NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2022
NOTE 1. GENERAL ORGANIZATION AND BUSINESS
Innovative MedTech, Inc. (the “Company”), a Delaware corporation, is a provider of health and wellness services. On February 1, 2021, the Company filed all required Form 10-Q’s and 10-K’s to be up to date with its filings which should have been filed before the Company filed its Form 15-12G on November 7, 2014. On February 11, 2021, the Company filed with FINRA to effectuate a reverse stock split, change its name from Fresh Harvest Products, Inc. to Innovative MedTech, Inc. and change its stock symbol from ‘FRHV’ to ‘IMTH’. FINRA permitted these corporate actions on March 8, 2021. The 10,000:1 reverse split and the name change from Fresh Harvest Products, Inc., to Innovative MedTech, Inc. corporate actions took effect at the open of business on March 9, 2021.
On March 25, 2021, the Company acquired two companies, Sarah Adult Day Services, Inc., and Sarah Day Care Centers, Inc. (collectively “SarahCare”), an adult day care center franchisor and provider, for a total of $3,718,833; $2,000,110 was paid in cash and the Company assumed approximately $393,885 in debt due to sellers, and the remaining is payable through a royalty fee liability due in the amount of $1,500,000. With 26 centers (2 corporate and 24 franchise locations) located in 13 states, SarahCare offers seniors daytime care and activities ranging from meeting their physical and medical needs, on a daily basis, ranging from nursing care to salon services and providing meals, to offering engaging and enriching activities to allow them to continue to lead active and engaged lives.
On March 25, 2021 the Company received a $2 million investment in the form of a private investment in public equity (“PIPE”) from several investors. For the $2 million PIPE, the investors received a combination of common stock and Series A Preferred Stock which together constitute ownership of 84.11% of the Company, 83.00% on a fully diluted basis.
On April 21, 2021, the Company formed ten wholly-owned limited liability companies which will operate ten additional SarahCare facilities. As of June 30, 2022, the newly formed entities are non-operating. Operations expect to begin in November 2022.
On April 28, 2022, the Company entered into a share exchange agreement with RX Vitality, Inc. (“RX Vitality”), a media and finance advisory company.
NOTE 2. LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the continuation of operations, realization of assets and liquidation of liabilities in the ordinary course of business.
For the years ended June 30, 2022 and 2021, the Company reported a net loss of $18,058,354 and $3,264,957, respectively.
As of June 30, 2022, the Company maintained total assets of $4,800,044, total liabilities including long-term debt of $6,210,483 along with an accumulated deficit of $32,974,366.
The Company continues to have limited capital resources and has experienced net losses and negative cash flows from operations and expects these conditions to continue for the foreseeable future. As of June 30, 2022, the Company had $301,337 cash available for operations and had an accumulated deficit of $32,974,366. Management believes that cash on hand as of June 30, 2022 is not sufficient to fund operations through June 30, 2023. The Company will be required to raise additional funds to meet its short and long-term planned goals. There can be no assurance that such funds, if available at all, can be obtained on terms reasonable to the Company.
The Company believes that additional capital will be required to fund operations through June 30, 2023 and beyond, as it attempts to generate increasing revenue, and develop new products. The Company intends to attempt to raise capital through additional equity offerings and debt obligations. There can be no assurance that the Company will be successful in obtaining financing at the level needed or on terms acceptable to the Company. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and reflect all adjustments, consisting of normal recurring adjustments, which management believes are necessary to fairly present the financial position, results of operations and cash flows of the Company as of and for the years ended June 30, 2022 and 2021.
Principles of Consolidation
The Company has two wholly-owned operating subsidiaries; Sarah Adult Day Services, Inc., and Sarah Day Care Centers, Inc., along with non-operating subsidiaries consisting of RX Vitality, Inc. and the 10 newly formed limited liability companies formed for the additional SarahCare location leases. The consolidated financial statements, which include the accounts of the Company and its two wholly-owned subsidiaries, are prepared in conformity with GAAP pursuant to the rules and regulations of the SEC. All significant intercompany balances and transactions have been eliminated. The consolidated financial statements have been prepared using the accrual basis of accounting in accordance with GAAP and presented in US dollars. The fiscal year end is June 30.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods. Because of the use of estimates inherent in the financial reporting process, actual results may differ significantly from those estimates.
Cash and Cash Equivalents
The Company maintains cash balances in a non-interest-bearing account that exceeds $250,000 at June 30, 2022. For the purpose of the consolidated financial statements, all highly liquid investments with a maturity of three months or less are considered to be cash equivalents. There were no cash equivalents as of June 30, 2022 and 2021.
Earnings Per Share Calculation
Basic earnings per common share (“EPS”) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued.
Intangible Assets
Certain intangible assets arose from the acquisition of Sarah Adult Day Services, Inc., and Sarah Day Care Centers, Inc. on March 25, 2021 and consist of the following, which have been or are being amortized on a straight-line basis over the following estimated useful lives unless they have an indefinite life:
Asset | | Estimated Useful Life | |
Customer Relationships | | | 3 | |
Trademarks | | Indefinite | |
Non-Compete Agreement | | | 3 | |
CARF Accreditation | | | 3 | |
Franchise Agreements | | Indefinite | |
An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. For the years ended June 30, 2022 and 2021, there were no impairment losses.
Revenue Recognition
Revenue is recognized when a customer obtains services. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those goods. The Company applies the following five-step model in order to determine this amount: (i) identification of the promised goods in the contract; (ii) determination of whether the promised goods are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the services it provides to the customer. Once a contract is determined to be within the scope of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606 at contract inception, the Company reviews the contract to determine which performance obligations the Company must deliver and which of these performance obligations are distinct.
Patient Fees
Participant fee revenue is reported at the amount that reflects the consideration the Company expects to receive in exchange for the services provided. These amounts are due from participants or third-party payors and include variable consideration for retroactive adjustments from estimated reimbursements, if any, under reimbursement programs. Performance obligations are determined based on the nature of the services provided. Resident fee revenue is recognized as performance obligations are satisfied.
Under the Company’s day care agreements, which are generally for a contractual term of 30 days to one year, the Company provides services to participants for a stated daily or monthly fee. The Company has elected the lessor practical expedient within ASC 842, Leases (“ASC 842”) and recognizes, measures, presents, and discloses the revenue for services under the Company’s senior living residency agreements based upon the predominant component, either the lease or nonlease component, of the contracts. The Company has determined that the services included under the Company’s independent living, assisted living, and memory care residency agreements have the same timing and pattern of transfer and are performance obligations that are satisfied over time. The Company recognizes revenue under ASC 606, Revenue Recognition from Contracts with Customers (“ASC 606”) for its participants agreements for which it has estimated that the nonlease components of such agreements are the predominant component of the contract.
The Company enters into contracts to provide home assisted health, and certain outpatient services. Each service provided under the contract is capable of being distinct, and thus, the services are considered individual and separate performance obligations. The performance obligations are satisfied as services are provided and revenue is recognized as services are provided.
The Company receives payment for services under various third-party payor programs which include Medicaid, Veterans Affairs and other third-party payors. Estimates for settlements with third-party payors for retroactive adjustments from estimated reimbursements due to audits, reviews, or investigations are included in the determination of the estimated transaction price for providing services. The Company estimates the transaction price based on the terms of the contract with the payor, correspondence with the payor, and historical payment trends. Changes to these estimates for retroactive adjustments are recognized in the period the change or adjustment becomes known or when final settlements are determined.
Billings for services under third-party payor programs are recorded net of estimated retroactive adjustments, if any. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods or as final settlements are determined. Contractual or cost related adjustments from Medicaid or Veterans Affairs are accrued when assessed (without regard to when the assessment is paid or withheld). Subsequent adjustments to these accrued amounts are recorded in net revenues when known.
Franchise Fees
The Company franchises a number of its locations under franchise contracts which provide periodic franchise fee payments to the Company and reimbursement for costs and expense related to such franchises. The Company’s franchisees pay a variety of royalties and fees, including an agreed upon percentage of gross revenues (as defined in the franchise agreement). The Company estimates the amount of franchise fee revenue expected to be earned, if any, during the annual contract period and revenue is recognized as services are provided. The Company’s estimate of the transaction price for the franchise services also includes the amount of reimbursement due from the franchises for services provided and related costs incurred.
SarahCare, as the franchisor, supplies the franchisee’s with initial assistance and approval with the following: (1) Providing the site selection criteria for the SARAH Business and, upon a potential franchisee’s request, provide input regarding possible sites. The Company does not own and lease any site to franchisees. After the franchise selects and the Company approves a site, the Company will designate the geographic area within which they may establish the SARAH Business; (2) Approve the signage; (3) Identify the standards and specifications for products, services, and materials that comply with the System, and, if the Company requires, the approved suppliers of these items. The Company will furnish a potential Franchisee with the listing of the package of initial franchise items as detailed in the Operations Manual. Neither the Company or its affiliate provide, deliver, or install any of these items; (4) Provide an Initial Training Program; and (5) Provide an Operations Training Program.
Once the Franchisee’s SarahCare business is operational, the Company will: (1) Issue and modify System standards for SARAH Businesses; (2) Provide access to a copy of the Company’s Operations Manual as they make available through our intranet. The Operations Manual contains mandatory and suggested specifications, standards and operating procedure; (3) Provide additional or special guidance and assistance and training as the Company deem appropriate and for which a potential Franchisee are financially responsible; (4) Inspect and observe the operation of the SARAH Business to help a potential Franchisee comply with the Franchise Agreement and all System standards; (5) Let the Franchisee use the confidential information; and, (6) Let the Franchisee use the Marks (trademarks, trade names, service marks, and logos).
Digital Healthcare Wallet & Card
Revenue will be recognized when fees are collected from cardholders at the time the fees are assessed and debited from their account balances. The Company anticipates the card revenues to consist of monthly maintenance fees, new card fees, ATM fees, and other card revenues. The fees will be earned by providing account services to each cardholder over the contract term. Agreements with cardholders are considered daily services contracts.
The Company intends to earn interchange revenue from fees remitted by the merchant’s bank, which are based on rates established by the payment networks, such as Visa, when account holders make purchase transactions using the card products and services. The Company intends to recognize revenues at the point in time the transactions occurs.
Income Taxes
The provision for income taxes is the total of the current taxes payable and the net of the change in the deferred income taxes. Provision is made for the deferred income taxes where differences exist between the period in which transactions affect current taxable income and the period in which they enter into the determination of net income in the financial statements.
Leases
The Company accounts for leases in accordance with Accounting Standards Update (ASU) 2016-02, “Leases” (Topic 842). Based on this standard, the Company determines if an agreement is a lease at inception. Leases are included – right to use, current portion of lease liability, and operating lease liability, less current portion in the Company’s consolidated balance sheets. Finance leases are included in property, plant and equipment, net current portion of long-term debt, net and long-term debt, less current portion and debt issuance costs in the Company’s consolidated balance sheets.
Fair value of financial instruments
The Company’s financial instruments include cash and cash equivalents, accounts payable, accrued expenses, and debt. The carrying value of these financial instruments is considered to be representative of their fair value due to the short maturity of these instruments. The carrying amount of the debt approximates fair value, because the interest rates on these instruments approximate the interest rate on debt with similar terms available to the Company. The Company’s derivative liabilities were adjusted to fair market value at the end of each reporting period, using Level 3 inputs.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities.
The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts payable, accrued expenses and interest, certain notes payable and notes payable – due to related parties, approximate their fair values because of the short maturity of these instruments. The Company accounts for its derivative liabilities, at fair value, on a recurring basis under Level 3 (See Note 12).
Embedded Conversion Features
The Company evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial feature.
Derivative financial instruments
When the Company issues debt that contains a conversion feature, it first evaluates whether the conversion feature meets the requirements to be treated as a derivative: a) one or more underlying, typically the price of the Company’s stock; b) one or more notional amounts or payment provisions or both, generally the number of shares upon conversion; c) no initial net investment, which typically excludes the amount borrowed; and d) net settlement provisions, which in the case of convertible debt generally means the stock received upon conversion can be readily sold for cash. There are certain scope exceptions from derivative treatment, but these typically exclude conversion features that provide for a variable number of shares.
If the conversion features within convertible debt meet the requirements to be treated as a derivative, the Company estimates the fair value of the derivative liability using the Monte Carlo Simulation Model upon the date of issuance. If the fair value of the derivative liability is higher than the face value of the convertible debt, the excess is immediately recognized as interest expense. Otherwise, the fair value of the derivative liability is recorded as a liability with an offsetting amount recorded as a debt discount, which offsets the carrying amount of the debt. The derivative liability is revalued at the end of each reporting period and any change in fair value is recorded as a change in fair value in the consolidated statements of operations. The debt discount is amortized through interest expense over the life of the debt. Derivative instrument liabilities and the host debt agreement are classified on the consolidated balance sheets as current or non-current based on whether settlement of the derivative instrument could be required within twelve months of the balance sheet date.
The accounting treatment of derivative financial instruments requires that the Company record the embedded conversion option at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. As a result of entering into warrant agreements, for which such instruments contained a variable conversion feature with no floor, the Company has adopted a sequencing policy in accordance with ASC 815-40-35-12 “Derivatives and Hedging” (provides comprehensive guidance on derivative and hedging transactions) whereby all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation issued to employees or directors.
Debt Issue Costs and Debt Discount
The Company may record debt issue costs and/or debt discounts in connection with raising funds through the issuance of debt. These costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
Reclassification of Presentation
Certain prior year amounts have been reclassified to conform with current year presentation. These reclassifications had no effect on the reported results of operations.
Recently Issued Accounting Pronouncements
The Company does not expect any of the recently issued accounting pronouncements to have a material impact on its financial condition or results of operations for the year ended as of June 30, 2022 or on a going forward basis..
Subsequent Events
In accordance with ASC 855, Subsequent Events, the Company evaluated subsequent events through the date of this report; the date the consolidated financial statements were available for issue.
NOTE 4. BUSINESS ACQUISITION
SarahCare
On March 25, 2021 the Company acquired SarahCare, an adult day care center franchisor and provider. The combined purchase price was $3,718,833. The purchase price was paid as follows: (i) $2,000,110 was paid in cash, (ii) the Company assumed $393,885 in debt due to sellers, and (iii) the remaining is payable through a royalty fee liability due in the amount of $1,500,000.
The Company completed its accounting for the acquisition on March 25, 2022. The purchase price allocation is as follows:
Consideration | | | |
Cash | | $ | 2,000,110 | |
Legal fees | | | (175,162 | ) |
Notes payable due to sellers | | | 393,885 | |
Royalty fee liability, net of discount | | | 1,388,513 | |
Total consideration | | $ | 3,607,346 | |
| | | | |
Fair value of net identifiable assets (liabilities) acquired | | | | |
Cash | | $ | 412,276 | |
Accounts receivable | | | 84,674 | |
Deposits and prepaid expenses | | | 15,139 | |
Notes receivable | | | 110,510 | |
Property and equipment | | | 335,426 | |
Right of use asset | | | 796,771 | |
Total fair value of net identifiable assets | | $ | 1,754,796 | |
| | | | |
Accounts payable and accrued expenses | | $ | 625,462 | |
Notes payable, current, net of debt discount | | | 454,524 | |
PPP Loan | | | 439,160 | |
Lease liability | | | 796,771 | |
Total fair value of net identifiable liabilities | | $ | 2,315,917 | |
| | | | |
Fair value of net identifiable assets (liabilities) acquired | | $ | (561,121 | ) |
| | | | |
Excess (consideration given minus fair value of identifiable net assets and liabilities) | | $ | 4,168,467 | |
Intangible assets: | | | |
Customer relationships | | $ | 40,000 | |
Trademarks | | | 410,000 | |
Non-Compete Agreement | | | 1,000 | |
CARF Accreditation | | | 23,000 | |
Franchise Agreements | | | 2,710,000 | |
Total intangible assets | | $ | 3,184,000 | |
| | | | |
Goodwill (excess minus values assigned to intangible assets) | | $ | 984,467 | |
Minus (goodwill impaired in prior period) | | | (806,690 | ) |
Remaining Goodwill | | $ | 177,777 | |
The Royalty fee liability has a term 3 years and is to be repaid from any new subsidiary franchisee fees.
The Company analyzed the acquisition under applicable guidance and determined that the acquisition should be accounted for as a business combination.
On June 30, 2021, the Company performed a test to determine if goodwill should be impaired. The test determined that the fair value of the reporting units was less than its carrying value. As such the Company recorded a loss on impairment of goodwill in the amount of $806,690.
On June 30, 2022, the Company performed a test to determine if goodwill should be impaired. The Company determined that the fair vale of the reporting units was greater than its carrying value. As such, no impairment was recorded for the year ended June 30, 2022.
Pro Forma Disclosures
The following unaudited pro forma financial results reflects the historical operating results of the Company, including the unaudited pro forma results of SarahCare. for the year ended June 30, 2021, as if each of these business combinations had occurred only as of July 1, 2020. The pro forma financial information set forth below reflects adjustments to the historical data of the Company to give effect to each of these acquisitions and the related equity issuances as if each had occurred on July 1, 2020 The pro forma information presented below does not purport to represent what the actual results of operations would have been for the periods indicated, nor does it purport to represent the Company’s future results of operations. The following table summarizes on an unaudited pro forma basis the Company’s results of operations for the year ended June 30, 2021:
| | 2021 | |
Net revenue | | $ | 677,997 | |
Net loss | | $ | (3,513,187 | ) |
Net loss per share- basic and diluted | | $ | (0.60 | ) |
| | | | |
Weighted average number of shares of common stock outstanding- basic and diluted | | | 2,117,130 | |
The calculations of pro forma net revenue and pro forma net loss give effect to the business combinations for the period from July 1, 2020 until the respective closing dates for (i) the historical net revenue and net income (loss), as applicable, of the acquired businesses, (ii) incremental depreciation and amortization for each business combination based on the fair value of property, equipment and identifiable intangible assets acquired and the related estimated useful lives, and (iii) recognition of accretion of discounts on obligations with extended payment terms that were assumed in the business combinations.
NOTE 5. NOTES RECEIVABLE
The Company’s wholly-owned subsidiary Sarah Adult Day Services, Inc., has notes receivables from two franchises, which were previously converted from trade receivables. They are as follows:
| | June 30, | | | June 30, | |
| | 2022 | | | 2021 | |
| | | | | | |
Notes receivable from a franchise, due in monthly installments of $5,000, no interest, maturing December 2021 | | $ | - | | | $ | 21,468 | |
| | | | | | | | |
Notes receivable from a franchise, due in monthly installments of $1,999, no interest, maturing March 2023 | | | 17,995 | | | | 41,985 | |
| | | | | | | | |
Note receivable from related party (see Note 17), due in six months, with no installments, 5% interest maturing March 2022 | | | 9,294 | | | | - | |
Total notes receivable | | | 27,289 | | | | 63,453 | |
Less long-term | | | - | | | | (14,466 | ) |
Total short term notes receivable | | $ | 27,289 | | | $ | 48,987 | |
Principal to be collected during the next year is as follows:
| | As of | |
| | June 30, 2022 | |
Year ending June 30, 2023 | | | 27,289 | |
Total | | $ | 27,289 | |
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 2022 and 2021:
| | June 30, | | | June 30, | |
| | 2022 | | | 2021 | |
| | | | | | |
Leasehold improvements | | $ | 294,864 | | | $ | 294,864 | |
Vehicles | | | 67,116 | | | | 22,554 | |
Computer equipment | | | 14,354 | | | | 12,553 | |
Furniture and fixtures | | | 5,455 | | | | 5,455 | |
| | | 381,789 | | | | 335,426 | |
Less: Accumulated depreciation | | | (48,898 | ) | | | (9,638 | ) |
Property and equipment - net | | $ | 332,891 | | | $ | 325,788 | |
Depreciation expense was $39,260 and $9,638 for the years ended June 30, 2022 and 2021.
NOTE 7. INTANGIBLE ASSETS
| | June 30, | | | June 30, | |
| | 2022 | | | 2021 | |
Customer relationships | | $ | 40,000 | | | $ | - | |
Trademarks | | | 410,000 | | | | - | |
Non-Compete agreement | | | 1,000 | | | | - | |
CARF accreditation | | | 23,000 | | | | - | |
Franchise agreements | | | 2,710,000 | | | | | |
Less: accumulated amortization | | | (26,267 | ) | | | - | |
Intangible assets - net | | $ | 3,157,733 | | | $ | - | |
During the year ended June 30, 2022, the Company finalized the purchase accounting for the Sarah Care Acquisition as described further in Note 4. As a result, the intangible assets (i.e. customer relationships, trademarks, non-compete agreement, CARF Accreditation and Franchise Agreements) arose from the acquisition. The Company is amortizing these intangible over their respective remaining useful lives. The Company recorded amortization expense in the amount of $26,267 for the year ended June 30, 2022. Of the $26,267 in amortization expense, $5,670 relates to the period from acquisition to June 30, 2021 and is being treated as a change in accounting estimate. The remaining $20,597 is the expense related to the year ended June 30, 2022.
NOTE 8. NOTES PAYABLE
As of June 30, 2022 and 2021, the Company had $180,626 and $238,686, respectively, in outstanding notes payable, as follows:
Ref No. | | | Date of Note Issuance | | Original Principal Balance | | | Maturity Date | | Interest Rate % | | | Principal Balance 06/30/22 | | | Principal Balance 6/30/2021 | |
| | | | | | | | | | | | | | | | | |
| 1 | | | 12/25/20 | | $ | 146,021 | | | 8/15/2025 | | | 10 | | | $ | 104,695 | | | $ | 137,755 | |
| 2* | | | 5/10/21 | | | 20,000 | | | 11/10/21 | | | 5 | | | | - | | | | 20,000 | |
| 3* | | | 6/29/21 | | | 5,000 | | | 12/29/21 | | | 5 | | | | - | | | | 5,000 | |
| 4 | | | 2/24/14 | | | 8,547 | | | ** | | | 9 | | | | 8,547 | | | | 8,547 | |
| 5 | | | 2/24/14 | | | 33,687 | | | ** | | | 9 | | | | 33,687 | | | | 33,687 | |
| 6 | | | 2/24/14 | | | 33,697 | | | ** | | | 9 | | | | 33,697 | | | | 33,697 | |
| | | | Total Current | | | | | | | | | | | | $ | 180,626 | | | $ | 238,686 | |
________
*These notes were assumed in connection with the acquisition on March 25, 2021.
** As of June 30, 2022, these notes are in default.
NOTE 9. NOTES PAYABLE, RELATED PARTIES, CURRENT
As of June 30, 2022 and 2021, the Company had $732,562 and $514,438, respectively, in outstanding notes payable, related parties. As of June 30, 2022 and 2021, the Company had $47,763 and $9,459, respectively, in accrued interest related to these notes. All of these notes were assumed in connection with the acquisition on March 25, 2021.
Ref No. | | | Date of Note Issuance | | Original Principal Balance | | | Maturity Date | | Interest Rate % | | | Principal Balance 06/30/22 | | | Principal Balance 6/30/21 | |
| 1* | | | 3/25/2021 | | | 308,500 | | | 6/3/2021 | | | 10 | % | | $ | 308,500 | | | | 308,500 | |
| 2* | | | 3/25/2021 | | | 47,436 | | | 6/3/2021 | | | 10 | % | | | 47,435 | | | | 47,435 | |
| 3* | | | 3/25/2021 | | | 158,503 | | | 6/3/2021 | | | 10 | % | | | 158,503 | | | | 158,503 | |
| 4 | | | 3/24/22 | | | 39,000 | | | 9/24/22 | | | 6 | % | | | 39,000 | | | | - | |
| 5 | | | 5/5/22 | | | 179,124 | | | 11/5/22 | | | 6 | % | | | 179,124 | | | | - | |
| | | | Total | | | | | | | | | | | | $ | 732,562 | | | $ | 514,438 | |
* As of June 30, 2022, these notes are in default.
NOTE 10. CONVERTIBLE NOTES PAYABLE, CURRENT
As of June 30, 2022 and 2021, the convertible notes payable were as follows:
Date of Note Issuance | | Original Principal Balance | | | Maturity Date | | Interest Rate % | | | Conversion Rate | | | Principal Balance 6/30/22 | | | Principal Balance 6/30/21 | |
8/26/14 | | | 50,000 | | | 2/26/14 | | | 10 | % | | $ | 0.0001 | | | $ | 50,000 | | | $ | 50,000 | |
6/15/12 | | | 8,000 | | | 12/15/12 | | | 10 | % | | $ | 0.000350 | | | | 8,000 | | | | 8,000 | |
10/18/11 | | | 1,900 | | | 10/18/11 | | | 8 | % | | 25% discount to market | | | | 6,900 | | | | 6,900 | |
10/3/10 | | | 20,000 | | | 10/3/12 | | | 10 | % | | lesser $0.01 or 20% discount to market | | | | 20,000 | | | | 20,000 | |
10/31/09 | | | 4,000 | | | 10/31/10 | | | 8 | % | | 25% discount of previous 5 days closing price | | | | 4,000 | | | | 4,000 | |
2/26/07 | | | 30,000 | | | 2/26/09 | | | 12 | % | | lesser $0.50 or 35% discount to market | | | | 30,000 | | | | 30,000 | |
4/17/07 | | | 20,000 | | | 4/17/09 | | | 10 | % | | lesser $0.45 or 35% discount to market | | | | 20,000 | | | | 20,000 | |
6/14/07 | | | 15,000 | | | 6/15/09 | | | 10 | % | | lesser $0.50 or 25% discount to market | | | | 15,000 | | | | 15,000 | |
1/29/07 | | | 15,000 | | | 1/29/09 | | | 10 | % | | $ | 0.95 | | | | 15,000 | | | | 15,000 | |
4/17/07 | | | 15,000 | | | 4/17/09 | | | 10 | % | | lesser $0.45 or 35% discount to market | | | | 15,000 | | | | 15,000 | |
12/23/06 | | | 18,000 | | | 12/23/08 | | | 10 | % | | $ | 0.95 | | | | 18,000 | | | | 18,000 | |
11/30/06 | | | 50,000 | | | 11/30/08 | | | 10 | % | | $ | 0.85 | | | | 50,000 | | | | 50,000 | |
9/16/06 | | | 100,000 | | | 9/9/08 | | | 12 | % | | 35% discount to market | | | | 38,000 | | | | 38,000 | |
10/1/05 | | | 15,000 | | | 4/1/07 | | | 10 | % | | $ | 0.50 | | | | 15,000 | | | | 15,000 | |
Total Current | | | | | | | | | | | | | | | | $ | 304,900 | | | $ | 304,900 | |
NOTE 11. NOTES PAYABLE, LONG TERM
PPP Loans
On April 21, 2020 and February 10, 2021, the Company received loan proceeds in the amount of approximately $82,600 and $85,920 for a total of $168,520 through Sarah Adult Days Services, Inc. under the Paycheck Protection Program (“PPP”) prior to the March 25, 2021 acquisition. On April 14, 2020 and February 10, 2021, the Company received loan proceeds in the amount of $199,367 and $180,720 for a total of $380,087 through Sarah Day Care Centers, Inc. under the Paycheck Protection Program (“PPP”) prior to the March 25, 2021 acquisition. The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after twenty-four weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the period.
The Company was granted forgiveness of $85,920 in PPP loans through Sarah Day Care Centers, Inc. and $82,600 through Sarah Adult Days Services, Inc. As a result, the Company recorded a gain on PPP forgiveness in the amount of $172,520, during the year ended June 30, 2021. On, January 20, 2022, the remaining balance of $266,640 on the PPP loan was forgiven. During the years ended June 30, 2022 and 2021, the Company recorded $0 and $855, respectively, in accrued interest related to the PPP loan.
SBA Loan
On June 25, 2020 and January 6, 2022, the Company’s wholly-owned subsidiary, Sarah Day Care Centers, Inc. received proceeds of $150,000 and $200,000, respectively, in the form of an SBA loan. Installment payments, including principal and interest of $1,746 are due monthly beginning on December 22, 2021. The balance of principal and interest is payable thirty years from the promissory note date. The interest accrues at a rate of 3.75% per annum. During the years ended June 30, 2022 and 2021, the Company recorded $1,402 and $5,779 in accrued interest related to the SBA loan.
NOTE 12. DERIVATIVE FINANCIAL INSTRUMENTS
The following tables summarize the components of the Company’s derivative liabilities and linked common shares As of June 30, 2022 and 2021 the amounts that were reflected in income related to derivatives for the year ended June 30, 2022 and 2021:
| | June 30, 2022 | |
| | Indexed | | | Fair | |
The financings giving rise to derivative financial instruments | | Shares | | | Values | |
Compound embedded derivative | | | 129,380 | | | $ | 226,585 | |
| | June 30, 2021 | |
| | Indexed | | | Fair | |
The financings giving rise to derivative financial instruments | | Shares | | | Values | |
Compound embedded derivative | | | 405,106 | | | $ | 254,700 | |
The following tables summarizes the effects on the Company’s gain (loss) associated with changes in the fair values of the derivative financial instruments by type of financing for the years ended June 30, 2022 and 2021:
The financings giving rise to derivative financial instruments and the income effects:
| | Years ended | |
| | June 30, 2022 | | | June 30, 2021 | |
Compound embedded derivative | | $ | 28,115 | | | $ | (223,264 | ) |
Day one derivative loss | | | - | | | | - | |
Total derivative gain (loss) | | $ | 28,115 | | | $ | (223,264 | ) |
The Company’s convertible notes gave rise to derivative financial instruments. The notes embodied certain terms and conditions that were not clearly and closely related to the host debt agreement in terms of economic risks and characteristics. These terms and features consist of the embedded conversion option.
Current accounting principles that are provided in ASC 815 - Derivatives and Hedging require derivative financial instruments to be classified in liabilities and carried at fair value with changes recorded in income. In addition, the standards do not permit an issuer to account separately for individual derivative terms and features embedded in hybrid financial instruments that require bifurcation and liability classification as derivative financial instruments. Rather, such terms and features must be bundled together and fair valued as a single, compound embedded derivative. The Company has selected the Monte Carlo Simulations valuation technique to fair value the compound embedded derivative because it believes that this technique is reflective of all significant assumption types, and ranges of assumption inputs, that market participants would likely consider in transactions involving compound embedded derivatives. Such assumptions include, among other inputs, interest risk assumptions, credit risk assumptions and redemption behaviors in addition to traditional inputs for option models such as market trading volatility and risk-free rates. The Monte Carlo Simulations technique is a level three valuation technique because it requires the development of significant internal assumptions in addition to observable market indicators.
Significant inputs and results arising from the Monte Carlo Simulations process are as follows for the compound embedded derivative that has been bifurcated from the Convertible Notes and classified in liabilities:
| | | | | June 30, | | | June 30, | |
| | Inception | | | 2022 | | | 2021 | |
Quoted market price on valuation date | | $ | 0.01 | | | $ | 3.49 | | | $ | 1.01 | |
Contractual conversion rate | | $ | 0.0054 - $0.0081 | | | $ | 1.94 - $2.62 | | | $ | 0.486 - $0.817 | |
Range of effective contractual conversion rates | | | - | | | | - | | | | - | |
Contractual term to maturity | | | 1.00 Year | | | | 0.25 Years | | | | 0.25 Years | |
Market volatility: | | | | | | | | | | | | |
Volatility | | | 138.28% - 238.13 | % | | | 138.28% - 238.13 | % | | | 138.28% - 238.13 | % |
Contractual interest rate | | | 5% - 12 | % | | | 5% - 12 | % | | | 5% - 12 | % |
The following table reflects the issuances of compound embedded derivatives and changes in fair value inputs and assumptions related to the compound embedded derivatives during the years ended June 30, 2022 and 2021.
| | June 30, 2022 | | | June 30, 2021 | |
Beginning balance | | $ | 254,700 | | | $ | 257,493 | |
Issuances: | | | | | | | | |
Convertible Note Financing | | | - | | | | - | |
Removals | | | - | | | | - | |
Changes in fair value inputs and assumptions reflected | | | (28,115 | ) | | | 223,264 | |
Conversions | | | - | | | | (226,057 | ) |
Ending balance | | $ | 226,585 | | | $ | 254,700 | |
The fair value of the compound embedded derivative is significantly influenced by the Company’s trading market price, the price volatility in trading and the interest components of the Monte Carlo Simulation technique.
NOTE 13. STOCKHOLDERS’ EQUITY
On February 11, 2021, the Company filed with FINRA to effectuate a 10,000:1 reverse stock split. FINRA permitted this corporate actions on March 8, 2021. The 10,000:1 reverse split took effect at the open of business on March 9, 2021.
On or about April 26, 2022, the Company entered into an Agreement for Share Exchange (the “Share Exchange Agreement”) to obtain 10,500,000 shares of common stock of Vitality RX, Inc., a Delaware corporation (“Vitality”), representing 100% ownership of Vitality, from Vitality’s five shareholders identified in the Share Exchange Agreement (the “Vitality Shareholders”), in consideration of the issuance by the Company to the Vitality Shareholders of 5,500,000 shares of Innovative common stock, and 50,000 shares of Series A Convertible Preferred Stock (which preferred stock is convertible into 5,000,000 shares of common stock) (such shares of common stock and preferred stock collectively the “Shares”). On or about April 28, 2022, the transaction closed, Innovative received the stock of Vitality from the Vitality Shareholders, and issued the Shares to the Vitality Shareholders. The Company determined that Vitality did not meet the definition of a business under ASC 805, as such, the issuance of shares was treated as stock-based compensation expense.
Common Stock
On or about April 26, 2022, the Company issued the Vitality Shareholders 5,500,000 common shares, par value, $0.000001 per share, to Vitality Shareholders' for consulting services and their expertise in technology, financial services and media related to the Company’s digital healthcare wallet.
On February 19, 2021, pre-reverse stock split, the Company decreased its authorized shares to 500,000,000 shares of common stock, par value, $0.000001 per share, and 2,000,000 shares of Series A Convertible Preferred Stock, par value, $0.000001 per share. Each share of Series A Convertible Preferred Stock is convertible into 100 shares of the Company’s common stock. The Company no longer authorized any Series B Convertible Preferred Stock.
On September 15, 2021 the Company issued 100,000 common stock, par value, $0.000001 per share, to a consultant for services rendered to the Company.
Conversion of Notes Payable to Common Shares
On December 31, 2020 (prior to the Company’s reverse split) the Company issued 1,050,000,000 common shares (which was the equivalent of 105,000 post-split common shares) for services rendered to the Company. On December 31, 2020 five (5) Noteholders, including the Company’s Board of Director Members, converted a total of $1,965,460 of convertible promissory notes into 40,702,104,817 common shares of the Company, pre-reverse stock split.
On December 31, 2020, the Company’s two Board of Director Members converted a total of $1,644,825 of convertible promissory notes into a total of 34,267,187,500 common shares. The Company’s Board of Director Members control approximately 87.32% of the voting rights of the Company. The 3 (three) Noteholders converted a total of $325,666 of convertible promissory notes into a total of 6,439,917,317 common shares, pre-reverse stock split.
On February 2, 2021 eleven (11) Noteholders converted a total of $833,790 of convertible promissory notes into 14,586,720,714 common shares of the Company, pre-reverse stock split.
On March 19, 2021 the Company’s Board of Directors converted all 47,400,000 of their Series A Preferred Stock into 474,000 shares of Common Stock. There was no Series A Preferred Stock outstanding after these conversions, until March 25, 2021, when the Company issued 317,500 shares of Series A Preferred Stock to 7 investors as part of their $1,602,097 cash investment for Series A Preferred Stock, pre-reverse stock split.
Series A Preferred Stock & Series B Preferred Stock
On April 26, 2022, the Company issued the Shareholders of Vitality 50,000 shares of Series A Convertible Preferred Stock, par value, $0.000001 per share, to Vitality’s five shareholder’s for consulting services and their expertise in technology, financial services and media related to the Company’s digital healthcare wallet.
As of June 30, 2022, the Company had 500,000,000 authorized shares of Series A Convertible Preferred Stock, par value, $0.000001 per share. Each share of Series A Convertible Preferred Stock is convertible into 100 shares of the Company’s common stock. The Company no longer authorized any Series B Convertible Preferred Stock.
On December 21, 2020, the Company increased its authorized shares to 1 Trillion shares of common stock, par value, $0.000001 per share, and 5 Billion shares of Series A Preferred Stock, par value, $0.000001 per share, and 5 Billion Shares of Series B Preferred Stock, par value, $0.000001 per share. Each share of Series A and Series B Preferred Stock is convertible into 100 shares of the Company’s common stock, pre-reverse stock split.
On December 21, 2020, the Company increased its authorized Preferred Series A and Series B shares to 5 Billion shares of Series A Preferred Stock, par value, $0.000001 per share, and 5 Billion Shares of Series B Preferred Stock, par value, $0.000001 per share (together the “Preferred Stock”), pre-reverse stock split.
Series A Preferred Stock & Series B Preferred Stock – Certificate of Designations
The Preferred Shares each have Certificate of Designations, which designate as follows:
Number
500,000,000 shares of the Parent Company’s Preferred Stock are designated as shares of Series A Convertible Preferred Stock, par value $0.000001 per share.
Dividends
Any dividends (other than dividends on common stock payable solely in common stock or dividends on the Series A Convertible Preferred Stock payable solely in Series A Convertible Preferred Stock or dividends on the Series B Preferred Convertible Stock payable solely in Series B Convertible Preferred Stock) declared or paid in any fiscal year will be declared or paid among the holders of the Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and common stock then outstanding in proportion to the greatest whole number of shares of common stock which would be held by each such holder if all shares of Series A Preferred Stock and Series B Convertible Preferred Stock were converted into shares of common stock pursuant to the terms of the Certificate of Designations. The Parent Company’s Board of Directors is under no obligation to declare dividends on the Series A Convertible Preferred Stock or Series B Convertible Preferred Stock.
Conversion
Each share of Preferred Stock is convertible into 100 shares of the Parent Company’s common stock (the “Conversion Rate”).
Liquidation
In the event of any liquidation, dissolution or winding up of the Parent Company, the assets of the Parent Company legally available for distribution by the Parent Company would be distributed with equal priority and pro rata among the holders of the Preferred Stock and common stock in proportion to the number of shares of common stock held by them, with the shares of Preferred Stock being treated for this purpose as if they had been converted to shares of common stock at the then applicable Conversion Rate.
Voting
On any matter presented to the stockholders of the Parent Company for their action or consideration at any meeting of stockholders of the Parent Company (or by written consent of stockholders in lieu of meeting), each holder of outstanding shares of Preferred Stock would be entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares of Preferred Stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the other provisions of the Parent Company’s Certificate of Incorporation, holders of Preferred Stock vote together with the holders of common stock as a single class.
NOTE 14. PROVISION FOR CORPORATE INCOME TAXES
The Company provides for income taxes by the use of an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse. This also requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The valuation allowance at June 30, 2022 was $6,584,324 and as of June 30, 2021 was $2,792,070. The net change in allowance during the years ended June 30, 2022 and 2021 was $3,792,254 and $514,843, respectively.
As of June 30, 2022, the Company has federal net operating loss carry forwards of approximately $31,354,000 available to offset future taxable income through 2040. The Company may be able to utilize its NOLs to reduce future federal and state income tax liabilities. However, these NOLs are subject to various limitations under Internal Revenue Code (“IRC”) Section 382. IRC Section 382 limits the use of NOLs to the extent there has been an ownership change of more than 50 percentage points. In addition, the NOL carry-forwards are subject to examination by the taxing authority and could be adjusted or disallowed due to such exams. Although the Company has not undergone an IRC Section 382 analysis, it is possible that the utilization of the NOLs could be substantially limited. The Company has no tax provision for the years ended June 30, 2022 and 2021 due to losses and full valuation allowances against net deferred tax assets.
As of June 30, 2022 and June 30, 2021, the difference between the tax provision at the statutory federal income tax rate and the tax provision attributable to loss before income taxes is as follows (in percentages):
Statutory federal income tax rate | | | (21 | )% |
State taxes – net of federal benefits | | | (5 | )% |
Valuation allowance | | | 26 | % |
Income tax rate – net | | | 0 | % |
FASB Interpretation No. 48 (Fin 48) - Accounting for Uncertain Tax Positions
The Company files income tax returns in the U.S. federal jurisdiction and various state, and local jurisdictions. The Company is no longer subject to U.S. federal income tax examination by tax authorities, with limited exception, for the years prior to June 30, 2014. With respect to state and local jurisdictions, with limited exception, the Company is no longer subject to income tax audits prior to June 30, 2014. In the normal course of business, the Company is subject to examination by various taxing authorities. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that may result from these open tax years.
Based on management’s review of the Company’s tax position, the Company had no significant unrecognized corporate tax liabilities as of June 30, 2022 and 2021 payable to the Internal Revenue Service due to the net operating loss carry-forward, however, the Company had yet to file its 2005 through 2009 and 2012 through 2021 Federal, New Jersey nor New York Corporate Income Tax Returns.
NOTE 15. UNPAID PAYROLL TAXES
As of June 30, 2022 and 2021, the Company owed the Internal Revenue Service and New York State payroll related taxes in the amounts of $60,402 and $17,401, respectively, subject to further interest and penalties. The total amount due to both taxing authorities including penalties and interest as of June 30, 2022 and 2021 was approximately $77,803 subject to further penalties and interest. This is included in accounts payable and accrued expenses on the Company’s consolidated balance sheets.
IRS Tax Lien
The Internal Revenue Service has placed a federal tax lien on all of the assets of the Company.
NOTE 16. COMMITMENTS AND CONTINGENCIES
Licensing Agreement
On March 31, 2022, the Company entered into a management agreement with TruCash Group of Companies, Inc. (“TruCash’) where the Company is licensing from TruCash certain VISA ICAs and BINs to be used by the Company to offer certain pre-paid cards, mobile apps, loyalty programs, and other merchant related services to its potential clients. The Agreement has a term of five (5) years and monthly payments due to TruCash of $250,000 (the “Licensing Fee”).
Rent
As of June 30, 2022, the Company maintains its corporate address in at 2310 York Street, Suite 200, Blue Island, IL, 60406. This space is provided by the Company’s Chairman, Charles Everhardt, a related party, on a rent free basis at the present time. The Company does not currently have a lease for this space but expects to enter into a month-to-month office lease for this space.
SarahCare leases three properties for its corporate office and its two corporate owned centers. SarahCare’s corporate office is approximately 3,470 square feet and is located at 4580 Stephen Circle NW, Canton, Ohio, 44718. The lease began in 2017 and ends in 2023.
SarahCare’s lease for its first corporate-owned SarahCare location is for approximately 5,300 square feet located at 6199 Frank Ave. NW, North Canton, Ohio, 44720. The lease began in 2018 and ends in 2026.
SarahCare’s lease for its second corporate-owned SarahCare location is for approximately 6,000 square feet located at SarahCare of Stow, 4472 Darrow Road, Stow, Ohio, 44224. The lease began in 2018 and ends in 2026.
On April 21, 2021, the Company, through ten newly-formed, wholly-owned limited liability companies, entered into lease agreements with entities controlled by our Chairman, Charles Everhardt, for ten additional SarahCare locations to be operated by the Company. All of the leases are for a ten-year period beginning on July 1, 2021, and ending on June 30, 2031, with a 5-year renewal option. The rent for each location is $7,500 per month. On April 29, 2022, the Company amended the leases to delay commencement until November 1, 2022. On August 19, 2022, the Company and landlord mutually agreed to terminate one of the leases formed on April 21, 2021.
NOTE 17. LEASES
Operating Leases
Stow Professional Lease
In connection with the acquisition of Sarah Adult Day Centers, Inc. on March 25, 2021, the Company acquired a facilities lease with 6,000 square feet at 4472 Darrow Road, Stow, Ohio 44224. The lease expires on December 31, 2025 and the lease payments are as follows:
| | Monthly Rent Payments | |
| | Base Rent | | | Covid-19 Recoup* | | | Total Rent | |
April 1, 2021 | | $ | 6,369 | | | $ | 983 | | | $ | 7,352 | |
May 1, 2021 to December 31, 2021 | | $ | 6,369 | | | $ | 621 | | | $ | 6,990 | |
January 1, 2022 to December 31, 2022 | | $ | 6,433 | | | $ | 621 | | | $ | 7,054 | |
January 1, 2023 to December 31, 2023 | | $ | 6,497 | | | $ | 621 | | | $ | 7,118 | |
January 1, 2024 to December 31, 2024 | | $ | 6,562 | | | $ | 621 | | | $ | 7,183 | |
January 1, 2025 to December 31, 2025 | | $ | 6,628 | | | $ | 621 | | | $ | 7,249 | |
________
*The Company has to repay the lessor monthly payments as a result of COVID relief.
Harbor Lease
In connection with the acquisition of Sarah Adult Day Centers, Inc. on March 25, 2021, the Company acquired a facilities lease with 3,469 square feet at 4580 Stephen Circle NW. Canton, OH 44718. The monthly lease payments are $4,500 and the lease expires on December 31, 2023.
In connection with the acquisition of Sarah Day Care Centers, Inc. on March 25, 2021, the Company acquired a facilities lease with 5,300 square feet in Jackson, Ohio. The monthly lease payments are $7,910, which includes monthly payments of $603 as repayments for COVID relief. The lease expires on July 1, 2026.
S. Frank Professional Lease
Operating lease right-of-use asset and liability are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value is the incremental borrowing rate, estimated to be 10%, as the interest rate implicit in most of the Company’s leases is not readily determinable. Operating lease expense is recognized on a straight-line basis over the lease term. Since the common area maintenance expenses are expenses that do not depend on an index or rate, they are excluded from the measurement of the lease liability and recognized in general and administrative expenses on the consolidated statements of operations.
Right-of-use asset is summarized below:
| | June 30, 2022 | |
| | Stow Professional Center Lease | | | Harbor Lease | | | S. Frank Professional Lease | | | Total | |
Office lease | | $ | 282,371 | | | $ | 130,441 | | | $ | 412,770 | | | $ | 825,582 | |
Less: accumulated amortization | | | (76,539 | ) | | | (66,710 | ) | | | (92,972 | ) | | | (236,221 | ) |
Right-of-use asset, net | | $ | 205,832 | | | $ | 63,731 | | | $ | 319,798 | | | $ | 589,361 | |
| | June 30, 2021 | |
| | Stow Professional Center Lease | | | Harbor Lease | | | S. Frank Professional Lease | | | Total | |
Office lease | | $ | 282,371 | | | $ | 120,003 | | | $ | 394,398 | | | $ | 796,772 | |
Less: accumulated amortization | | | (14,571 | ) | | | (10,701 | ) | | | (14,187 | ) | | | (39,459 | ) |
Right-of-use asset, net | | $ | 267,800 | | | $ | 109,302 | | | $ | 380,211 | | | $ | 757,313 | |
Operating lease liability is summarized below:
| | June 30, 2022 | |
| | Stow Professional Center Lease | | | Harbor Lease | | | S. Frank Professional Lease | | | Total | |
Office lease | | $ | 206,887 | | | $ | 63,732 | | | $ | 319,798 | | | $ | 590,417 | |
Less: current portion | | | (68,101 | ) | | | (50,343 | ) | | | (66,738 | ) | | | (185,182 | ) |
Long term portion | | $ | 138,786 | | | $ | 13,389 | | | $ | 253,060 | | | $ | 405,235 | |
| | June 30, 2021 | |
| | Stow Professional Center Lease | | | Harbor Lease | | | S. Frank Professional Lease | | | Total | |
Office lease | | $ | 267,798 | | | $ | 109,303 | | | $ | 380,212 | | | $ | 757,313 | |
Less: current portion | | | (60,912 | ) | | | (45,571 | ) | | | (60,412 | ) | | | (166,895 | ) |
Long term portion | | $ | 206,886 | | | $ | 63,732 | | | $ | 319,800 | | | $ | 590,418 | |
Maturity of the lease liability is as follows:
| | June 30, 2022 | |
| | Stow Professional Center Lease | | | Harbor Lease | | | S. Frank Professional Lease | | | Total | |
Year ending June 30, 2023 | | $ | 85,026 | | | $ | 54,000 | | | $ | 94,923 | | | $ | 233,949 | |
Year ending June 30, 2024 | | | 85,802 | | | | 13,500 | | | | 94,923 | | | | 194,225 | |
Year ending June 30, 2025 | | | 64,840 | | | | - | | | | 94,923 | | | | 159,763 | |
Year ending June 30, 2026 | | | - | | | | - | | | | 94,923 | | | | 94,923 | |
Year ending June 30, 2027 | | | - | | | | - | | | | 7,910 | | | | 7,910 | |
Present value discount | | | (28,781 | ) | | | (3,768 | ) | | | (67,804 | ) | | | (100,353 | ) |
Lease liability | | $ | 206,887 | | | $ | 63,732 | | | $ | 319,798 | | | $ | 590,417 | |
| | June 30, 2021 | |
| | Stow Professional Center Lease | | | Harbor Lease | | | S. Frank Professional Lease | | | Total | |
Year ending June 30, 2022 | | $ | 84,258 | | | $ | 54,000 | | | $ | 94,923 | | | $ | 233,181 | |
Year ending June 30, 2023 | | | 85,025 | | | | 54,000 | | | | 94,923 | | | | 233,948 | |
Year ending June 30, 2024 | | | 85,802 | | | | 13,501 | | | | 94,923 | | | | 194,226 | |
Year ending June 30, 2025 | | | 64,841 | | | | - | | | | 94,923 | | | | 159,764 | |
Year ending June 30, 2026 | | | - | | | | - | | | | 94,923 | | | | 94,923 | |
Year ending June 30, 2027 | | | - | | | | - | | | | 7,913 | | | | 7,913 | |
Present value discount | | | (52,128 | ) | | | (12,198 | ) | | | (102,316 | ) | | | (166,642 | ) |
Lease liability | | $ | 267,798 | | | $ | 109,303 | | | $ | 380,212 | | | $ | 757,313 | |
Finance leases
Commencing during the year ended June 30, 2022, the Company leases office equipment under two finance leases with combined monthly payments of $5,897. The leases mature on March 1, 2024 and December 1, 2026.
Finance right of use assets are summarized below:
| | As of | | | As of | |
| | June 30, | | | June 30, | |
| | 2022 | | | 2021 | |
Equipment lease | | $ | 24,097 | | | $ | - | |
Less accumulated amortization | | | (3,442 | ) | | | - | |
Finance right of use asset | | $ | 20,655 | | | $ | - | |
On October 1, 2021, the Company discontinued use of one of its copiers. As a result, the Company recorded an impairment of assets in the amount of $84,364. Amortization expense was $3,442 and $0 for the years ended June 30, 2022 and 2021, respectively.
Finance lease liabilities are summarized below:
| | As of | | | As of | |
| | June 30, | | | June 30, | |
| | 2022 | | | 2021 | |
Equipment lease | | $ | 186,124 | | | $ | - | |
Less: current portion | | | (42,855 | ) | | | - | |
Long term portion | | $ | 143,269 | | | $ | - | |
| | Equipment Lease | |
Year Ended June 30, 2023 | | $ | 70,761 | |
Year Ended June 30, 2024 | | | 61,167 | |
Year Ended June 30, 2025 | | | 32,388 | |
Year Ended June 30, 2026 | | | 32,388 | |
Year Ended June 30, 2027 | | | 16,194 | |
Total future minimum lease payments | | | 212,898 | |
Less imputed interest | | | (26,774 | ) |
PV of payments | | $ | 186,124 | |
NOTE 18. RELATED PARTY TRANSACTIONS
During the years ended June 30, 2022 and 2021, related party transactions were as follows:
As of June 30, 2022, the Company maintains its corporate address in at 2310 York Street, Suite 200, Blue Island, IL, 60406. This space is provided by the Company’s Chairman, Charles Everhardt, a related party, on a rent free basis at the present time. The Company does not currently have a lease for this space but expects to enter into a month-to-month office lease for this space.
As of March 31, 2022, a company founded and partially owned by the Company’s Chairman, Charles Everhardt, has paid the Licensing Fees of $750,000 on behalf of the Company, which is included in accounts payable and accrued liabilities.
On May 5, 2022, the Company signed a note receivable of $179,124 from a company founded and partially owned by the Company’s Chairman, Charles Everhardt.
On March 25, 2022, the Company signed a note receivable of $39,000 from a company founded and partially owned by the Company’s Chairman, Charles Everhardt.
On September 28, 2021, the Company signed a note receivable of $50,000 from a company founded and partially owned by the Company’s Chairman, Charles Everhardt.
On September 8, 2021 the Company signed a note receivable of $29,294 from a company founded and partially owned by the Company’s Chairman, Charles Everhardt.
On April 21, 2021, the Company, through ten newly-formed, wholly-owned limited liability companies, entered into lease agreements with entities controlled by our Chairman, Charles Everhardt, for ten additional SarahCare locations to be operated by the Company. All of the leases are for a ten-year period beginning on July 1, 2021, and ending on June 30, 2031, with a 5-year renewal option. The rent for each location is $7,500 per month. In July 2021, the Company has amended the leases to delay commencement until November 1, 2021. On October 29, 2021 the Company amended the leases to delay commencement until May 1, 2022. The newly formed entities have no other activity aside from the lease activity described above.
On March 25, 2021, the Company issued 2,476,212 shares of restricted common stock in exchange for $250,000 which were issued at $0.0503 per share and the Company issued 100,542 shares of Series A Preferred Stock in exchange for $508,834, which were issued at $5.06 per share, to an investor, the son of Charles Everhardt, the Company’s Chairman. Additionally, Mr. Everhardt owns 50% of DE Holdings 20, LLC which converted $114,244 in convertible notes and accrued interest for 114,244 shares of restricted common shares, at a price of $1.00 per share. On that same day, Mr. Everhardt became Chairman of the Board of the Company.
On March 19, 2021, the Company issued 426,000 shares of restricted common stock to the Company’s then CEO and Chairman, Michael J Friedman, for the conversion 42,600,000 shares of Series A Convertible Preferred Stock.
On March 19, 2021, the Company issued 48,000 shares of restricted common stock to Jay Odintz, a Member of the Company’s Board of Directors, for the conversion 4,800,000 shares of Series A Convertible Preferred Stock.
On December 30, 2020, the Company issued 29,749,125,000 shares of restricted common stock for the conversion of notes payable in the amount of $1,427,958, to the Company’s then CEO and Chairman, Michael J. Friedman. These shares were valued by the Company at $0.000048 per share, pre-reverse stock split.
On December 30, 2020, the Company issued 4,518,062,500 shares of restricted common stock for the conversion of notes payable in the amount of $216,867, to a Board of Director Member, Jay Odintz. These shares were valued by the Company at $0.000048 per share, pre-reverse stock split.
NOTE 19. SUBSEQUENT EVENTS
The Company has evaluated subsequent events for recognition and disclosure through October 13, 2022, the date the financial statements were available to be issued, and determined that there were no such events requiring adjustment to, or disclosure in, the accompanying consolidated financial statements except as described below.
