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.
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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.
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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.
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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.
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