UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-Q
|
þ |
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2021
OR
|
o |
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: 001-13621
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 o No þ
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 o No þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
Large
accelerated filer o |
Accelerated
filer o |
Non-accelerated
filer þ |
Smaller reporting
company þ |
|
Emerging growth
company o |
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13 (a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company
(as defined by Rule 12b-2 of the Exchange Act). Yes o No þ
As of May 14, 2021, the issuer had 194,190,907 shares of Common
Stock outstanding, par value $.005 per share.
UPD HOLDING CORP.
TABLE
OF CONTENTS
CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
The statements contained in this Quarterly 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. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
March 31, |
|
June
30, |
|
|
2021 |
|
2020 |
ASSETS |
|
(unaudited) |
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
52,825 |
|
|
$ |
20,718 |
|
Assets
held for sale |
|
|
— |
|
|
|
755 |
|
Total
current assets |
|
$ |
52,825 |
|
|
$ |
21,473 |
|
|
|
|
|
|
|
|
|
|
Property and
equipment, net |
|
|
26,364 |
|
|
|
— |
|
Right of use
asset, net |
|
|
48,691 |
|
|
|
— |
|
Goodwill |
|
|
416,981 |
|
|
|
— |
|
Total
assets |
|
$ |
544,861 |
|
|
$ |
21,473 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
82,549 |
|
|
$ |
14,805 |
|
Accrued
interest |
|
|
86,305 |
|
|
|
75,934 |
|
Convertible notes
payable, net of discount |
|
|
206,820 |
|
|
|
180,129 |
|
Related party
notes payable |
|
|
94,560 |
|
|
|
84,560 |
|
Lease
liability |
|
|
25,708 |
|
|
|
— |
|
Liabilities related to assets sold |
|
|
— |
|
|
|
250,167 |
|
Total current
liabilities |
|
|
495,942 |
|
|
|
605,595 |
|
Lease
liability, net of current portion |
|
|
22,983 |
|
|
|
— |
|
Total
liabilities |
|
|
518,925 |
|
|
|
605,595 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
Stockholders' equity (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 194,190,907 and
172,450,907 issued and
outstanding at
March 31, 2021 and June 30, 2020,
respectively
|
|
|
970,955 |
|
|
|
862,255 |
|
Additional
paid-in-capital |
|
|
2,428,992 |
|
|
|
1,872,632 |
|
Accumulated deficit |
|
|
(3,374,011 |
) |
|
|
(3,319,009 |
) |
Total
stockholders' equity (deficit) |
|
|
25,936 |
|
|
|
(584,122 |
) |
Total
liabilities and stockholders' equity (deficit) |
|
$ |
544,861 |
|
|
$ |
21,473 |
|
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
UPD HOLDING
CORP. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
|
|
For
the Three Months Ended |
|
|
For
the Nine Months Ended |
|
|
|
March
31, |
|
|
March
31, |
|
|
March
31, |
|
|
March31, |
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
Revenues: |
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
Net revenue |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees |
|
|
75,526 |
|
|
|
29,092 |
|
|
|
142,712 |
|
|
|
113,838 |
|
General
and administrative |
|
|
115,623 |
|
|
|
595 |
|
|
|
120,815 |
|
|
|
4,111 |
|
Total
operating costs and expenses |
|
|
191,149 |
|
|
|
29,687 |
|
|
|
263,527 |
|
|
|
117,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(191,149 |
) |
|
|
(29,687 |
) |
|
|
(263,527 |
) |
|
|
(117,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(9,388 |
) |
|
|
(5,837 |
) |
|
|
(19,237 |
) |
|
|
(40,708 |
) |
Other income,
net |
|
|
— |
|
|
|
301,383 |
|
|
|
(23,402 |
) |
|
|
324,822 |
|
Income (loss) from
continuing operations, before income taxes |
|
|
(200,537 |
) |
|
|
265,859 |
|
|
|
(306,166 |
) |
|
|
166,165 |
|
Benefit from
income taxes |
|
|
— |
|
|
|
— |
|
|
|
10,852 |
|
|
|
— |
|
Income
(loss) from continuing operations |
|
|
(200,537 |
) |
|
|
265,859 |
|
|
|
(295,314 |
) |
|
|
166,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of
discontinued operations, net of tax |
|
|
— |
|
|
|
— |
|
|
|
240,312 |
|
|
|
— |
|
Income
from discontinued operations, net of tax |
|
|
— |
|
|
|
— |
|
|
|
240,312 |
|
|
|
— |
|
Net
income (loss) |
|
$ |
(200,537 |
) |
|
$ |
265,859 |
|
|
$ |
(55,002 |
) |
|
$ |
166,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per
share from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations |
|
$ |
(0.00 |
) |
|
$ |
0.00 |
|
|
$ |
(0.00 |
) |
|
$ |
0.00 |
|
Discontinued operations |
|
|
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 |
|
|
185,135,574 |
|
|
|
169,545,852 |
|
|
|
176,617,403 |
|
|
|
169,414,938 |
|
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
UPD HOLDING
CORP. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ DEFICIT
FOR THE PERIODS ENDED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
Total |
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Paid-in |
|
|
Accumulated |
|
|
Stockholders' |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Equity (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 |
) |
Issuance of common stock for acquisition of Vital
Behavioral
Health, Inc. |
|
|
— |
|
|
|
— |
|
|
|
16,840,000 |
|
|
|
84,200 |
|
|
|
437,840 |
|
|
|
— |
|
|
|
522,040 |
|
Stock
based compensation |
|
|
— |
|
|
|
— |
|
|
|
500,000 |
|
|
|
2,500 |
|
|
|
13,000 |
|
|
|
— |
|
|
|
15,500 |
|
Beneficial conversion feature for convertible
debt |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25,000 |
|
|
|
— |
|
|
|
25,000 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(200,537 |
) |
|
|
(200,537 |
) |
BALANCE, March 31, 2021 |
|
|
— |
|
|
$ |
— |
|
|
|
17,340,000 |
|
|
$ |
970,955 |
|
|
$ |
2,428,992 |
|
|
$ |
(3,374,011 |
) |
|
$ |
25,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
June 30, 2019 |
|
|
— |
|
|
$ |
— |
|
|
|
171,008,684 |
|
|
$ |
855,044 |
|
|
$ |
1,709,731 |
|
|
$ |
(3,449,946 |
) |
|
$ |
(885,171 |
) |
Issuance of common stock for conversion of debt
and interest |
|
|
— |
|
|
|
— |
|
|
|
113,833 |
|
|
|
569 |
|
|
|
10,814 |
|
|
|
— |
|
|
|
11,383 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(20,243 |
) |
|
|
(20,243 |
) |
BALANCE,
September 30, 2019 |
|
|
— |
|
|
$ |
— |
|
|
|
171,122,517 |
|
|
$ |
855,613 |
|
|
$ |
1,720,545 |
|
|
$ |
(3,470,189 |
) |
|
$ |
(894,031 |
) |
Issuance of common stock for conversion of debt
and interest |
|
|
— |
|
|
|
— |
|
|
|
337,039 |
|
|
|
1,685 |
|
|
|
31,990 |
|
|
|
— |
|
|
|
33,675 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(79,451 |
) |
|
|
(79,451 |
) |
BALANCE, December 31, 2019 |
|
|
— |
|
|
$ |
— |
|
|
|
171,459,556 |
|
|
$ |
857,298 |
|
|
$ |
1,752,535 |
|
|
$ |
(3,549,640 |
) |
|
$ |
(939,807 |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
265,859 |
|
|
|
265,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
March 31, 2020 |
|
|
— |
|
|
$ |
— |
|
|
|
171,459,556 |
|
|
$ |
857,298 |
|
|
$ |
1,752,535 |
|
|
$ |
(3,283,781 |
) |
|
$ |
(673,948 |
) |
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
UPD HOLDING
CORP. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)
|
|
For
the Nine Months Ended |
|
|
March
31, |
|
March
31, |
|
|
2021 |
|
2020 |
Cash flows from operating
activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(55,002 |
) |
|
$ |
166,165 |
|
(Income) loss from discontinued
operations |
|
|
— |
|
|
|
— |
|
Gain on sale of discontinued
operations |
|
|
(240,312 |
) |
|
|
— |
|
Adjustments to reconcile net income
(loss) to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,915 |
|
|
|
— |
|
Stock-based compensation |
|
|
27,150 |
|
|
|
— |
|
Loss (gain) on settlement of debt |
|
|
23,402 |
|
|
|
(324,822 |
) |
Amortization of debt discount |
|
|
1,820 |
|
|
|
— |
|
Changes in operating assets and
liabilities: |
|
|
|
|
|
|
|
|
Assets held for
sale |
|
|
755 |
|
|
|
(755 |
) |
Accrued
interest |
|
|
17,417 |
|
|
|
42,631 |
|
Accounts
payable |
|
|
39,624 |
|
|
|
(6,003 |
) |
Net cash used in
operating activities - continuing operations |
|
|
(183,231 |
) |
|
|
(122,784 |
) |
Net cash
used in operating activities - discontinued operations |
|
|
(11,667 |
) |
|
|
— |
|
Net cash
used in operating activities |
|
|
(194,898 |
) |
|
|
(122,784 |
) |
Cash flows from investing
activities: |
|
|
|
|
|
|
|
|
Purchase of
property and equipment |
|
|
(28,279 |
) |
|
|
— |
|
Cash
acquired in business combination |
|
|
10,284 |
|
|
|
— |
|
Net cash
used in investing activities |
|
|
(17,995 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities: |
|
|
|
|
|
|
|
|
Proceeds from
related party notes payable |
|
|
— |
|
|
|
10,000 |
|
Proceeds from
issuance of convertible notes payable |
|
|
115,000 |
|
|
|
115,129 |
|
Proceeds from
issuance notes payable |
|
|
130,000 |
|
|
|
— |
|
Principal payments on notes payable |
|
|
— |
|
|
|
(6,561 |
) |
Net cash
provided by financing activities |
|
|
245,000 |
|
|
|
118,568 |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents |
|
|
32,107 |
|
|
|
(4,216 |
) |
Cash and cash
equivalents at beginning of period |
|
|
20,718 |
|
|
|
7,215 |
|
Cash and cash
equivalents at end of period |
|
$ |
52,825 |
|
|
$ |
2,999 |
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes |
|
$ |
— |
|
|
$ |
— |
|
Cash
paid for interest |
|
$ |
— |
|
|
$ |
4,000 |
|
|
|
|
|
|
|
|
|
|
Non-Cash Supplemental Disclosures |
|
|
|
|
|
|
|
|
Common stock issued for asset acquisition |
|
$ |
522,040 |
|
|
$ |
— |
|
Common stock issued for debt settlement |
|
$ |
90,870 |
|
|
$ |
40,000 |
|
Notes payable forgiven for asset disposition |
|
$ |
— |
|
|
$ |
350,000 |
|
Notes payable forgiven in business acquisition |
|
$ |
120,000 |
|
|
$ |
— |
|
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
UPD HOLDING
CORP. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 – BUSINESS AND ORGANIZATION
UPD Holding Corp. (“UPD”, “Company”), incorporated in the State of
Nevada, is a holding Company seeking to acquire assets and
businesses to provide a competitive advantage through cost-sharing
and other synergies. The Company is pursuing business development
opportunities in the rehabilitation services industry.
On February 16, 2021, UPD completed its acquisition of Vital
Behavioral Health, Inc., which intends to operate U.S. facilities
focusing on substance abuse treatment and offer various programs
that help provide a continuum of care to its patients.
The Company previously operated in the food and beverage industry
through Record Street Brewing (“RSB”), which was sold as of
December 31, 2020.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Statements
The accompanying unaudited interim consolidated financial
statements of the Company and its subsidiaries have been prepared
in accordance with generally accepted accounting principles
(“GAAP”), pursuant to the rules and regulations of the Securities
and Exchange Commission and are unaudited. Accordingly, they do not
include all the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all
adjustments (which include only normal recurring adjustments)
necessary for a fair presentation of the results for the interim
periods presented have been made. The results for the three and
nine-month period ended March 31, 2021, may not be indicative of
the results for the entire year. These financial statements should
be read in conjunction with the Company’s Annual Report on Form
10-K for the fiscal year ended June 30, 2020 filed with the
Securities and Exchange Commission on August 14, 2020, and the
Company’s Current Report on Form 8-K/A filed with the Securities
and Exchange Commission on May 4, 2021, which amends and
supplements the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 22, 2021.
Principles of Consolidation
The Company consolidates the assets, liabilities, and operating
results of its wholly owned and majority-owned subsidiaries: (i)
iMetabolic Corp, a Nevada corporation; (ii) United Product
Development Corp., a Nevada corporation; (iii) Vital Behavioral
Health, Inc., a Nevada corporation (since February 16, 2021);
(iv) VBH Frankfort LLC, a Nevada limited liability company (since
February 16, 2021); (v) VSL Frankfort LLC, a Nevada limited
liability company (since February 16, 2021); (vi) VBH Garden
Grove Inc. (since February 17, 2021); (vii) VBH Kentucky Inc., a
Nevada corporation (since March 16, 2021); and (viii) Record Street
Brewing Co., a Nevada corporation (through December 31, 2020). All
intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid
investments with original maturities of 90 days of less at the date
of purchase. The Company is exposed to credit risk in the event of
default by the financial institutions or the issuers of these
investments to the extent the amounts on deposit or invested are in
excess of amounts that are insured. As of March 31, 2021 and June
30, 2020 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.
Revenue Recognition
The Company previously licensed its beer and beverage products to
its customers. The royalties earned from these licensing agreements
represent revenue earned under contracts in which the Company bills
and collects from its licensee in arrears. The Company determines
the measurement of revenue and the timing of revenue recognition
utilizing the following core principles:
|
1. |
Identifying the contract with a
customer; |
|
2. |
Identifying the performance
obligations in the contract; |
|
3. |
Determining the transaction
price; |
|
4. |
Allocate the transaction price to
the performance obligations in the contract; and |
|
5. |
Recognize revenue when (or as) the
Company satisfies its performance obligations. |
Revenues from licensing royalties are recognized when the Company’s
performance obligations are satisfied upon its licensee’s sales to
its customers. The Company primarily invoices its licensee on a
quarterly basis, net of returns. The Company did not realize
material revenues in the current period through the disposition
date on December 31, 2020.
The Company’s expected rehab service and facility revenue will be
recognized in accordance with the same five core principles after
meeting the applicable licensing requirements.
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); furnishings and fixtures are
5 to 7 years; and 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.
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 $250,767 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 condensed consolidated
balance sheets.
During the three and nine months ended March 31, 2021 and the three
and nine months ended March 31, 2020, 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 – NOTES AND CONVERTIBLE NOTES PAYABLE
The Company’s notes payable consist of the following:
Note Description
|
|
March 31,
2021 |
|
|
June 30,
2020 |
|
Notes Payable: |
|
|
|
|
|
|
|
|
Notes payable matured in
March 2018 with a nominal interest rate
of 12%* |
|
$ |
- |
|
|
$ |
20,000 |
|
Related Party
Notes Payable due October 2020 a nominal interest
rate of 6% |
|
|
94,560 |
|
|
|
84,560 |
|
Total Notes
payable |
|
$ |
94,560 |
|
|
$ |
104,560 |
|
Accrued
interest |
|
|
11,655 |
|
|
|
8,900 |
|
Total notes payable, net |
|
$ |
106,215 |
|
|
$ |
113,460 |
|
*As of December 31, 2020 $20,000 of notes payable outstanding at
June 30, 2020 were reclassified to liabilities related to assets
sold in the accompanying consolidated balance sheet.
Throughout the nine months ended March 31, 2021 the Company did not
have the financial resources to make current payments on these
notes payable. The Company is in negotiations with the note holders
and has not incurred significant penalties associated with the
current defaults.
The Company’s convertible notes payable consist of the
following:
Convertible Note Description |
|
March 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 $0.10 per share;
nominal interest rate of 12%; and matured in July 2020 (related
party) |
|
|
- |
|
|
|
65,129 |
|
Notes payable convertible into common
stock at $0.05 per share;
nominal interest rate of 12%; and matures in March 2022 |
|
|
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 |
|
|
|
- |
|
Notes payable convertible into common
stock at $0.10 per share; nominal interest |
|
|
|
|
|
|
|
|
rate
of 12%; and matures in the fourth quarter of fiscal 2021 (related
party) |
|
|
50,000 |
|
|
|
50,000 |
|
Total Convertible
notes payable |
|
$ |
230,000 |
|
|
$ |
180,129 |
|
Unamortized
discount |
|
|
(23,180 |
) |
|
|
- |
|
Convertible notes
payable, net |
|
|
206,820 |
|
|
|
180,129 |
|
Accrued
interest |
|
|
74,650 |
|
|
|
68,234 |
|
Total
convertible notes payable, net |
|
$ |
281,470 |
|
|
$ |
248,363 |
|
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 $0.10 per share upon maturity if not paid in
full prior to maturity. The Company did not make any monthly and
interest payments on its outstanding convertible notes payable.
During the nine months ended March 31, 2021, a note holder became a
related party through the acquisition (in a private transaction not
involving the Company) of shares of outstanding common stock in
excess of 5%. In October 2020, the Company issued the related party
a note payable for total cash proceeds of $100,000. In February
2021, the Company acquired the entity, Vital Behavioral Health,
Inc., holding 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.
During the three and nine months ended March 31, 2021 the Company
recognized interest expense on all outstanding notes and
convertible notes payable totaling approximately $9,000 and
$19,000, respectively. During the three and nine months ended
March 31, 2020 the Company recognized interest expense on all
outstanding notes and convertible notes payable totaling
approximately $6,000 and $41,000, respectively.
NOTE 5 – RELATED PARTY TRANSACTIONS
From time to time the Company has received working capital advances
from shareholders. These advances are used to settle the Company’s
on-going operating expenses. The shareholders have agreed to not
accrue interest on the notes, and they are due on demand. As of
March 31, 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. As
discussed in Note 4, certain outstanding notes payable and
convertible notes payable became related party obligations through
the holder’s common stock ownership.
During the nine months ended March 31, 2021 a significant
shareholder paid operating expenses on behalf of the Company. As of
March 31, 2021 the Company owed the significant shareholder
approximately $61,000.
NOTE 6 – STOCKHOLDERS EQUITY
In February 2021, the Company issued 16,840,000 fully vested shares
of common stock for total consideration of approximately $522,000
for the acquisition of Vital Behavioral Health, Inc.
In February 2021, the Company issued a consultant 500,000 fully
vested shares of common stock for total consideration of
approximately $16,000.
In December 2020, the Company issued a related party 3,900,000
shares of common stock for the settlement of convertible notes
payable and accrued interest totaling approximately $69,000.
In December 2020, the Company issued a consultant 500,000 fully
vested shares of common stock for total consideration of
approximately $12,000.
NOTE 7 – ACQUISITION
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 |
|
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 8 – OPERATING LEASES
As of March 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 Frankfort Lease commenced on
February 1, 2021. |
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:
2021 (April 1 to June 30) |
|
$ |
7,095 |
|
2022 |
|
|
28,380 |
|
2023 |
|
|
16,555 |
|
2024 |
|
|
- |
|
2025 |
|
|
- |
|
Total undiscounted cash payments |
|
|
52,030 |
|
Less interest |
|
|
(3,339 |
) |
Present
value of payments |
|
$ |
48,691 |
|
The weighted average remaining term of the Company’s non-cancelable
operating leases as of March 31, 2021 was approximately 18
months.
On January 14, 2021, our wholly owned subsidiary, United Product
Development Corporation (the “Subsidiary”), a Nevada corporation,
entered into a commercial lease (the “Lexington Lease”) with Athens
Commons, LLC, a Kentucky limited liability company, for the lease
of a 88,740 square foot building at 5532 Athens Boonsboro Road,
Lexington, Kentucky. The Lexington Lease is for a 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. As of March 31, 2021,
the Company had not received the applicable approvals necessary to
operate the as a substance abuse detoxification facility and
determined the likelihood of the lease being canceled as
probable.
NOTE 9 – SUBSEQUENT EVENTS
On May 20, 2021 the Company terminated the Lexington operating
lease agreement with Athens Commons without early termination
penalties. Prior to the termination, the Company made monthly base
rent payments of $20,000 plus utilities.
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
30,2020, filed with the Securities and Exchange Commission on
August 14, 2020.
This discussion and analysis provides 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.
Overview of Business
We are a health and wellness company with a focus in the
rehabilitation services industry. We intend to become a national
operator of clinical and transitional housing services for clients
affected by substance use disorders and co-occurring disorders. The
Company’s treatment plans will be based on an individualized
approach and are customized to meet each client’s specific
needs.
Clients of the Company’s facilities are intended to 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 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.
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.
The Company intends to offer both IOP and PHP services at the
Leased facility and accept Medicare and Medicaid payor-qualified
patients and clients.
By keeping the majority of its treatment facilities and housing on
campuses that are conveniently located within walking distance to
traditional community services, the Company hopes to create
so-called ‘sober cities’ throughout the United States that will
nurture its clients’ development at all stages from detox to
long-term self-sufficiency.
During the current reporting period, UPD completed the acquisition
of Vital Behavioral Health, Inc. (“Vital”), 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. As of March 31, 2021, Vital had four wholly owned
subsidiaries, VBH Kentucky Inc. (“VBH Kentucky”), VBH Frankfort LLC
(“VBH Frankfort”), VSL Frankfort LLC (“VSL Frankfort”), and VBH
Garden Grove Inc. (“VBH Garden Grove”).
VBH Kentucky has succeeded to all of the preexisting and intended
operations of VBH Frankfort, which has substantially concluded all
of its material operations as of May 3, 2021. VBH Kentucky intends
to operate an outpatient substance abuse treatment facility in
Frankfort, Kentucky and an inpatient substance abuse detoxification
facility in Lexington, Kentucky. VBH Kentucky is in its early
development stage and do not possess any operational licenses or
permits at this time.
The first of our leased facilities, located in Lexington, Kentucky,
was entered into on January 14, 2021. Since the Vital acquisition,
VBH Kentucky has assumed that lease and taken over development of
the project. VBH Kentucky has engaged legal and other professional
services with respect to the Lexington project and spoken to
governmental authorities and other stakeholders concerning
viability of the project. However, there is a contingent of ‘not in
my back yard’ advocates that wish to maintain the use of the rural
overlay district in which the facility and its current transitory
services zone are located. We cannot make any assurances about its
ability to obtain a conditional or special use permit, zoning
variance, or zoning change that would be necessary to complete its
current project in Lexington, Kentucky. However, at the present
time, we do not anticipate any significant issues in obtaining the
necessary non-land use regulatory permits or licenses for the
project. VBH Kentucky may cancel the lease prior to June 30 under
the terms and seek other facilities in the area.
VBH Kentucky has applied for its license to operate an outpatient
substance use treatment facility in Frankfort, Kentucky on April 9,
2021 and anticipates that facility will be operational within our
fiscal fourth quarter ended June 30, 2021.
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
likely will be limited to planning and preparation.
VBH Garden Grove 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 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 May 3, 2021.
Going Concern
Our financial statements are prepared using generally accepted
accounting principles 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. We
have not yet established an ongoing source of revenues sufficient
to cover our operating costs and to allow us to continue as a going
concern. Our ability to continue as a going concern is dependent on
our company obtaining adequate capital to fund operating losses
until we become profitable. If we are unable to obtain adequate
capital, we could be forced to significantly curtail or cease
operations.
In its report on our financial statements for the year ended June
30, 2020, our independent registered public accounting firm
included an explanatory paragraph regarding substantial doubt about
our ability to continue as a going concern. Our financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
We will need to raise additional funds to finance continuing
operations. However, there are no assurances that we will be
successful in raising additional funds. Without sufficient
additional financing, it would be unlikely for us to continue as a
going concern. Our ability to continue as a going concern is
dependent upon our ability to successfully accomplish the plans
described in this report and eventually secure other sources of
financing and attain profitable operations.
RESULTS OF OPERATIONS
The Company did not generate material revenues from its RSB
operations through its disposal in December 2020. The Company has
focused on entering into the rehabilitation services industry in
the second half of fiscal 2021. The Company has focused its efforts
on obtaining the necessary licenses to operate various
rehabilitation facilities and, if successful, expects to commence
operations in fiscal 2022.
Professional Fees
During the three and nine months ended March 31, 2021, the Company
recognized professional fees of approximately $76,000 and $143,000,
respectively, representing an increase of approximately 160% and
25%, respectively, from the prior comparable periods. This increase
is the result of the Company’s change in business industry,
diligence procedures associated with seeking acquisition targets,
and legal and accounting fees associated with the disposal of its
former food and beverage operations.
The Company expects its professional fees to increase throughout
the remainder of fiscal 2021 and into fiscal 2022 as it develops
its rehabilitation facilities and service which requires
significant additional regulatory compliance.
General and Administrative Expenses
The Company incurred general and administrative expenses totaling
approximately $116,000 and $121,000 for the three and nine months
ended March 31, 2021, respectively. The significant increase in the
current fiscal year from the immaterial amounts incurred in the
prior comparable periods is primarily related travel and related
costs for the performance of diligence procedures, and facility
rental expenses. We expect these items to increase over the next
several periods if we are successful in executing our business
plans which will primarily consist of facilities costs, management
and other salaries, travel, and other corporate overhead.
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.
Interest Expense
Throughout fiscal 2020 and the first half of fiscal 2021, we
settled several of our previously outstanding promissory notes and
convertible promissory notes payable. Additionally, certain
interest-bearing notes payable totaling approximately $20,000 were
assumed by the purchaser in our RSB disposal. As a result, interest
expense decreased approximately 53% to approximately $19,000 for
the nine months ended March 31, 2021, respectively. During the
three months ended March 31, 2021 we issued 12% convertible notes
for cash proceeds totaling $115,000. As a result of the additional
convertible notes outstanding, interest expense for the three
months ended March 31, 2021 increased approximately 61% to
approximately $9,000 from the prior comparable period. Our future
interest expense obligations are dependent on the types of
financing arrangements we are successful in arranging over the next
twelve months, if any.
Liquidity and Capital Resources
As of March 31, 2021, the Company had a working capital deficit of
approximately $424,000. We estimate that, over the next twelve
months, 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 and professional fees, which
include accounting, legal and other professional fees, as well as
filing fees. Additionally, we will need to raise additional capital
to pursue our rehabilitation facility and services plans. As of the
date of this report, we have not entered into any firm funding
commitments and 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. In the absence
of obtaining additional financing, we may be unable to fund our
operations.
During the nine months ended March 31, 2021, the Company’s
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. The Company’s operational cash uses primarily
consisted of the incurrence of on-going professional and general
and administrative expenses for the nine months ended March 31,
2021. The Company expects these operational cash uses to continue
until sufficient capital is raised, if any.
The Company’s investing activities consisted of acquiring the
assets of Vital Behavioral Health, Inc. totaling approximately
$63,000, exclusive of goodwill. The Company also acquired
approximately $5,000 of office furniture and equipment and
completed approximately $23,000 of tenant improvements for its
Frankfort facility.
During the nine months ended March 31, 2021, the Company received a
total of $245,000 from the issuance of notes payable and
convertible notes payable. In addition, $120,000 of previously
outstanding notes payable were forgiven in the acquisition of Vital
Behavioral Health.
Depending on the size, type, and location of a detoxification or
rehabilitation facility at issue, there may be significant capital
expenditures necessary to engage in the intended lines of business,
including the costs to carry the property while obtaining zoning
variances, conditional use permits, regulatory licenses, and other
legal entitlements.
VBH Kentucky anticipates up to $75,000 of additional capital
expenditures to get our outpatient facility in Frankfort, Kentucky
fully operational, which primarily will consist of ordinary costs
associated with outfitting a facility of this type over the next
30-45 days. VBH Kentucky also anticipates up to $1,500,000 of
additional capital expenditures to get our inpatient facility in
Lexington, Kentucky fully operational, which expenditures will
include the costs of rent and utilities, legal, engineering, and
regulatory fees, and ordinary costs associated with outfitting a
facility of this type over the next six to twelve months.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as set forth in
Item 303(a)(4) of the Regulation S-K.
Critical Accounting Policies
Our Unaudited Financial
Statements and Notes to Unaudited Financial Statements have
been prepared in accordance with U.S. GAAP. The preparation of
these financial statements requires management to make estimates,
judgments, and assumptions that affect reported amounts of assets,
liabilities, revenues, and expenses. We continually evaluate the
accounting policies and estimates used to prepare the accompanying
financial statements. The estimates are based on historical
experience and assumptions believed to be reasonable under current
facts and circumstances. Actual amounts and results could differ
from these estimates made by management. Certain accounting
policies that require significant management estimates and are
deemed critical to our results of operations or financial position
are discussed in our Annual Report on Form 10-K for the year
ended June 30, 2020. During the period ended March 31, 2021 we
identified the following additional critical accounting
policies:
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, 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.
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.
The Company needs additional funding to execute its business plans.
In the event the Company is unable raise additional funds the
Company may need to perform impairment tests that could result in
recognizing an impairment charge to earnings in future periods.
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 March 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 three months ended March 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.
PART II.
OTHER INFORMATION
Item
1. Legal Proceedings
As of the date of this report, the Company is not currently
involved in any legal proceedings.
Item 1A. Risk Factors
We are a smaller reporting company as defined by Rule 12b-2 of the
Securities Exchange Act of 1934 and are not required to provide the
information under this item. However, the risks associated with our
Company are set forth in the "Risk Factors" section of our Form
10-K filed with the SEC on August 14, 2020. In addition, the
following industry-specific risks may be associated with our entry
into the substance use disorder treatment business.
Risks Related to Our Business
Our revenue, profitability and cash flows could be materially
adversely affected if we are unable to operate certain key
treatment facilities, our corporate office or our laboratory
facilities.
We intend to derive a significant portion of our revenue from our
flagship treatment facilities located in Kentucky. It is likely
that a small number of facilities will continue to contribute a
significant portion of our total revenue in any given year for the
foreseeable future. Additionally, we have a centralized corporate
office that houses our accounting, billing and collections,
information technology, and admissions center departments,
centralized and marketing offices. We also are building out a high
complexity laboratory that will conduct quantitative drug testing
and other laboratory services. If any event occurs that results in
a complete or partial shutdown of any of these facilities, our
centralized corporate office, our centralized marketing offices or
laboratory, including, without limitation, any material changes in
legislative, regulatory, economic, environmental, or competitive
conditions in these states or natural disasters such as hurricanes,
earthquakes, tornadoes, or floods or prolonged airline disruptions
due to a natural disaster or for any reason, such event could lead
to decreased revenue and/or higher operating costs, which could
have a material adverse effect on our revenue, profitability, and
cash flows.
Any disruption in our national sales and marketing program,
including our digital marketing resources, could have a material
adverse effect on our business, financial condition, and results of
operations.
If any disruption occurs in our national sales and marketing
program for any reason, or if we are unable to effectively attract
and enroll new patients to our network of facilities, our ability
to maintain census could be adversely affected, which could have a
material adverse effect on our business, financial condition and
results of operations.
Internet search engines play an increasingly important role in
addiction treatment marketing. Google and other search engines use
complex algorithms to rank websites. The algorithms take into
account many factors, including the domain name itself, website
content and user-friendly factors such as the speed at which the
website pages may be clicked through and viewed. We cannot predict
or control changes in algorithms and website rankings, which may
result in lower ranking search results for our websites.
Additionally, Google and other online platforms have instituted
review processes required to advertise on their websites. Some of
these processes are time-consuming, complex and continuously
evolving. We cannot predict how these private processes, rules and
restrictions will evolve or be applied to individual advertising
applicants. Unexpected changes in these areas may result in a
decrease in calls to our admissions center, a decrease in
interactions with potential patients and a lowering of our census,
which could have and material adverse effects on our business,
financial condition and results of operations.
In addition, our ability to grow or even to maintain our existing
level of business depends significantly on our ability to establish
and maintain close working and referral relationships with
hospitals, other treatment facilities and clinicians, employers,
alumni, employee assistance programs and other referral sources. We
have no binding commitments with any of these referral sources. We
may not be able to maintain our existing referral relationships or
develop and maintain new relationships in existing or new markets.
Negative changes to our existing referral relationships may cause
the number of people to whom we provide care to decrease, which
could have material adverse effects on our business, financial
condition and results of operations.
If reimbursement rates paid by third-party payors are
reduced, if we are unable to maintain favorable contract terms with
payors or comply with our payor contract obligations, or if
third-party payors otherwise restrain our ability to obtain or
provide services to patients, our business, financial condition and
results of operation could be adversely affected. This risk is
heightened because we are generally an “out-of-network”
provider.
Managed care organizations and other third-party payors pay for the
services that we provide to many of our patients. We anticipate
that approximately 90% or more of our revenue will be reimbursable
by third-party payors, including amounts paid by such payors to
patients, with the remaining portion payable directly by our
patients. If any of these third-party payors reduce their
reimbursement rates or elect not to cover some or all of our
services, our business, financial condition, and results of
operations may be materially adversely affected.
In addition to limits on the amounts payors will pay for the
services we provide to their members or participants, controls
imposed by third-party payors designed to reduce admissions and the
length of stay for patients, including pre-admission authorizations
and utilization review, have affected and are expected to affect
our facilities. Utilization review entails the review of the
admission and course of treatment of a patient by third-party
payors. Inpatient utilization, average lengths of stay, and
occupancy rates are likely to be negatively affected by
payor-required preadmission authorization and utilization review
and by payor pressure to maximize outpatient and alternative
healthcare delivery services for less acutely ill patients.
We believe that, generally, health insurance companies have become
more stringent and aggressive with respect to addiction treatment
providers, taking measures that are putting pressure on
reimbursement rates, length of stay, and timing of reimbursement
throughout the industry. We expect that payor efforts to impose
more stringent cost controls will continue. Although we are unable
to predict the effect these controls and changes could have on our
operations, significant limits on the scope of services reimbursed
and on reimbursement rates and fees could have a material adverse
effect on our business, financial condition, and results of
operations. If the rates paid or the scope of substance use
treatment services covered by third-party commercial payors are
reduced, our business, financial condition, and results of
operations could be materially adversely affected.
Third-party payors often use plan structures, such as narrow
networks or tiered networks, to encourage or require patients to
use in-network providers. In-network providers typically provide
services through third-party payors for a negotiated lower rate or
other less favorable terms. Third-party payors generally attempt to
limit use of out-of-network providers by requiring patients to pay
higher copayment and/or deductible amounts for out-of-network care.
Additionally, third-party payors have become increasingly
aggressive in attempting to minimize the use of out-of-network
providers by disregarding the assignment of payment from patients
to out-of-network providers (i.e., sending payments directly to
patients instead of to out-of-network providers), capping
out-of-network benefits payable to patients, waiving out-of-pocket
payment amounts, and initiating litigation against out-of-network
providers for interference with contractual relationships,
insurance fraud, and violation of state licensing and consumer
protection laws. The majority of third-party payors consider
certain of our facilities to be “out-of-network” providers. If
third-party payors continue to impose and to increase restrictions
on out-of-network providers, our revenue could be threatened,
forcing our facilities to participate with third-party payors and
accept lower reimbursement rates compared to our historic
reimbursement rates.
Third-party payors also are entering into sole source contracts
with some healthcare providers, which could effectively limit our
pool of potential patients. Moreover, third-party payors are
beginning to carve out specific services, including substance abuse
treatment and behavioral health services, and establish small,
specialized networks of providers for such services at fixed
reimbursement rates. Continued growth in the use of carve-out
arrangements could materially adversely affect our business to the
extent we are not selected to participate in such smaller
specialized networks or if the reimbursement rate is not adequate
to cover the cost of providing the service.
If reimbursement rates paid by federal or state healthcare
programs are reduced or if government payors otherwise restrain our
ability to obtain or provide services to patients, our business,
financial condition, and results of operation could be adversely
affected.
Managed care organizations and other third-party payors, both
government and commercial, pay for the services that we provide to
many of our patients. We intend for a significant portion of our
revenues to come from government healthcare programs, principally
Medicare and Medicaid. Payments from federal and state government
programs are subject to statutory and regulatory changes,
administrative rulings, interpretations and determinations,
requirements for utilization review, and federal and state funding
restrictions, all of which could materially increase or decrease
program payments, as well as affect the cost of providing service
to patients and the timing of payments to facilities.
We are unable to predict the effect of recent and future policy
changes on our operations. In addition, the uncertainty and fiscal
pressures placed upon federal and state governments as a result of,
among other things, deterioration in general economic conditions
and the funding requirements from the federal healthcare reform
legislation, may affect the availability of taxpayer funds for
Medicare and Medicaid programs. Changes in government healthcare
programs may reduce the reimbursement we receive and could
adversely affect our business and results of operations.
As federal healthcare expenditures continue to increase, and state
governments continue to face budgetary shortfalls, federal and
state governments have made, and continue to make, significant
changes in the Medicare and Medicaid programs. These changes
include reductions in reimbursement levels and to new or modified
demonstration projects authorized pursuant to Medicaid waivers.
Some of these changes have decreased, or could decrease, the amount
of money we receive for our services relating to these programs. In
some cases, private third-party payers rely on all or portions of
Medicare payment systems to determine payment rates. Changes to
government health care programs that reduce payments under these
programs may negatively impact payments from private third-party
payers.
In addition to limits on the amount payors will pay for the
services we provide to their members, government and commercial
payors attempt to control costs by imposing controls designed to
reduce admissions and the length of stay for patients, including
preadmission authorizations and utilization review. The ability of
governmental payors to control healthcare costs using these
measures may be enhanced by the increasing consolidation of
insurance and managed care companies and vertical integration of
health insurers with healthcare providers. Although we are unable
to predict the effect these controls and changes could have on our
operations, significant limits on the scope of services reimbursed
and on reimbursement rates and fees could have a material adverse
effect on our business, financial condition and results of
operations. If the rates paid or the scope of substance use
treatment services covered by government payors are reduced, our
business, financial condition and results of operations could be
materially adversely affected.
If we overestimate the reimbursement amounts that payors will
pay us for out-of-network services performed, it would increase our
revenue adjustments, which could have a material adverse effect on
our revenue, profitability, and cash flows and lead to significant
shifts in our results of operations from quarter to quarter that
may make it difficult to project
long-term performance.
For out-of-network services, we recognize revenue from payors at
the time services are provided based on our estimate of the amount
that payors will pay us for the services performed. We estimate the
net realizable value of revenue by adjusting gross patient charges
using our expected realization and applying this discount to gross
patient charges. A significant or sustained decrease in our
collection rates could have a material adverse effect on our
operating results. There is no assurance that we will be able to
maintain or improve historical collection rates in future reporting
periods.
Estimates of net realizable value are subject to significant
judgment and approximation by management. It is possible that
actual results could differ from the historical estimates
management has used to help determine the net realizable value of
revenue. If our actual collections either exceed or are less than
the net realizable value estimates, we will record a revenue
adjustment, either positive or negative, for the difference between
our estimate of the receivable and the amount actually collected in
the reporting period in which the collection occurred. A
significant negative revenue adjustment could have a material
adverse effect on our revenue, profitability and cash flows in the
reporting period in which such adjustment is recorded. In addition,
if we record a significant revenue adjustment, either positive or
negative, in any given reporting period, it may lead to significant
changes in our results from operations from quarter to quarter,
which may limit our ability to make accurate long-term predictions
about our future performance.
Certain third-party payors are likely to account for a
significant portion of our revenue, and the reduction of
reimbursement rates or coverage of services by any such payor could
have a material adverse effect on our revenue, profitability and
cash flows.
We intend that certain payors such as Medicaid and Medicare will
account for a significant portion of our revenue on an annual
basis. If any of these or other third-party payors reduce their
reimbursement rates for the services we provide or otherwise
implement measures, such as specialized networks, that reduce the
payments we receive, our revenue, profitability, and cash flows
could be materially adversely affected.
A deterioration in the collectability of the accounts
receivable could have a material adverse effect on our business,
financial condition, and results of operations.
The collection of receivables from third-party payors and patients
will be critical to our operating performance. Our primary
collection risks are: (i) the risk of overestimating our net
revenue at the time of billing, which may result in us receiving
less than the recorded receivable; (ii) the risk of non-payment as
a result of commercial insurance companies denying claims; (iii) in
certain states, the risk that patients will fail to remit insurance
payments to us when the commercial insurance company pays
out-of-network claims directly to the patient; and (iv) resource
and capacity constraints that may prevent us from handling the
volume of billing and collection issues in a timely manner.
Additionally, our ability to hire and retain experienced personnel
may affect our ability to bill and collect accounts in a timely
manner.
We intend to routinely review accounts receivable balances in
conjunction with these factors and other economic conditions that
might ultimately affect the collectability of the patient accounts
and to adjust our allowances as warranted. Significant changes in
business operations, payor mix or economic conditions, including
changes resulting from legislation or other health reform efforts
(including to repeal or significantly change the Affordable Care
Act), could affect our collection of accounts receivable, cash
flows, and results of operations. In addition, future patient
concentration in states that permit commercial insurance companies
to pay out-of-network claims directly to the patient instead of the
provider, such as California and Nevada, could adversely affect our
collection of receivables. Unexpected changes in reimbursement
rates by third-party payors could have a material adverse effect on
our business, financial condition, and results of operations.
Our business depends on our information systems. Failure to
effectively integrate, manage, and keep our information systems
secure could disrupt our operations and have a material adverse
effect on our business.
Our business depends on effective and secure information systems
that assist us in, among other things, admitting patients to our
facilities, monitoring census and utilization, processing and
collecting claims, reporting financial results, measuring outcomes
and quality of care, managing regulatory compliance controls, and
maintaining operational efficiencies. These systems may include
software developed in-house and systems provided by external
contractors and other service providers. To the extent that these
external contractors or other service providers become insolvent or
fail to support the software or systems, our operations could be
negatively affected. Our facilities also depend upon our
information systems for electronic medical records, accounting,
billing, collections, risk management, payroll, and other
information. If we experience a reduction in the performance,
reliability, or availability of our information systems, our
operations and ability to process transactions and produce timely
and accurate reports could be adversely affected.
Our information systems and applications require continual
maintenance, upgrading, and enhancement to meet our operational
needs. We regularly upgrade and expand our information systems’
capabilities. If we experience difficulties with the transition and
integration of information systems or are unable to implement,
maintain, or expand our systems properly or in a timely manner, we
could suffer from, among other things, operational disruptions,
regulatory problems, working capital disruptions, and increases in
administrative expenses.
In addition, we could be subject to cybersecurity risks such as a
cyber-attack that bypasses our information technology security
systems and other security incidents that result in security
breaches, including the theft, loss, destruction, or
misappropriation of individually identifiable health information
subject to HIPAA and other privacy and security laws, proprietary
business information, or other confidential or personal data. Such
an incident could disrupt our information technology systems,
impede clinical operations, cause us to incur significant
investigation and remediation expenses, and subject us to
litigation, government inquiries, penalties, and reputational
damages. Information security and the continued development,
maintenance, and enhancement of our safeguards to protect our
systems, data, software, and networks are a priority for us. As
security threats continue to evolve, we may be required to expend
significant additional resources to modify and enhance our
safeguards and investigate and remediate any information security
vulnerabilities. Cyber-attacks may also impede our ability to
exercise sufficient disclosure controls. If we are subject to
cyberattacks or security breaches, our business, financial
condition, and results of operations could be adversely
impacted.
Further, our information systems are vulnerable to damage or
interruption from fire, flood, natural disaster, power loss,
telecommunications failure, break-ins, and similar events. A
failure to implement our disaster recovery plans or ultimately
restore our information systems after the occurrence of any of
these events could have a material adverse effect on our business,
financial condition, and results of operations. Because of the
confidential health information that we store and transmit, loss,
theft or destruction of electronically-stored information for any
reason could expose us to a risk of regulatory action, litigation,
liability to patients and other losses.
Our acquisition strategy exposes us to a variety of
operational, integration, and financial risks, which may have a
material adverse effect on our business, financial condition, and
results of operations.
An element of our business strategy is to grow by acquiring other
companies and assets in the mental health and substance abuse
treatment industry. We
evaluate potential acquisition opportunities consistent with the
normal course of our business. Our ability to complete acquisitions
is subject to a number of risks and variables, including our
ability to negotiate mutually agreeable terms with the
counterparties, our ability to finance the purchase price and our
ability to obtain any licenses or other approvals required to
operate the assets to be acquired. We may not be successful in
identifying and consummating suitable acquisitions, which may
impede our growth and negatively affect our results of operations,
and may also require a significant amount of management resources.
In addition, rapid growth through acquisitions exposes us to a
variety of operational and financial risks. We summarize the most
significant of these risks below.
Integration risks. We must integrate our acquisitions with
our existing operations. This process involves various components
of our business and the businesses we have acquired, including the
following:
|
· |
physicians and employees who are
not familiar with our operations; |
|
· |
patients who may elect to switch to
another substance abuse treatment provider; |
|
· |
assignment or termination of
material contracts, including commercial payor agreements; |
|
· |
regulatory compliance programs and
state and federal licensing requirements; and |
|
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disparate operating, information
and record keeping systems and technology platforms. |
The integration of acquisitions with our operations could be
expensive, require significant attention from management, may
impose substantial demands on our operations or other projects, and
may impose challenges on the combined business including, without
limitation, consistencies in business standards, procedures,
policies, business cultures, internal controls, and compliance. In
addition, certain acquisitions require a capital outlay, and the
return we achieve on such invested capital may be less than the
return that we could achieve on other projects or investments.
Expected benefits may not materialize. When evaluating
potential acquisition targets, we identify potential synergies and
cost savings that we expect to realize upon the successful
completion of the acquisition and the integration of the related
operations. We may, however, be unable to achieve or may otherwise
never realize the expected benefits. Our ability to realize the
expected benefits from potential cost savings and revenue
improvement opportunities is subject to significant business,
economic, and competitive uncertainties, many of which are beyond
our control. Such uncertainties may include changes to regulations
impacting the substance abuse treatment and behavioral healthcare
industries, reductions in reimbursement rates from third-party
payors, operating difficulties, difficulties obtaining required
licenses and permits, patient preferences, changes in competition,
and general economic or industry conditions. If we do not achieve
our expected results, it may adversely impact our results of
operations.
Assumptions of unknown liabilities. Businesses that we
acquire may have unknown or contingent liabilities, including,
without limitation, liabilities for failure to comply with
healthcare laws and regulations. Although we typically attempt to
exclude significant liabilities from our acquisition transactions
and seek indemnification from the sellers of such facilities for at
least a portion of these matters, we may experience difficulty
enforcing those indemnification obligations, or we may incur
material liabilities in excess of any indemnification for the past
activities of acquired facilities. Such liabilities and related
legal or other costs and/or resulting damage to a facility’s
reputation could negatively impact our business.
Completing acquisitions. Suitable acquisitions may not
be accomplished due to unfavorable terms. Further, the cost of an
acquisition could result in a dilutive effect on our results of
operations, depending on various factors, including the amount paid
for an acquired facility, the acquired facility’s results of
operations, the fair value of assets acquired and liabilities
assumed, effects of subsequent legislation, and limits on
reimbursement rate increases. In addition, we may have to pay cash,
incur additional debt, or issue equity securities to pay for any
such acquisition, which could adversely affect our financial
results, result in dilution to our existing stockholders, result in
increased fixed obligations, or impede our ability to manage our
operations.
Managing growth. Some of the facilities we may acquire
in the future either had or may have significantly lower operating
margins than the facilities we operated prior to the time of our
acquisition thereof or had or may have operating losses prior to
such acquisition. If we fail to improve the operating margins of
the facilities we acquire, operate such facilities profitably, or
effectively integrate the operations of acquired facilities, our
results of operations could be negatively impacted.
Liquidity risk could impair our ability to fund operations
and meet our obligations as they become due, and our funding
sources may be insufficient to fund our future operations and
growth.
Liquidity is essential to our business. Liquidity risk is the
potential that we will be unable to meet our obligations as they
come due because of an inability to obtain adequate funding. An
inability to obtain such funding, at competitive rates or at all,
could have a substantial negative effect on our liquidity. Our
access to funding sources in amounts adequate to finance our
activities or on terms that are acceptable to us could be impaired
by factors that affect us specifically or the healthcare industry
or economy in general.
Any substantial, unexpected and/or prolonged change in the level or
cost of liquidity could have a material adverse effect on our
ability to fund our future operations and growth, which could have
a material adverse effect on our assets, business, cash flow,
condition (financial or otherwise), liquidity, prospects and
results of operations.
The uncertainties associated with the factors described above raise
substantial doubt about our ability to continue as a going concern.
In order for us to continue operations beyond the next twelve
months and to be able to discharge our liabilities and commitments
in the normal course of business, we must do some or all of the
following: (i) increase the bed counts and other capacities at our
facilities; (ii) increase gross revenues while improving operating
margins through cost savings initiatives; and (iii) obtain
additional financing. There can be no assurance that we will be
able to achieve any or all of the foregoing objectives.
We will need additional financing to execute our long-term
business plan and fund operations, at which time additional
financing may not be available on reasonable terms or at
all.
To fund our acquisition development and operational strategies, we
may consider raising additional funds through various financing
sources, including the sale of our common or preferred stock and
the procurement of commercial debt financing. However, there can be
no assurance that such funds will be available on commercially
reasonable terms, if at all. If such financing is not available on
satisfactory terms, we may be unable to expand or continue our
business as desired and operating results may be adversely
affected. Any debt financing will increase expenses and must be
repaid regardless of operating results and may involve restrictions
limiting our operating flexibility. If we issue equity securities
to raise additional funds, the percentage ownership of our existing
stockholders will be reduced, and our stockholders may experience
additional dilution in net book value per share.
Our ability to obtain needed financing may be impaired by such
factors as the capital markets, both generally and specifically in
our industry, which could impact the availability or cost of future
financings. Any deterioration of credit and capital markets may
adversely affect our access to sources of funding, and we cannot be
certain that we will have access to adequate capital to fund our
acquisition and development strategies when needed. In addition,
substantial sales of our common stock by existing stockholders
could adversely affect our stock price and limit our ability to
raise capital. If the amount of capital we are able to raise from
financing activities, together with our revenue from operations, is
not sufficient to satisfy our capital needs, we may be required to
decrease the pace of, or eliminate, our acquisition strategy and
potentially reduce or even cease operations.
Our business may face significant risks with respect to
future de novo expansion, including the time and costs of
identifying new geographic markets, the ability to obtain necessary
licensure and other zoning or regulatory approvals and significant
start-up costs including advertising, marketing, and the costs of
providing equipment, furnishings, supplies, and other capital
resources.
As part of our growth strategy, we intend to develop new substance
abuse treatment facilities in existing and new markets, either by
building a new facility or by acquiring an existing facility with
an alternative use and repurposing it as a substance abuse
treatment facility. Such de novo expansion involves
significant risks, including, but not limited to, the
following:
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the time and costs associated with
identifying locations in suitable geographic markets, which may
divert management attention from existing operations; |
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the possibility of changes to
comprehensive zoning plans or zoning regulations that imposes
additional restrictions on use or requirements, which could impact
our expansion into otherwise suitable geographic markets; |
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the need for significant
advertising and marketing expenditures to attract patients; |
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our ability to provide each de
novo facility with the appropriate equipment, furnishings,
materials, supplies, and other capital resources; |
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our ability to obtain licensure and
accreditation, establish relationships with healthcare providers in
the community, and delays or difficulty in installing our operating
and information systems; |
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the costs of evaluating new
markets, hiring experienced local physicians, management, and
staff, and opening new facilities, and the time lags between these
activities and the generation of sufficient revenue to support the
costs of the expansion; and |
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our ability to finance de
novo expansion and possible dilution to our existing
stockholders if our common stock is used as consideration. |
As a result of these and other risks, there can be no assurance
that we will be able to develop de novo treatment facilities
or that a de novo treatment facility will become profitable.
De novo expansion could expose us to liabilities or
loss.
Our ability to maintain census is dependent on a number of
factors outside of our control, and if we are unable to
maintain census (i.e., our daily patient occupancy), our business,
results of operations and cash flows could be materially adversely
affected.
Our revenue is directly impacted by our ability to maintain census
(i.e., the daily patient occupancy of our facilities by bed count).
Our ability to maintain census is dependent on a variety of
factors, many of which are outside of our control, including our
referral relationships, average length of stay of our patients, the
extent to which third-party payors require preadmission
authorization or utilization review controls, competition in the
industry, and the decisions of our patients to seek and commit to
treatment.
Further, our census depends upon the effectiveness of our
multi-faceted marketing program. See above, Item 2.01. Risk
Factors —“We rely on a multi-faceted sales and marketing program
to attract and enroll patients in our network of facilities. Our
sales and marketing program includes the use of digital media,
including our recovery resource websites that provide information
about addiction treatment and connect website visitors with our
helpline. Any disruption in our national sales and marketing
program, including our digital marketing resources, could have a
material adverse effect on our business, financial condition, and
results of operations.” A significant decrease in census could
materially adversely affect our revenue, profitability, and cash
flows due to fewer or lower reimbursements received and the
additional resources required to collect accounts receivable and
maintain our existing level of business.
Given the patient-driven nature of the substance abuse treatment
sector, our business is dependent on patients seeking and
committing to treatment. Although increased awareness and
de-stigmatization of substance abuse treatment in recent years has
resulted in more people seeking treatment, the decision of each
patient to seek treatment is ultimately discretionary. In addition,
even after the initial decision to seek treatment, our patients may
decide at any time to discontinue treatment and leave our
facilities against the advice of our physicians and other treatment
professionals. For this reason, among others, average length of
stay can vary among periods without correlating to the overall
operating performance of our business. If patients or potential
patients decide not to seek treatment or discontinue treatment
early, census could decrease and, as a result, our business,
financial condition, and results of operations could be adversely
affected.
We operate in a highly competitive industry where competition
may lead to declines in patient volumes and an increase in labor
costs, which could have a material adverse effect on our business,
financial condition, and results of operations.
The substance abuse treatment industry is highly competitive, and
competition among substance abuse treatment providers (including
behavioral healthcare facilities) for patients has intensified in
recent years. In 2018, there were approximately 4,200 substance
abuse treatment businesses in the United States. There are
behavioral healthcare facilities that provide substance abuse and
other mental health treatment services comparable to at least some
of the services offered by our facilities in each of the
geographical areas in which we intend to operate. Some of our
competitors are owned by tax-supported governmental agencies or by
nonprofit corporations and may have certain financial advantages
not available to us, including endowments, charitable
contributions, tax-exempt financing, and exemptions from sales,
property, and income taxes. In some markets, certain of our
competitors may have greater financial resources, be better
equipped, and offer a broader range of services than we do. Some of
our competitors are local, independent operators or physician
groups with strong established reputations within the surrounding
communities, which may adversely affect our ability to attract new
patients in markets where we compete with such providers. If our
competitors are better able to attract patients, expand services,
or obtain favorable participation agreements with third-party
payors, we may experience a decline in patient volume, which could
have a material adverse effect on our business, financial condition
and results of operations.
Our operations depend on the efforts, abilities, and experience of
our management team, physicians, and medical support personnel,
including our nurses, mental health technicians, therapists,
addiction counselors, pharmacists, and clinical technicians. We
compete with other healthcare providers in recruiting and retaining
qualified management, mental health technicians, therapists,
nurses, counselors, and other support personnel responsible for the
daily operations of our facilities. The nationwide shortage of
nurses and other medical support personnel has been a significant
operating issue facing our industry in recent years. This shortage
may require us to enhance our wages and benefits to recruit and
retain nurses and other medical support personnel or require us to
hire expensive temporary personnel. If we are unable to attract and
retain qualified personnel, we may be unable to provide our
services, the quality of our services may decline, and we could
experience a decline in patient volume, all of which could have a
material adverse effect on our business, financial condition, and
results of operations.
Increased labor union activity is another factor that could
adversely affect our labor costs. We do not currently employ a
unionized labor force. In the event of the independent organization
or unionization of our employees, we may become subject to the risk
of labor disputes, strikes, work stoppages, slowdowns, and other
labor-relations matters. Although we are not aware of any union
organizing activity at any of our other facilities, we are unable
to predict whether any such activity will take place in the
future.
We depend heavily on key executives and other key management
personnel, and the departure of one or more of our key executives
or other key management personnel could have a material adverse
effect on our business, financial condition, and results of
operations.
The expertise and efforts of our key executives, including our
Chief Executive Officer, Mark Conte, and other management personnel
are critical to the success of our business. We currently do not
have employment agreements or non-compete covenants with any of our
key executives. The loss of the services of one or more of our key
executives could significantly undermine our management expertise
and our ability to provide efficient, quality healthcare services
at our facilities. Furthermore, if one or more of our key
executives were to terminate employment with us and engage in a
competing business, we would be subject to increased competition,
which could have a material adverse effect on our business,
financial condition, and results of operations.
Failure to adequately protect our trademarks and any other
proprietary rights could have a material adverse effect on
our business, financial condition, and results of
operations.
We intend to develop a trademark portfolio that we consider to be
of significant importance to our business, and we may acquire
additional trademarks or other proprietary rights in acquisitions
that we pursue as part of our growth strategy. If the actions we
take to establish and protect our trademarks and other proprietary
rights are not adequate to prevent imitation of our services by
others or to prevent others from seeking to block sales of our
services as an alleged violation of their trademarks and
proprietary rights, it may be necessary for us to initiate or enter
into litigation in the future to enforce our trademark rights or to
defend ourselves against claimed infringement of the rights of
others. The cost of any such legal proceedings could be expensive,
and such legal proceedings could result in an adverse determination
that could have a material adverse effect on our business,
financial condition, and results of operations.
Risks Related to Regulatory Matters
If we fail to comply with the extensive laws and government
regulations impacting our industry, we could suffer penalties, be
the subject of federal and state investigations, or be required to
make significant changes to our operations, which may reduce our
revenue, increase our costs, and have a material adverse effect on
our business, financial condition, and results of
operations.
Healthcare service providers are required to comply with extensive
and complex laws and regulations at the federal, state, and local
government levels relating to, among other things:
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licensure, certification and
accreditation of substance use treatment services; |
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licensure, Clinical Laboratory Improvement Amendments of 1988
(CLIA) certification and accreditation of laboratory services;
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handling, administration and
distribution of controlled substances; |
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necessity and adequacy of care and
quality of services; |
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licensure, certification and
qualifications of professional and support personnel; |
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referrals of patients and
permissible relationships with physicians and other referral
sources; |
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claim submission and collections,
including penalties for the submission of, or causing the
submission of, false, fraudulent or misleading claims and the
failure to repay overpayments in a timely manner; |
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extensive conditions of
participation for Medicare and Medicaid programs |
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consumer protection issues and
billing and collection of patient-owed accounts issues; |
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communications with patients and
consumers, including laws intended to prevent misleading marketing
practices; |
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privacy and security of
health-related information, patient personal information and
medical records; |
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physical plant planning,
construction of new facilities and expansion of existing
facilities; |
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activities regarding
competitors; |
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U.S. Federal Drug Administration
(FDA) laws and regulations related to drugs and medical
devices; |
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operational, personnel and quality
requirements intended to ensure that clinical testing services are
accurate, reliable and timely; |
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health and safety of
employees; |
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handling, transportation and
disposal of medical specimens and infectious and hazardous
waste; |
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corporate practice of medicine,
fee-splitting, self-referral and kickback prohibitions, including
recent state and federal laws intended to eliminate bribes and
kickbacks; and |
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the SUPPORT for Patients and
Communities Act, which became law on October 24, 2018. |
A CLIA certificate demonstrates that a testing laboratory meets the
federal regulations for clinical diagnostic testing, ensuring
quality and safety in the laboratory and laboratory results. The
Clinical Laboratory Improvement Amendments of 1988 are administered
by the Centers for Medicare & Medicaid Services (CMS).
The United States has recently enacted the Eliminating Kickbacks in
Recovery Act of 2018 (EKRA) to create a new federal crime for
knowingly and willfully: (1) soliciting or receiving any
remuneration in return for referring a patient to a recovery home,
clinical treatment facility, or laboratory; or (2) paying or
offering any remuneration to induce such a referral or in exchange
for an individual using the services of a recovery home, clinical
treatment facility, or laboratory. Certain states, including
Florida, have enacted similar laws, or will likely enact similar
laws in the future.
As a provider of addiction treatment services, we are subject
to governmental investigations and potential claims and lawsuits by
patients, employees, and others, which may increase our costs,
cause reputational issues, and have a material adverse effect on
our business, financial condition, results of operations, and
reputation.
Given the addiction and mental health issues of patients and the
nature of the services provided, the substance abuse treatment
industry is heavily regulated by governmental agencies and involves
significant risk of liability. We and others in our industry are
exposed to the risk of governmental investigations, regulatory
actions, and whistleblower lawsuits or other claims against us and
our physicians and other professionals arising out of our day to
day business operations, including, without limitation, patient
treatment at our facilities and relationships with healthcare
providers that may refer patients to us. Addressing any
investigation, lawsuit, or other claim may distract management and
divert resources, even if we ultimately prevail. Regardless of the
outcome of any such investigation, lawsuit, or claim, the publicity
and potential risks associated with the investigation, lawsuit, or
claim could harm our reputation or the reputation of our management
and negatively impact the perception of the Company by patients,
investors, or others and could have a materially adverse impact on
our financial condition and results of operations. Fines,
restrictions, penalties, and damages imposed as a result of an
investigation or a successful lawsuit or claim that is not covered
by, or is in excess of, our insurance coverage may increase our
costs and reduce our profitability. Our insurance premiums may
increase year over year, and insurance coverage may not be
available at a reasonable cost in the future, especially given the
significant increase in insurance premiums generally experienced in
the healthcare industry.
We also are subject to an inherent risk of potential medical
malpractice lawsuits and other potential claims or legal actions in
the ordinary course of business. From time to time, we may be
subject to claims alleging that we did not properly treat or care
for a patient, that we failed to follow internal or external
procedures that resulted in death or harm to a patient, or that our
employees mistreated our patients, resulting in death or harm. Any
deficiencies in the quality of care provided by our employees could
expose us to governmental investigations and lawsuits from our
patients. Some of these actions may involve large claims as well as
significant defense costs. We cannot predict the outcome of these
lawsuits or the effect that findings in such lawsuits may have on
us. In an effort to resolve one or more of these matters, we may
decide to negotiate a settlement, and amounts we pay to settle any
of these matters may be material. All professional and general
liability insurance we purchase is subject to policy limitations.
We believe that, based on our past experience, our insurance
coverage is adequate considering the claims arising from the
operation of our facilities. While we continuously monitor our
coverage, our ultimate liability for professional and general
liability claims could change materially from our current
estimates. If such policy limitations should be partially or fully
exhausted in the future or if payments of claims exceed our
estimates or are not covered by our insurance, they could have a
material adverse effect on our financial condition and results of
operations.
We intend to care for a large number of patients with complex
medical conditions, special needs, or who require a substantial
level of care and supervision. There is an inherent risk that our
patients could be harmed while in treatment, whether through
negligence, by accident, or otherwise. Further, patients might
engage in behavior that results in harm to themselves, our
employees, or to one or more other individuals. Patient safety
incidents may result in regulatory enforcement actions, negative
press about us, or the addiction treatment industry generally, as
well as in lawsuits filed by plaintiff’s lawyers against us. These
developments could diminish public perception of the quality of our
services, which in turn could lead to a loss of patient placements
and referrals, resulting in a material adverse effect on our
business, results of operations, and financial condition.
Failure to comply with these laws and regulations could result in
the imposition of significant civil or criminal penalties, loss of
licenses or certifications, or require us to change our operations,
or in the ultimate exclusion of one or more facilities from
participation in Medicare, Medicaid, and other federal and state
healthcare programs, any of which may have a material adverse
effect on our business, financial condition, and results of
operations. Both federal and state government agencies, as well as
commercial payors, have heightened and coordinated civil and
criminal enforcement efforts as part of numerous ongoing
investigations of healthcare organizations.
We endeavor to comply with all applicable legal and regulatory
requirements; however, there is no guarantee that we will be able
to adhere to all of the complex government regulations that apply
to our business. We seek to structure all of our relationships with
referral sources and patients to comply with applicable
anti-kickback laws, physician self-referral laws, fee-splitting
laws, and state corporate practice of medicine prohibitions. We
monitor these laws and their implementing regulations and implement
changes as necessary. However, the laws and regulations in these
areas are complex and often subject to varying interpretations. For
example, if an enforcement agency were to challenge the
compensation paid under our contracts with professional physician
groups, we could be required to change our practices, face criminal
or civil penalties, pay substantial fines, or otherwise experience
a material adverse effect as a result.
We may be required to spend substantial amounts to comply
with legislative and regulatory initiatives relating to privacy and
security of patient health information.
There currently are numerous legislative and regulatory initiatives
at the federal and state levels addressing patient privacy and
security concerns. For example, the regulations contained in 42 CFR
Part 2 (the “Part 2 Regulations”) serve to protect patient records
created by federally assisted programs for the treatment of
substance use disorders (SUD) and are administered by the Substance
Abuse and Mental Health Services Administration (SAMHSA) branch of
the U.S. Department of Health and Human Services (HHS).
Specifically, the Part 2 Regulations restrict the disclosure, and
regulate the security, of our patient’s identifiable information
related to substance abuse. These requirements apply to any of our
facilities that receive federal assistance, which is interpreted
broadly to include facilities licensed, certified or registered by
a federal agency.
In addition, the federal privacy and security regulations issued
under the Health Insurance Portability and Accountability Act of
1996 (HIPAA) require our facilities to comply with extensive
requirements on the use and disclosure of protected health
information and to implement and maintain administrative, physical,
and technical safeguards to protect the security of such
information. Additional security requirements apply to electronic
protected health information. These regulations also provide
patients with substantive rights with respect to their health
information and impose substantial administrative obligations on
our facilities, including the requirement to enter into written
agreements with contractors, known as business associates, to whom
our programs disclose protected health information. We may be
subject to penalties as a result of a business associate violating
HIPAA, if the business associate is found to be our agent. Covered
entities must notify individuals, HHS and, in some cases, the media
of breaches involving unsecured protected health information. HHS
and state attorneys general are authorized to enforce these
regulations. Violations of the HIPAA privacy and security
regulations may result in significant civil and criminal penalties,
and data breaches and other HIPAA violations may give rise to class
action lawsuits by affected patients under state law.
Our programs remain subject to any privacy-related federal or state
laws that are more restrictive than the HIPAA privacy and security
regulations. These laws vary by state and may impose additional
requirements and penalties. For example, some states impose strict
restrictions on the use and disclosure of health information
pertaining to mental health or substance abuse. Further, most
states have enacted laws and regulations that require us to notify
affected individuals in the event of a data breach involving
individually identifiable information. In addition, the Federal
Trade Commission may use its consumer protection authority to
initiate enforcement actions in response to data breaches or other
privacy or security lapses.
As public attention is drawn to issues related to the privacy and
security of medical and other personal information, federal and
state authorities may increase enforcement efforts and seek to
impose harsher penalties, as well as revise and expand laws or
enact new laws concerning these topics. Compliance with current as
well as any newly established provisions or interpretations of
existing requirements will require us to expend significant
resources. Increased focus on privacy and security issues by
enforcement authorities may increase the overall risk that our
substance abuse treatment facilities may be found lacking under
federal and state privacy and security laws and regulations.
Our treatment facilities operate in an environment of
increasing state and federal enforcement activity and private
litigation targeted at healthcare providers.
Both federal and state government agencies have heightened and
coordinated their civil and criminal enforcement efforts as part of
numerous ongoing investigations of healthcare companies and various
segments of the healthcare industry. These investigations relate to
a wide variety of topics, including relationships with physicians,
billing practices and use of controlled substances. The Affordable
Care Act included an additional $350 million of federal funding
over ten years to fight healthcare fraud, waste, and abuse,
including $10 million for each of federal fiscal years 2018 through
2020. The HHS Office of Inspector General and the Department of
Justice have established national enforcement initiatives that
focus on specific billing practices or other suspected areas of
abuse. Some of our facilities participate in Medicare or Medicaid
and, therefore, could be subject to government investigation.
Even if a facility does not currently bill Medicare or Medicaid for
substance use treatment services, there is a risk that specific
investigative initiatives or new laws such as EKRA could result in
investigations or enforcement actions that include or affect our
treatment services, laboratory service providers, or marketing
operations. In addition, increased government enforcement
activities, even if not directed towards our treatment facilities
or laboratories, also increase the risk that our facilities,
physicians, and other clinicians furnishing services in our
facilities, or our executives and directors, could be named as
defendants in private litigation such as state or federal false
claims act cases or consumer protection cases, or could become the
subject of complaints at the various state and federal agencies
that have jurisdiction over our operations.
Any governmental investigations, private litigation, or other legal
proceedings involving any of our facilities, laboratories,
executives, or directors, even if we ultimately prevail, could
result in significant expense, adversely affect our reputation or
profitability and materially adversely affect our financial
condition and results of operation. In addition, we may be required
to make changes in our laboratory, substance use treatment services
or marketing or other operational practices as a result of an
adverse determination in any governmental enforcement action,
private litigation or other legal proceeding, which could
materially adversely affect our business and results of
operations.
Changes to federal, state, and local regulations, as well as
different or new interpretations of existing regulations, could
adversely affect our operations and profitability.
Because our treatment programs and operations are regulated at
federal, state, and local levels, we could be affected by
regulatory changes in different regional markets. Increases in the
costs of regulatory compliance and the risks of noncompliance may
increase our operating costs, and we may not be able to recover
these increased costs, which may adversely affect our results of
operations and profitability.
Many of the current laws and regulations are relatively new,
including the EKRA and recent state laws intended to prohibit
deceptive marketing practices in the addiction treatment industry.
Thus, we do not always have the benefit of significant regulatory
or judicial interpretation of these laws and regulations. Evolving
interpretations or enforcement of these laws and regulations could
subject our current or past practices to allegations of impropriety
or illegality or could require us to make changes in our treatment
facilities, equipment, personnel, services or capital expenditure
programs. A determination that we have violated these laws or a
public announcement that we are being investigated for possible
violations of these laws could adversely affect our business,
operating results, and overall reputation in the marketplace.
In addition, federal, state, and local regulations may be enacted
that impose additional requirements on our facilities. Adoption of
legislation or the creation of new regulations affecting our
facilities could increase our operating costs, restrain our growth
or limit us from taking advantage of opportunities presented and
could have a material adverse effect on our business, financial
condition and results of operations. Adverse changes in existing
comprehensive zoning plans or zoning regulations that impose
additional restrictions on the use of, or requirements applicable
to, our facilities may affect our ability to operate our existing
facilities or acquire new facilities, which may adversely affect
our results of operations and profitability.
We are subject to uncertainties regarding the direction and
impact of healthcare reform efforts, particularly efforts to repeal
or significantly modify the Affordable Care Act.
The healthcare industry is subject to changing political,
regulatory, scientific and technological changes, which have
resulted and may continue to result in initiatives intended to
reform the industry. The most prominent of recent efforts, the
Affordable Care Act, as currently structured, provides for
increased access to coverage for healthcare and seeks to reduce
healthcare-related expenses. Among other mandates, it requires all
new small group and individual market health plans to cover ten
essential health benefit categories, which currently include
substance abuse addiction and mental health disorder services.
However, efforts by the executive branch and some members of
Congress to repeal or make fundamental changes to the Affordable
Care Act, its implementation and/or its interpretation have cast
significant uncertainty on the future of the law. For example, in
2017, Congress eliminated the penalties associated with the
individual mandate, effective January 2019, which may affect rates
of insurance coverage.
We are unable to predict the full impact of the Affordable Care Act
and related regulations or the impact of its repeal or modification
on our operations in light of the uncertainty regarding whether or
how the law will be changed, what alternative reforms, if any, may
be enacted or what other actions may be taken. Any government
efforts related to health reform may have an adverse effect on our
business, results of operations, cash flow, capital resources and
liquidity. Moreover, the general uncertainty of health reform
efforts, particularly if Congress elects to repeal provisions of
the Affordable Care Act but delays the implementation of repeal or
fails to enact replacement provisions at the time of repeal, may
negatively impact our payment sources or demand for our
services.
The expansion of health insurance coverage under the Affordable
Care Act has been beneficial to the substance abuse treatment
industry. This is due, in part, to higher demand for treatment
services, which resulted from the requirement that small group and
individual market plans comply with the requirements of the Mental
Health Parity and Addiction Equity Act of 2008, which previously
applied only to group health plans and group insurers. The
21st Century Cures Act requires
development of an action plan for enhanced enforcement of mental
health parity requirements and additional guidance for health plans
regarding compliance with parity laws. Increased demand for
treatment services may bring new competitors to the market, some of
which may be better capitalized and have greater market penetration
than we do. In addition, we expect increased demand for substance
use treatment services to increase the demand for case managers,
therapists, medical technicians and others with clinical expertise
in substance abuse treatment, which may make it more difficult to
adequately staff our substance abuse treatment facilities and could
significantly increase our costs in delivering treatment, which may
adversely affect both our operations and profitability.
One of the many impacts of the Affordable Care Act and subsequent
legislation has been a dramatic increase in payment reform efforts
by federal and state government payors as well as commercial
payors. These efforts take many forms, including the growth of
accountable care organizations, pay-for-performance bonus
arrangements, partial capitation arrangements and the bundling of
services into a single payment. One result of these efforts is that
more risk of the overall cost of care is being transferred to
providers. As institutional providers and their affiliated
physicians assume more risk for the cost of care, we expect more
services to be furnished within provider networks that are formed
for these types of payment arrangements. Our ability to compete and
to retain our traditional sources of patients may be adversely
affected by our exclusion from such networks or our inability to be
included in such networks.
Change of ownership or change of control requirements imposed
by state and federal licensure and certification agencies as well
as third-party payors may limit our ability to timely realize
opportunities, adversely affect our licenses and certifications,
interrupt our cash flows, and adversely affect our
profitability.
State licensure laws and many federal healthcare programs (where
applicable) impose a number of obligations on healthcare providers
undergoing a change of ownership or change of control transaction.
These requirements may require new license applications as well as
notices given a fixed number of days prior to the closing of
affected transactions. These provisions require us to be proactive
when considering both internal restructuring and acquisitions of
other treatment companies. Failure to provide such notices or to
submit required paperwork can adversely affect licensure on a going
forward basis, can subject the parties to penalties and can
adversely affect our ability to operate our facilities.
Many third-party payor agreements, including government payor
programs, also have change of ownership or change of control
provisions. Such provisions generally include a prior notice
provision as well as require the consent of the payor in order to
continue the terms of the payor agreement. Abiding by the terms of
such provisions may reopen pricing negotiations with third-party
payors where the provider currently has favorable reimbursement
terms as compared to the market. Failure to comply with the terms
of such provisions can result in a breach of the underlying
third-party payor agreement. As substance abuse treatment coverage
and payment reform initiatives continue to expand, these types of
provisions could have a significant impact on our ability to
realize opportunities and could adversely affect our cash flows and
profitability.
State efforts to regulate the construction or expansion of
healthcare facilities could impair our ability to operate and
expand our facilities.
The construction of new healthcare facilities, the expansion,
transfer, or change of ownership of existing facilities and the
addition of new beds, services, or equipment may be subject to
state laws that require a determination of public need and prior
approval by state regulatory agencies under CON laws or other
healthcare planning initiatives. The National Health Planning and
Resources Development Act of 1974 requires the withholding of
federal funds from states that fail to adopt certificate-of-need
(CON) laws regulating healthcare facilities.
CON laws require healthcare providers wishing to open or expand a
healthcare facility to first prove to a regulatory body that the
community needs the planned services. Review of CONs and similar
proposals may be lengthy and may require public hearings. States in
which we now or may in the future operate may require CONs under
certain circumstances not currently applicable to us or may impose
standards and other health planning requirements upon us. Violation
of these state laws and our failure to obtain any necessary state
approval could:
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· |
result in our inability to acquire
a targeted facility, complete a desired expansion or make a desired
replacement; or |
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· |
result in the revocation of a
facility’s license or imposition of civil or criminal penalties on
us, any of which could have a material adverse effect on our
business, financial condition and results of operations. |
If we are unable to obtain required regulatory, zoning, or other
required approvals for renovations and expansions, our growth may
be restrained, and our operating results may be adversely affected.
In the past, we have not experienced any material adverse effects
from such requirements, but we cannot predict their future impact
on our operations.
We could face risks associated with, or arising out of,
environmental, health, and safety laws and regulations.
We are subject to various federal, state, and local laws and
regulations that:
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· |
regulate certain activities and
operations that may have environmental or health and safety
effects, such as the generation, handling and disposal of medical
and pharmaceutical wastes; |
|
· |
impose liability for costs of
cleaning up, and damages to natural resources from, past spills,
waste disposals on and off-site and other releases of hazardous
materials or regulated substances; and |
|
· |
regulate workplace safety. |
Compliance with these laws and regulations could increase our costs
of operation. Violation of these laws may subject us to significant
fines, penalties, or disposal costs, which could negatively impact
our results of operations, financial position, or cash flows. We
could be responsible for the investigation and remediation of
environmental conditions at currently or formerly operated or
leased sites, as well as for associated liabilities, including
liabilities for natural resource damages, third-party property
damage, or personal injury resulting from lawsuits that could be
brought by the government or private litigants relating to our
operations, the operations of our facilities, or the land on which
our facilities are located.
Liability for contamination under certain environmental laws can be
imposed on current or past owners or operators of a site without
regard to fault. Therefore, we may be subject to these liabilities
regardless of whether we lease or own the facility or such
environmental conditions were created by us, a prior owner or
tenant, a third-party, or a neighboring facility whose operations
may have affected such facility or land. We cannot assure you that
environmental conditions relating to our prior, existing, or future
sites or those of predecessor companies whose liabilities we may
have assumed or acquired will not have a material adverse effect on
our business.
Changes in tax laws or their interpretations, or becoming
subject to additional U.S., state or local taxes, could negatively
affect our business, financial condition, and results of
operations.
We are subject to tax liabilities, including federal and state
taxes such as excise, sales/use, payroll, franchise, withholding,
and ad valorem taxes. Changes in tax laws or their interpretations
could decrease the amount of revenues we receive, the value of any
tax loss carryforwards and tax credits recorded on our balance
sheet and the amount of our cash flow, and have a material adverse
impact on our business, financial condition and results of
operations. Some of our tax liabilities are subject to periodic
audits by the respective taxing authority which could increase our
tax liabilities. If we are required to pay additional taxes, our
costs would increase.
COVID-19 RELATED RISKS
The coronavirus may negatively impact sourcing and
manufacturing of the products that we plan to sell as well as
consumer spending, which could adversely affect our business,
results of operations and financial condition.
In December 2019, a novel strain of coronavirus was reported
to have surfaced in Wuhan, China, which has and is continuing to
spread throughout China and other parts of the world, including the
United States. On January 30, 2020, the World Health Organization
declared the outbreak of the coronavirus disease (COVID-19) a
“Public Health Emergency of International Concern.” On January 31,
2020, U.S. Health and Human Services Secretary Alex M. Azar II
declared a public health emergency for the United States to aid the
U.S. healthcare community in responding to COVID-19, and on March
11, 2020 the World Health Organization characterized the outbreak
as a “pandemic”. The significant outbreak of COVID-19 has resulted
in a widespread health crisis that could adversely affect the
economies and financial markets worldwide, and could adversely
affect our business, results of operations and financial
condition.
The ultimate extent of the impact of any epidemic, pandemic, or
other health crisis on our business, financial condition and
results of operations will depend on future developments, which are
highly uncertain and cannot be predicted, including new information
that may emerge concerning the severity of such epidemic, pandemic
or other health crisis and actions taken to contain or prevent
their further spread, among others. These and other
potential impacts of an epidemic, pandemic, or other health crisis,
such as COVID-19, could therefore materially and adversely affect
our business, financial condition, and results of operations.
The effect of the COVID-19 may adversely affect occupancy at
our rehabilitation facility.
The coronavirus may materially impact occupancy rates at our
facility and the availability of our rehabilitation services, which
would adversely affect our business, results of operations and
financial condition.
The outbreak of COVID-19 has resulted in a widespread health crisis
that could adversely affect the economies and financial markets in
which operate and could significant increase the risk factors
described above and herein.
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.
_________________
* 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.
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. |
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Dated: May 21, 2021 |
By: |
/s/ Mark W.
Conte |
|
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Mark W. Conte |
|
|
President and Chief Executive Officer |
|
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(Principal Executive Officer) |
|
|
|
|
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Dated: May 21, 2021 |
By: |
/s/ Mark W.
Conte |
|
|
Mark W. Conte |
|
|
Chief Financial Officer |
|
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(Principal Financial and Accounting Officer) |
28
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