  
Current liabilities     (2,052,611 )     (1,982,603 )
Working capital deficiency   $ (1,994,155 )   $ (1,857,593 )

 

Current assets for the period ended October 31, 2020 decreased as compared to the year ended July 31, 2020 due to a decrease in cash and cash equivalents and the amortization of prepaid expenses.

 

Current liabilities for the period ended October 31, 2020 increased as compared to the year ended July 31, 2020 primarily due to the continued accrual of unpaid officer’s compensation partially offset by the payment of certain amounts owed to related parties.

 

Net Cash Used by Operating Activities

 

We currently do not have a revenue source and will continue to have negative cash flow from operations for the near future. The factors in determining operating cash flows are largely the same as those that affect net earnings, except for non-cash expenses such as depreciation and stock-based compensation, which affect earnings but do not affect cash flow. Net cash used by operating activities was $95,065 for the three months ended October 31, 2020 as compared to $9,646 for the three months ended October 31, 2019. The $85,419 increase in cash used during 2020 is attributable to the partial payment of accrued officer’s compensation and the payment of certain amounts owed to related parties in 2020 as compared to 2019.

 

Net Cash Used by Investing Activities

 

Net cash used by investing activities was $3,030 for the three months ended October 31, 2020. The amount is comprised solely of cash paid for the expense of filing our patent applications. We had no cash flows from investing activities during the same period of 2019.

 

Net Cash Provided by Financing Activities

 

Net cash provided by financing activities was $34,971 for the three months ended October 31, 2020, which represented a $25,664 increase over the same period of 2019. During 2020, we raised $105,000 from the sale of common stock in two (2) private transactions. The amount was partially offset by $70,029 in payments made for amounts owed to related parties. In fiscal year 2019, we raised $9,307 in cash exclusively from short-term loans from related parties.

 

At this time, we cannot provide investors with any assurance that we will be able to obtain sufficient funding from debt financing and/or the sale of our equity securities to meet our obligations over the next twelve months. We are likely to continue using short-term loans from management to meet our short-term funding needs. We have no material commitments for capital expenditures as of October 31, 2020.

 

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Going Concern Qualification

 

We have a history of losses, an accumulated deficit, a negative working capital and have not generated cash from operations to support a meaningful and ongoing business plan. Our Independent Registered Public Accounting Firm has included a “Going Concern Qualification” in their report for the years ended July 31, 2020, 2019, 2018, 2017 and 2016. The foregoing raises substantial doubt about the Company’s ability to continue as a going concern. We intend on financing our future activities and working capital needs largely from the sale of private and/or public equity securities with additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. There is no guarantee that additional capital or debt financing will be available when and to the extent required, or that if available, it will be on terms acceptable to us. The interim consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The “Going Concern Qualification” might make it substantially more difficult to raise capital.

 

Critical Accounting Policies and Estimates

 

Our interim consolidated financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“U.S. GAAP”). U.S. GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to U.S. GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.

 

Our significant accounting policies are summarized in Note 1 of our interim consolidated financial statements.

 

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our July 31, 2020 Annual Report.

 

We believe the following critical policies impact our more significant judgments and estimates used in preparation of our financial statements.

 

Use of Estimates

 

We prepare our financial statements in conformity with U.S. GAAP. These principals require 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 revenues and expenses during the reporting period. Management believes that these estimates are reasonable and have been discussed with the Board; however, actual results could differ from those estimates.

 

Impairment of Long-Lived Assets

 

Long-lived assets such as property, equipment and identifiable intangibles are reviewed for impairment whenever facts and circumstances indicate that the carrying value may not be recoverable. When required impairment losses on assets to be held and used are recognized based on the fair value of the asset. The fair value is determined based on estimates of future cash flows, market value of similar assets, if available, or independent appraisals, if required. If the carrying amount of the long-lived asset is not recoverable from its undiscounted cash flows, an impairment loss is recognized for the difference between the carrying amount and fair value of the asset. When fair values are not available, we estimate fair value using the expected future cash flows discounted at a rate commensurate with the risk associated with the recovery of the assets. We did not recognize any impairment losses for any periods presented.

 

8
 

 

Stock-Based Compensation

 

We issue options and warrants to consultants, directors, and officers as compensation for services. These options and warrants are valued using the Black-Scholes model, which focuses on the current stock price and the volatility of moves to predict the likelihood of future stock moves. This method of valuation is typically used to estimate the value of stock options and warrants based on the price of the underlying stock.

 

Fair Value of Financial Instruments

 

Fair value estimates used in preparation of the financial statements are based upon certain market assumptions and pertinent information available to management. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, accounts payable, note payable and amounts due to related parties. Fair values were assumed to approximate carrying values for these financial instruments since they are short-term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand.

 

Capital Resources

 

We had no material commitments for capital expenditures as of October 31, 2020.

 

Off-Balance Sheet Arrangements

 

The Company has no off-balance sheet arrangements as of October 31, 2020.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We do not hold any derivative instruments and do not engage in any hedging activities.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended, at the end of the period covered by this report (the “Evaluation Date”). In conducting its evaluation, management considered the material weaknesses described below in Management’s Report on Internal Control over Financial Reporting.

 

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of the Evaluation Date we did not maintain disclosure controls and procedures that were effective in providing reasonable assurances that information required to be disclosed in our reports filed under the Securities Exchange act of 1934 was recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and that such information was accumulated and communicated to our management to allow timely decisions regarding required disclosure.

 

Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

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Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

The Company is currently not involved in any litigation that the Company believes could have a materially adverse effect on the Company’s financial condition or results of operations. On January 2, 2020, a sworn account lawsuit was filed against our IndeLiving Holdings, Inc. (“IndeLiving”) subsidiary and our CEO Scott M. Boruff by our previous Certified Public Accounting Firm, RBSM LLP demanding payment of $28,007 for services rendered. We have filed our Answer and IndeLiving filed a breach of contract Counterclaim on February 24, 2020 demanding repayment of a $7,500 retainer paid to RBSM LLP by IndeLiving for services that we allege were not provided. Given the early state of the proceedings in this case, we currently cannot assess the probability of losses, but we can reasonably estimate that the range of losses in this case will be immaterial since the full amount of the lawsuit has previously been recorded in the consolidated financial statements.

 

ITEM 1A. RISK FACTORS.

 

Not required for smaller reporting companies.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On October 13, 2020, we issued 550,000 shares of our common stock at a price of $0.10 per share to an accredited investor resulting in net proceeds to the Company of $55,000. We incurred no cost related to the private transaction. The net proceeds were used for working capital. The issuance of the shares was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(a)2 of that act.

 

On October 13, 2020, we issued 500,000 shares of our common stock at a price of $0.10 per share to an accredited investor resulting in net proceeds to the Company of $50,000. We incurred no cost related to the private transaction. The net proceeds were used for working capital. The issuance of the shares was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(a)2 of that act.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

On various dates during the month of March 2018 we issued a series of 5% Convertible Promissory Notes (collectively, the “5% Notes”) totaling $750,000 in face amount. The 5% Notes bear interest at the rate of five percent (5%) per annum, compounded annually, and matured one-year from the date of issuance. As of October 31, 2020, 5% Notes with a face amounts totaling $200,000 have been converted into commons stock of the Company, 5% Notes with face amounts totaling $325,000 have been previously amended to extend their maturity date to March 31, 2021, and 5% Notes with face amounts totaling $225,000 matured on various dates during March 2019 and are currently in default for non-payment of principal and interest. As of December 11, 2020, principal and accrued interest of approximately $32,000 are due on the notes in default.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

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ITEM 6. EXHIBITS

 

Exhibit

No.

  Description
     
10.1**   Employment Agreement between the Company and Susan A. Reyes, M.D., dated September 1, 2020 (as filed with the Securities and Exchange Commission on Form 8-K dated September 4, 2020 and incorporated herein by reference)
     
31.1   Chief Executive Officer and Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
     
32.1   Chief Executive Officer and Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

** Executive Compensation Agreement

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Healthcare Integrated Technologies, Inc.
     
Date: December 11, 2020    
  By: /s/ Scott M. Boruff
   

Scott M. Boruff

President, Chief Executive Officer

(Principal Executive Officer)

 

  Healthcare Integrated Technologies, Inc.
     
Date: December 11, 2020    
  By: /s/ Charles B. Lobetti, III
    Charles B. Lobetti, III
   

Chief Financial Officer

(Principal Financial Officer)

 

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