UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018
Commission file number: 333-206839
HEALTH-RIGHT DISCOVERIES, INC.
(Exact name of registrant as specified in its charter)
| Florida | 45-3588650 |
| (State or Other Jurisdiction of | (I.R.S. Employer |
| Incorporation or Organization) | Identification No.) |
18851 NE 29th Avenue, Suite 700, Aventura, Florida 33180
(Address of Principal Executive Offices)
(305) 705-3247
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
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 (ss.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large Accelerated Filer ☐ | Accelerated Filer ☐ |
| Non-accelerated Filer ☐ | Smaller reporting company ☒ |
| Emerging growth company ☒ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of November 8, 2018 was 22,869,191 shares.
TABLE OF CONTENTS
2
PART I – FINANCIAL INFORMATION
| Item 1. | Financial Statements. |
| HEALTH-RIGHT DISCOVERIES, INC. |
| CONDENSED CONSOLIDATED BALANCE SHEETS |
| (Unaudited) |
| September 30, 2018 | December 31, 2017 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 2,109,656 | $ | 1,458,942 | ||||
| Accounts receivable, net | 291,514 | 471,112 | ||||||
| Inventories | 41,056 | 32,580 | ||||||
| Prepaid and other assets | 15,750 | — | ||||||
| Total current assets | 2,457,976 | 1,962,634 | ||||||
| Property and equipment, net | 49,314 | 10,592 | ||||||
| Intangible assets, net | 3,847,867 | 4,196,717 | ||||||
| Goodwill | 3,313,226 | 3,313,226 | ||||||
| TOTAL ASSETS | $ | 9,668,383 | $ | 9,483,169 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and accrued expenses | $ | 1,053,344 | $ | 1,346,317 | ||||
| Loans payable - related parties | — | 33,512 | ||||||
| Salaries payable - related party | 82,000 | 182,000 | ||||||
| Current portion - notes payable, net of discounts of $399,252 September 30, 2018 and December 31, 2017, respectively | 265,196 | 265,196 | ||||||
| Total current liabilities | 1,400,540 | 1,827,025 | ||||||
| LONG-TERM LIABILITIES: | ||||||||
| Notes payable, net of discounts of $458,390 and $757,829 September 30, 2018 and December 31, 2017, respectively | 6,377,152 | 6,077,713 | ||||||
| Deferred tax liability | 1,028,894 | 980,212 | ||||||
| Total long-term liabilities | 7,406,046 | 7,057,925 | ||||||
| Total liabilities | $ | 8,806,586 | $ | 8,884,950 | ||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred Stock, .001 par value, 5,000,000 shares authorized No shares issued and outstanding September 30, 2018 and December 31, 2017, respectively | — | — | ||||||
| Common Stock, .001 par value, 100,000,000 shares authorized 22,869,191 shares issued and outstanding September 30, 2018 and December 31, 2017, respectively | 22,869 | 22,869 | ||||||
| Additional Paid in Capital | 1,117,967 | 1,117,967 | ||||||
| Accumulated Deficit | (279,039 | ) | (542,617 | ) | ||||
| Total stockholders’ equity | 861,797 | 598,219 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 9,668,383 | $ | 9,483,169 | ||||
| See accompanying notes to unaudited Condensed Consolidated Financial Statements. |
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| HEALTH-RIGHT DISCOVERIES, INC. |
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
| (Unaudited) |
| FOR THE THREE MONTHS ENDED SEPTEMBER 30, | FOR THE NINE MONTHS ENDED SEPTEMBER 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Revenue | $ | 1,361,956 | $ | — | $ | 5,179,290 | $ | — | ||||||||
| Cost of Revenue | 207,508 | — | 865,251 | — | ||||||||||||
| Gross Profit | 1,154,448 | — | 4,314,039 | — | ||||||||||||
| COST AND EXPENSES: | ||||||||||||||||
| Acquisition Costs | — | 370,000 | — | 370,000 | ||||||||||||
| General and administrative | 964,352 | 26,750 | 3,182,109 | 78,874 | ||||||||||||
| Interest expense - related parties | — | 2,897 | — | 7,938 | ||||||||||||
| Interest expenses - other | 261,591 | 3,541 | 775,918 | 3,541 | ||||||||||||
| Total cost and expenses | 1,225,943 | 403,188 | 3,958,027 | 460,353 | ||||||||||||
| Income (loss) before income tax (provision) benefit | (71,495 | ) | (403,188 | ) | 356,012 | (460,353 | ) | |||||||||
| Income tax (provision) benefit | 23,307 | — | (92,434 | ) | — | |||||||||||
| NET INCOME (LOSS) | $ | (48,188 | ) | $ | (403,188 | ) | $ | 263,578 | $ | (460,353 | ) | |||||
| Income (loss) per common share | (0.00 | ) | (0.02 | ) | 0.01 | (0.03 | ) | |||||||||
| Weighted average common shares outstanding - basic and diluted | 22,869,191 | 17,649,329 | 22,869,191 | 17,572,138 | ||||||||||||
| See accompanying notes to unaudited Condensed Consolidated Financial Statements. |
4
| HEALTH-RIGHT DISCOVERIES, INC. |
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (Unaudited) |
| FOR THE NINE MONTHS ENDED SEPTEMBER 30, | ||||||||
| 2018 | 2017 | |||||||
| OPERATING ACTIVITIES: | ||||||||
| Net income (loss) | $ | 263,578 | $ | (460,353 | ) | |||
| Adjustments to reconcile net income (loss) to net | ||||||||
| cash provided by (used in) operating activities: | ||||||||
| Depreciation expense | 5,018 | — | ||||||
| Amortization | 348,850 | — | ||||||
| Non-cash interest | 299,439 | — | ||||||
| Deferred income tax benefit | 48,682 | — | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 179,598 | — | ||||||
| Inventories | (8,476 | ) | — | |||||
| Prepaid and other assets | (15,750 | ) | — | |||||
| Accounts payable and accrued expenses | (292,973 | ) | 14,576 | |||||
| Accrued salary to related party | (100,000 | ) | 38,000 | |||||
| Accrued interest | — | 3,541 | ||||||
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | 727,966 | (404,236 | ) | |||||
| INVESTING ACTIVITIES: | ||||||||
| Cash paid for Acquisitions, net of cash acquired | — | (3,518,641 | ) | |||||
| Purchase of property and equipment | (43,740 | ) | — | |||||
| NET CASH USED IN INVESTING ACTIVITIES | (43,740 | ) | (3,518,641 | ) | ||||
| FINANCING ACTIVITIES: | ||||||||
| Repayment of related party loan | (33,512 | ) | (193,662 | ) | ||||
| Proceeds from note payable, net of loan costs | — | 4,865,083 | ||||||
| NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | (33,512 | ) | 4,671,421 | |||||
| INCREASE IN CASH | 650,714 | 748,544 | ||||||
| CASH - BEGINNING OF PERIOD | 1,458,942 | 18,373 | ||||||
| CASH - END OF PERIOD | $ | 2,109,656 | $ | 766,917 | ||||
| Noncash investing and financing activities: | ||||||||
| Debt incurred for acquisitions, net of imputed interest | $ | — | $ | 1,736,442 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | 485,207 | $ | — | ||||
| Cash paid for income taxes | $ | — | $ | — | ||||
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
5
HEALTH-RIGHT DISCOVERIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – Summary of Significant Accounting Policies
The significant accounting policies of Health-Right Discoveries, Inc and its subsidiaries, (collectively, the “Company”) were described in Note 1 to the audited consolidated financial statements included in the Company’s 2017 Annual Report on Form 10-K (“2017 Form 10-K”). There have been no significant changes in the Company’s significant accounting policies for the nine months ended September 30, 2018.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. Therefore, they do not include all information and footnotes normally included in annual consolidated financial statements and should be read in conjunction with the consolidated financial statement and notes thereto included in the 2017 Form 10-K. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of September 30, 2018 and the results of operations and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the operating results for the full fiscal year or any future period.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Certain of the Company’s estimates could be affected by external conditions, including those unique to its industry, and general economic conditions. It is possible that these external factors could have an effect on the Company’s estimates that could cause actual results to differ from its estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and record adjustments when necessary.
Inventories
Inventories, which consist of the Company’s product held for resale, are stated at the lower of cost, determined using the first-in, first-out, or net realizable value. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose of the product.
If the Company identifies excess, obsolete or unsalable items, its inventories are written down to their realizable value in the period in which the impairment is first identified. Shipping and handling costs incurred for inventory purchases and product shipments are recorded in cost of sales in the Company’s statements of operations. In the nine months of 2018 and 2017, the Company recorded no loss due to management’s estimate of obsolete inventory.
6
Property and Equipment
Property and equipment are stated at cost. Expenditures for additions are capitalized, repairs and maintenance are expensed as incurred. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which are as follows:
| September 30, 2018 | December 31, 2017 | |||||||
| Machinery and equipment – 7 years | $ | 62,935 | $ | 19,195 | ||||
| Accumulated depreciation | (13,621 | ) | (8,603 | ) | ||||
| Total property and equipment | $ | 49,314 | $ | 10,592 | ||||
Financial Instruments and Fair Value Measurements
The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of judgment, and therefore cannot be determined with precision.
Accounting standards define fair value as the price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and also establishes the following three levels of inputs that may be used to measure fair value:
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 fair value of the assets or liabilities
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
| ● | Cash and cash equivalents, restricted cash, operating lease related receivables, and accounts payable: The amounts reported in the accompanying Consolidated Balance Sheets approximate fair value due to their short-term nature |
| ● | Goodwill, other intangible assets, and long-lived assets held and used:The assets are measured at fair value when there is an indicator of impairment and recorded at fair value only when impairment is recognized or for a business combination. The fair values less costs to sell of long-lived assets or disposal groups held for sale are assessed each reporting period they remain classified as held for sale. Subsequent changes in the held for sale long-lived asset’s or disposal group’s fair value less cost to sell (increase or decrease) are reported as an adjustment to its carrying amount, except that the adjusted carrying amount cannot exceed the carrying amount of the long-lived asset or disposal group at the time it was initially classified as held for sale. |
7
Stock-based compensation
The Company recognizes compensation expense for stock-based compensation in accordance with ASC Topic 718. For employee stock-based awards, the fair value of the award is calculated on the date of grant using the Black-Scholes method for stock options and the quoted price of our common stock for common shares; the expense is recognized over the service period for awards expected to vest. For non-employee stock-based awards, the fair value of the award on the date of grant is calculated in the same manner as employee awards. However, the awards are revalued at the end of each reporting period and the pro rata compensation expense is adjusted accordingly until such time the nonemployee award is fully vested, at which time the total compensation recognized to date equals the fair value of the stock-based award as calculated on the measurement date, which is the date at which the award recipient’s performance is complete. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding, noted above.
Recent Accounting Pronouncements
Revenue Recognition
As of January 1, 2018, the Company adopted ASU 2014-09 and all subsequent ASUs that modified ASC 606. As part of the implementation process the Company performed an analysis to identify accounting policies that needed to change and additional disclosures that are required. The Company considered factors such as customer contracts with unique revenue recognition considerations, the nature and type of goods and services offered, the degree to which contracts include multiple performance obligations or variable consideration, and the pattern in which revenue is currently recognized, among other things. All of the Company’s revenue streams were evaluated, and similar performance obligations resulted under the new standard. In addition, the Company considered recognition under the new standard and concluded the timing of the Company’s revenue recognition will remain the same. The Company has also evaluated the changes in controls and processes that are necessary to implement the new standard, and no material changes were required.
The revenue from the Company’s subsidiary, Common Compounds, Inc., n/k/a Complete Claim Management, Inc. (“CCI”) predominantly represent consulting services agreements, which included providing services to physicians for billing insurance companies. The amounts reported as revenue are net of amounts remitted.
8
The revenue from the Company’s second subsidiary EZPharmaRx, LLC n/k/a Script Connection, LLC(“SCLLC”) sale of products are recognized when the sale is consummated and title is transferred. The Company and customer enter into an agreement which outlines the place and date of sale, purchase price, payment terms, and the assignment of rights and warranties from the Company to the customer. Management has identified the promise in the sale contract to be the transfer of ownership of the asset. Management believes the asset holds standalone value to the customer as it is not dependent on any other services for functionality purposes and therefore is distinct within the context of the contract and as described in ASC 606-10. As such, management has identified the transfer of the asset as the performance obligation. The transaction price is set at a fixed dollar amount per fixed quantity (number of assets) and is explicitly stated in each contract. Sales revenue is based on a set price for a set number of assets, which is allocated to the performance obligation discussed above, in its entirety. The Company has determined the date of transfer to the customer to be the date the customer obtains control and title over the asset and the date which revenue is to be recognized and payment is due. As such, there is no impact to the timing and amounts of revenue recognized for equipment sales related to the implementation of ASC 606.
Accounting for Leases
In February 2016, the FASB issued an accounting standard update that amends the accounting guidance on leases. The intent of this ASU is to increase transparency and comparability among organizations recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Lessors will account for leases using an approach that is substantially equivalent to existing U.S. GAAP for sales-type leases, direct financing leases and operating leases. Unlike current guidance, however, a lease with collectability uncertainties may be classified as a sales-type lease. If collectability of lease payments, plus any amount necessary to satisfy a lessee residual value guarantee, is not probable, lease payments received will be recognized as a deposit liability and the underlying assets will not be derecognized until collectability of the remaining amounts becomes probable. The ASU is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and must be adopted using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company plans to adopt this guidance on January 1, 2019, that standard’s effective date, and is currently in the process of determining the impact that the updated accounting guidance will have on the consolidated financial statements and related disclosures.
Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued an accounting standard update that provides guidance on the following eight specific cash flow classification issues: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. Current GAAP does not include specific guidance on these eight cash flow classification issues. The amendments of this ASU are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. We will adopt this accounting standard update effective January 1, 2018. The provisions of this update will not have a material impact on our consolidated statements of cash flows.
9
Tax Cuts and Jobs Act
In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” to address stakeholder concerns about the guidance in current U.S. GAAP that requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. The amendments in this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The Company is currently evaluating the timing, methods and impact of adopting this new standard on the consolidated financial statements.
NOTE 2 – Acquisitions
The Company Health-Right Discoveries, Inc. modified its business plan from building a platform of products in the nutraceutical and dietary supplement space to seeking acquisitions in the healthcare field. HRD identified two target companies for sale that fit their plan going forward of acquiring small, profitable, privately held companies in the healthcare space that generate at least $5 million in revenue and $1 million in EBITDA.
On September 29, 2017, the Company finalized a securities purchase agreement to purchase 100% of the outstanding equity interests in CCI and SCLLC for $6.1 million plus 1,751,580 shares of its common stock. The $6.1 million purchase price consists of $3.6 million cash and a $2.5 million 5-year non-interest bearing note, payable at $500,000 per year. Interest on the non-interest bearing note has been imputed using 12.75% interest rate (see Note 4).
In accordance with the acquisition method of accounting, the Company allocated the consideration to the net tangible and identifiable intangible assets based on their estimated fair values which were determined by an independent valuation performed by a third party.
Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets.
The following table presents the consideration of net assets purchased:
| Cash | $ | 3,600,000 | ||
| 1,751,580 shares of common stock issued | 175,158 | |||
| Note payable | 2,500,000 | |||
| Imputed interest | (763,558 | ) | ||
| Total Purchase Price | $ | 5,511,600 |
10
The assets acquired and liabilities assumed as part of our acquisition were recognized at their fair values as of the effective acquisition date, September 29, 2017, based upon an appraisal from a third party. The following table summarizes the fair values assigned to the assets acquired and liabilities assumed.
| Cash | $ | 81,359 | ||
| Current assets | 759,710 | |||
| Other non-current assets | 11,167 | |||
| Intangible assets | 4,313,000 | |||
| Goodwill | 3,313,226 | |||
| Current liabilities | (1,343,880 | ) | ||
| Deferred tax liability | (1,622,982 | ) | ||
| Net assets acquired | $ | 5,511,600 |
Acquisition costs of $410,000 were incurred and expensed for the year December 31, 2017. As part of the acquisition the Company recognized deferred tax liabilities of $1,622,982 related to the unamortized identifiable intangible assets acquired in the amount of $4,313,000 using a blended 37.63% tax rate.
The following table provides unaudited pro forma results of operations for the three and nine months ended September 30, 2017 as if the acquisitions had been consummated as of the beginning of that period presented. The pro forma results include the effect of certain purchase accounting adjustments, such as the estimated changes in depreciation and amortization expense on the acquired intangible assets. However, pro forma results do not include any anticipated cost savings or other effects of the planned integration of the companies. Accordingly, such amounts are not necessarily indicative of the results if the acquisition has occurred on the dates indicated, or which may occur in the future.
| (Unaudited) Pro Forma Results Three and Nine months ended September 30, 2017 | ||||||||
| Three months | Nine months | |||||||
| Revenues | $ | 2,043,272 | $ | 4,997,009 | ||||
| Income before income taxes | $ | 27,094 | $ | 676,463 | ||||
| Basic and fully diluted earnings (loss) per share | $ | 0.00 | $ | 0.03 | ||||
NOTE 3 – Intangible Assets
| Amortizing | Estimates | Gross | ||||
| Intangible Assets | Useful Life | Carrying Amount | ||||
| Customer Lists | 10 years | $ | 2,653,000 | |||
| Tradenames | 15 years | 377,000 | ||||
| IP Technologies | 10 years | 819,000 | ||||
| Non-compete | 5 years | 464,000 | ||||
| 4,313,000 | ||||||
| Less: Accumulated Amortization | (465,133 | ) | ||||
| $ | 3,847,867 | |||||
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The amortization expense related to the intangible assets was $116,283 and$348,850 for the three and nine months ended September 30, 2018, respectively and $-0- for the comparative periods in 2017.
The valuation of the assets acquired and liabilities assumed in connection with this acquisition was based on fair values at the acquisition date. The assets purchased and liabilities assumed for these acquisitions have been reflected in the accompanying consolidated balance sheets.
NOTE 4 – Notes payable
The Company obtained a secured convertible note with a lender for $5 million, interest is payable monthly, at 12.75% per annum, the note matures on September 29, 2020. The note can be converted at any time in whole or in part at $0.44 per share. In addition, the lender received 3,584,279 shares of common stock valued at $0.10 per share along with a 2% original issue discount. The total amount of the discount is $493,345. The Company had incurred $34,917 in loan costs. Both the discount and loan costs are presented as a reduction of the note payable.
The Company, as part of consideration for the purchase of CCI and SCLLC, issued a $2.5 million promissory note to the seller. The note is non-interest bearing with five annual payments of $500,000 (subject to adjustment to $377,400 if the business of CCI and SCLLC does not meet certain financial targets in 2017 and 2018) and matures on September 30, 2022. Interest has been imputed at 12.75% per annum. Upon each annual payment date (each, a “Due Date”), the holder may elect to convert the annual installment of the principal amount due into shares of common stock at a conversion price equal to 50% of “fair market value,” which is defined as the average closing price for the shares on the principal market on which they are traded during the thirty (30) trading days prior to the applicable Due Date, provided, further, that (a) the conversion price shall not be lower than $2.00 per share, subject to adjustment for stock splits, stock dividends and similar recapitalization events; and (b) in the event such conversion price as so adjusted is lower than $2.00 per share, the installment payable upon such Due Date may not be converted into shares without written agreement between the Company and the seller.
| September 30, | December 31, | |||||||
| 2018 | 2017 | |||||||
| Note payable – monthly interest, 12.75% per annum, matures on September 29, 2020 | $ | 5,000,000 | $ | 5,000,000 | ||||
| Less discounts | (328,897 | ) | (452,233 | ) | ||||
| Note payable – monthly interest, 12.75% per annum, matures on September 30, 2022 | 2,500,000 | 2,500,000 | ||||||
| Less discounts | (528,755 | ) | (704,858 | ) | ||||
| Subtotal | 6,642,348 | 6,342,909 | ||||||
| Less: current portion, net of discount $399,252 | 265,196 | 265,196 | ||||||
| Long- term portion | $ | 6,377,152 | $ | 6,077,713 | ||||
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Principal payments on the above notes mature as follows:
| Year ending December 31: | ||||
| 2018 | $ | 500,000 | ||
| 2019 | 500,000 | |||
| 2020 | 5,500,000 | |||
| 2021 | 500,000 | |||
| 2022 | 500,000 | |||
| Thereafter | $ | 7,500,000 | ||
NOTE 5 – Related Party
From inception through September 30, 2017, the Company relied in large part on loans from James Pande and David Hopkins, its principal shareholders, to fund its operations.
Mr. Pande and Mr. Hopkins advanced money to help fund the Company’s operations. Interest rates ranged from 2.9% - 7.5%, per annum. The balance due as of September 30, 2018 and December 31, 2017 was $0, respectively. The related party loan balance of $33,512 as of December 31, 2017 represented reimbursed expenses owed to shareholder.
As of September 30, 2018 and December 31, 2017, the Company has unpaid and accrued salary to its President in the amount of $82,000 and $182,000, respectively.
On January 10, 2018, the Company entered into employment agreement with David Hopkins, its President, effective as of January 1, 2018. Pursuant to the employment agreement, Mr. Hopkins assumed the additional position of Chief Executive Officer of the Company. The employment agreement is for an initial term of three (3) and automatically renews for additional three (3) year periods, provided that the Company achieves Adjusted EBITDA (as defined) of $3,500,000 for any calendar year during the initial term and any renewal term.
The employment agreement provides for an initial base salary of $175,000. In the event in any calendar year during the initial term or any renewal term, HRD achieves Adjusted EBITDA of $3,500,000, Mr. Hopkins’ annual base salary shall automatically increase to $250,000 and in the event in any calendar year during the initial term or any renewal term, the Company achieves Adjusted EBITDA of $5,000,000, his annual base salary shall automatically increase to $325,000. Mr. Hopkins will also receive a $600 per month car allowance while the employment agreement is in effect.
In addition to the foregoing, pursuant to the employment agreement, Mr. Hopkins was granted an option to purchase 525,000 shares of HRD common stock under the Company’s 2015 Stock Incentive Plan at an exercise price of $0.35 per share. The option vests in six equal semi-annual installments commencing June 30, 2018, expires ten (10) years from the date of grant and is otherwise subject to the terms of the Incentive Plan.
NOTE 6 – Stockholders’ Equity
The Company has authorized 100,000,000 shares of common stock $.001 par value and 5,000,000 shares of preferred stock $.001 par value.
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On September 29, 2017, the Company issued 1,751,580 shares of common stock for the purchase of CCI and SCLLC (see Note 2). Also, on September 29, 2017, the Company issued 3,584,279 shares of its common stock in connection with its $5 million note (see Note 4).
NOTE 7 – 2015 Incentive Stock Plan
Our 2015 Incentive Stock Plan (the “Incentive Plan”) provides for equity incentives to be granted to our employees, executive officers or directors or to key advisers or consultants. Equity incentives may be in the form of stock options with an exercise price not less than the fair market value of the underlying shares as determined pursuant to the Incentive Plan, restricted stock awards, other stock based awards, or any combination of the foregoing. The Incentive Plan is administered by the board of directors. 3,000,000 shares of our common stock are reserved for issuance pursuant to the exercise of awards under the Incentive Plan. The number of shares so reserved automatically adjusts upward on January 1 of each year, so that the number of shares covered by the Incentive Plan is equal to 15% of our issued and outstanding common stock. As of September 30, 2018, options to purchase 1,266,666 shares at an exercise price of $0.35 per share have been granted and are outstanding under the Incentive Plan.
NOTE 8 – Income Taxes
Income tax expense (benefit) for the three and nine months ended September 30, 2018 was ($23,307) and $92,434, respectively and $-0- for the comparative periods during 2017. The effective tax rates for the nine months ended September 30, 2018 and 2017 were 27% and 38.5%, respectively. The 2018 tax rate reflects the enactment of the Tax Cuts and Jobs Act of 2017 (the “Act”) which made significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017.
As of December 31, 2017, the Company had approximately $258,778 of federal and state net operating loss carryovers (“NOLs”) which begin to expire in 2031. Utilization of the NOLs may be subject to limitation under the Internal Revenue Code Section 382 should there be a greater than 50% ownership change as determined under regulations.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the assessment, management has established a full valuation allowance against the entire deferred tax asset relating to NOLs for every period because it is more likely than not that all of the deferred tax asset will not be realized.
The Company files U.S. federal and state of Florida and Arkansas tax returns that are subject to audit by tax authorities beginning with the year ended December 31, 2013. The Company’s policy is to classify assessments, if any, for tax and related interest and penalties as tax expense.
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NOTE 9 – Business Segment Information
The Company has two reportable segments (billing services and OTC and prescription medication) supported by a corporate group which conducts activities that are non-segment specific. The following table present selected financial information about the Company’s reportable segments for the nine months ended September 30, 2018.
For the three months ended September 30, 2018 | Consolidated | Billing Services | OTC and Prescription Medication | Corporate | ||||||||||||
| Revenues | $ | 1,361,956 | $ | 1,083,773 | $ | 278,183 | $ | — | ||||||||
| Cost of Revenue | 207,508 | — | 207,508 | — | ||||||||||||
| Long-lived assets | 7,210,407 | 6,248,440 | 961,967 | — | ||||||||||||
| Income (loss) before income tax | (71,495 | ) | 460,974 | 57,680 | (590,149 | ) | ||||||||||
| Identifiable assets | 3,897,181 | 2,935,214 | 961,967 | — | ||||||||||||
| Depreciation and amortization | 121,726 | 91,928 | 29,798 | |||||||||||||
For the nine months ended September 30, 2018 | Consolidated | Billing Services | OTC and Prescription Medication | Corporate | ||||||||||||
| Revenues | $ | 5,179,290 | $ | 4,027,735 | $ | 1,151,555 | $ | — | ||||||||
| Cost of Revenue | 865,251 | — | 865,251 | — | ||||||||||||
| Long-lived assets | 7,210,407 | 6,248,440 | 961,967 | — | ||||||||||||
| Income (loss) before income tax | 356,012 | 1,879,325 | 230,206 | (1,753,519 | ) | |||||||||||
| Identifiable assets | 3,897,181 | 2,935,214 | 961,967 | — | ||||||||||||
| Depreciation and amortization | 353,868 | 266,655 | 87,213 | |||||||||||||
The Company only had one reportable segment for the three and nine months ended September 30, 2017.
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NOTE 10 – Litigation
In August 2018, we were served with a complaint (which was amended in September 2018 to include David Hopkins, our CEO, as a defendant), filed in Miami-Dade County, Florida Circuit Court by the seller of CCI and SCLLC, the two Arkansas-based companies that we acquired in September 2017. In the complaint, the seller alleges breach of contract and fraud in that we allegedly failed to pay him excess working capital as of the closing of the acquisition of approximately $381,000 and failed to reimburse him for certain credit card expenses. We believe that the seller’s claims are without merit, as his calculation of working capital does not follow the methodology provided for in the Securities Purchase Agreement for the transaction (the “SPA”) and that in fact, there was a working capital shortfall at closing of approximately $725,000 (for which we have demanded payment). Moreover, the seller has refused to submit the working capital dispute to the resolution process provided for in the SPA. Accordingly, we have filed a motion to dismiss the amended complaint. Seller’s counsel is expected to file a response to our motion, after which we will await a ruling from the Court.
NOTE 11 – Subsequent Events
The Company has evaluated subsequent events through the date that the financial statements were issued and determined that there were subsequent events requiring adjustment to or disclosure in the financial statements.
The Company is expanding to the State of South Carolina and has entered into a 4 year lease for office space, which commenced on November 1, 2018 and expires on October 31, 2022.The monthly rent for the first 24 months is $750.00 and will increase to $800.00 per month for the remaining 24 months.
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Unless the context otherwise requires, references in this report to “HRD,” “Health-Right,” “the Company,” “we,” “our” and “us” refers to Health-Right Discoveries, Inc. and its subsidiaries.
Forward-Looking Statements
Certain statements made in this report are “forward-looking statements” regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on assumptions involving judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein particularly in view of the current state of our operations, the inclusion of such information should not be regarded as a statement by us or any other person that our objectives and plans will be achieved. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Historical Background
Health-Right was founded as a natural biotech company that seeks to combine science and nutrition to develop branded ingredients, formulations and products that seek to provide a better quality of life for consumers who primarily suffer from stress-induced viruses and diseases. The Company developed a formulation platform by utilizing and scientifically combining various natural ingredients to help positively influence the interrelationship between stress and the immune system. The Company initially applied the formulation platform to Advanced H-Plex Defense Formula 11, its first product (“H-Plex Defense”), an all-natural dietary supplement whose formulation sought to address less than optimal nutrition and nutritional deficiencies to aid persons afflicted with Herpes Simplex Virus 1. Despite test marketing H-Plex Defense through the end of 2014 and positive customer feedback, HRD was unable to raise sufficient capital to complete development of and commercialize H-Plex Defense.
Accordingly, during 2016, the Company shifted its focus to identifying and exploring various opportunities for growth and revenue generation through the acquisition of other products, technologies or companies in the natural biotech, healthcare, nutraceutical and related fields.
Business Overview
On September 29, 2017, pursuant to a Securities Purchase Agreement dated August 17, 2017, the Company acquired (the “Acquisition”) all the outstanding shares of Common Compounds, Inc., n/k/a Complete Claim Management, Inc. (“CCI”) and EZPharmaRX, LLC n/k/a Script Connection, LLC (“SCLLC”). HRD, through its subsidiaries, CCI and SCLLC, along with a licensed pharmaceutical wholesaler, offer and provide their respective services to physician practices that desire to prescribe and dispense certain pharmaceutical products and medications in the practice’s office to patients receiving treatment for work-related injuries (“In-Office Dispensing Services”).
CCI offers and provides administrative services and billing services to physician practices (each a “Practice” and collectively, the “Practices”) desiring to make certain over-the-counter products, including non-narcotic topical medications, patches, and creams (“OTC Products”), and certain oral prescription medications (“Oral Medications”) available to patients in the physician practice’s office. Each participating Practice is responsible for obtaining and maintaining any necessary and appropriate licenses, permits, or other documentation required to order, receive, store, and dispense OTC Products or Oral Medications in the Practice’s office in accordance with applicable federal and state law. Such services include, but are not limited to, assisting Practices with insurance claim processing, prior authorization, billing and collections, and recordkeeping. CCI offers its services to Practices participating in the OTC Program and the Full-Formulary Program. CCI also provides billing and collection services on behalf of SCLLC in connection with SCLLC’s sales and distribution of OTC Products to Practices participating in the OTC Program.
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SCL offers OTC Products to Practices that desire to make such products available to patients in the Practice’s office through participation in the OTC Program. SCLLC is not a compounding pharmacy, and neither CCI nor SCLLC is involved in creating topicals with compounding pharmacies.
Practices participating in the Full-Formulary Program may order and obtain certain Oral Medications directly from a licensed pharmaceutical wholesaler that oversees and manages the sale and distribution of Oral Medications in connection with the Full-Formulary Program.
The Acquisition
The purchase price for the Acquisition (the “Purchase Price”) consisted of (a) $6,100,000 in cash (the “Cash Purchase Price”); and (b) 1,751,580 “restricted” shares of HRD’s common stock (the “Acquisition Shares”). The Purchase Price was paid at Closing by (a) payment by the Company to the seller of $3,600,000 of the Cash Purchase Price; (b) issuance by the Company to the seller of the Acquisition Shares; and (c) execution and delivery to the seller of a convertible promissory note for the $2,500,000 balance of the Cash Purchase Price (the “CCM Note”).
The CCM Note, which does not bear interest, is payable in five equal annual installments of $500,000 on the first, second, third, fourth and fifth anniversaries of the Closing (each a “Due Date”), which installments will be reduced to $377,400 each (with a corresponding reduction in the Cash Purchase Price), if the business fails to meet certain agreed upon financial targets for the years ending December 31, 2017 and 2018. Upon each Due Date, the seller, at his sole option, may elect to convert the annual installment then due under the Note, into shares of Health-Right’s common stock (the “HRD Shares”) at a conversion price equal to 50% of “fair market value,” which is defined as the average closing price for the HRD Shares on the principal market on which they are traded during the thirty (30) trading days prior to the applicable Due Date,provided, further, that (a) the conversion price shall not be lower than $2.00 per HRD Share, subject to adjustment for stock splits, stock dividends and similar recapitalization events; and (b) in the event such conversion price as so adjusted is lower than $2.00 per HRD Share, the installment payable upon such Due Date may not be converted into HRD Shares without written agreement between the Company and the seller.
In order to finance the Acquisition, we also entered into a securities purchase agreement with GPB Debt Holdings II, LLC (“GPB”) at Closing (the “GPB Purchase Agreement”). Pursuant to the GPB Purchase Agreement, we sold and issued to GPB a $5,000,000 principal amount senior secured convertible note (the “GPB Note”), for an aggregate purchase price of $4,900,000 (a 2.0% original issue discount). In addition, Health-Right issued to GPB 3,584,279 HRD Shares (the “GPB Shares”).
The GPB Note, which matures on the third anniversary of Closing (the “Maturity Date”), provides for monthly payments of interest only, which accrues at the rate of 12.75% per annum. In addition, the GPB Note also provides for an annual payment of paid in kind interest at the rate of 3.0% per annum.
The GPB Note (including accrued and unpaid interest) may be prepaid, in whole or in part, so long as a minimum of $500,000 is prepaid each time a repayment is made, at any time prior to the Maturity Date, upon thirty (30) days’ prior written notice;provided, however, that during such notice period, GPB may exercise its conversion rights described below with respect to the portion of the GPB Note to be repaid. Upon a prepayment, in whole or in part, the Company shall pay GPB an additional success fee equal to (a) 2% of any such payment if such payment is paid prior to the first anniversary of Closing; (b) 4% of any such payment if such amount is paid on or after the first anniversary of Closing; and (c) 6% of any such payment if such amount is paid on or after the second anniversary of Closing, but prior to the Maturity Date.
The GPB Note is convertible at any time, in whole or in part, at GPB’s option, into HRD Shares at a conversion price of $0.44 per GPB Share, with customary adjustments for stock splits, stock dividends and other recapitalization events and anti-dilution provisions set forth in the GPB Note, including adjustments in the event the Company sells HRD Shares or HRD Share equivalents at an effective purchase price lower than the conversion price then in effect.
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The GPB Note (a) provides for customary affirmative and negative covenants, including restrictions on Health-Right incurring subsequent debt, and (b) contains customary event of default provisions with a default interest rate of the lesser of 17.75% for the cash interest and 8.0% for the paid in-kind interest or the maximum rate permitted by law. Upon the occurrence of an event of default, GPB may require the Company to redeem the GPB Note at 120% of the then outstanding principal balance. The GPB Note is secured by a lien on all of the assets of the Company, including its intellectual property, pursuant to a security agreement entered into between the Company and GPB at Closing (the “Security Agreement”).
Corporate Information
The Company was incorporated in the state of Florida on October 11, 2011 under the name “Four Plex Partners, Inc.” and changed its name to “Health-Right Discoveries, Inc.” on March 22, 2012.
Our executive offices are located at 18851 NE 29th Avenue, Suite 700, Aventura, Florida 33180 and our telephone number is (305) 705-3247. Our corporate website iswww.health-right.com. Information appearing on our corporate website is not part of this report.
Results of Operations
Three months ended September 30, 2018 compared to three months ended September 30, 2017
For the three months ended September 30, 2018, we had revenues of $1,361,956, as compared to $-0- for the three months ended September 30, 2017. Revenues in 2018 were wholly generated by the operations of CCI and SCLLC subsequent to completion of the Acquisition. Cost of sales was $207,508 for the three months ended September 30, 2018, relating entirely to post-Acquisition operations of CCI and SCLLC, as compared to $-0- for the 2017 quarter.
Acquisition costs were $0 for the three months ended September 30, 2018 compared to $370,000 for the 2017 quarter. This was attributable to the purchase of CCI and SCLLC.
General and administrative costs were $964,352 for the three months ended September 30, 2018, as compared to $26,750 for the three months ended September 30, 2017. This increase is attributable to the significant expansion of the Company’s operations post-Acquisition. Interest expense was $261,591 for the 2018 quarter, as compared to $6,438 for the 2017 quarter. This increase was due in large part to the issuance of notes to the seller and the lender on September 29, 2017, in connection with completing and financing the Acquisition. As a result of the issuance of such notes, it is anticipated that interest expense will increase in future periods.
Income tax provision (benefit) for the three months ended September 30, 2018 was $23,307, as compared to $-0- for the three months ended September 30, 2017.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law, making significant changes to the Internal Revenue Code of 1986, as amended. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company has calculated the impact of the Act in the year end income tax provision in accordance with management’s understanding of the Act and guidance available as of the date of this report.
The Company had net loss for the three months ended September 30, 2018 of $48,188, as compared to a net loss of $403,188 for the three months ended September 30, 2017. The change from net loss in the 2017 quarter to net income in the 2018 quarter, was entirely due to post-Acquisition operations of CCI and SCLLC.
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Nine months ended September 30, 2018 compared to nine months ended September 30, 2017
For the nine months ended September 30, 2018, we had revenues of $5,179,290, as compared to $-0- for the nine months ended September 30, 2017. Revenues in 2018 were wholly generated by the operations of CCI and SCLLC subsequent to completion of the Acquisition. Cost of sales was $865,251 for the nine months ended September 30, 2018, relating entirely to post-Acquisition operations of CCI and SCLLC, as compared to $-0- for the 2017 period.
Acquisition costs were $0 for the nine months ended September 30, 2018 compared to $370,000 for the 2017 quarter. This was attributable to the purchase of CCI and SCLLC.
General and administrative costs were $3,182,109 for the nine months ended September 30, 2018, as compared to $78,874 for the nine months ended September 30, 2017. This increase is attributable to the significant expansion of the Company’s operations post-Acquisition. Interest expense was $775,918 for the 2018 period, as compared to $11,479 for the 2017 period. This increase was due in large part to the issuance of notes to the seller and the lender on September 29, 2017, in connection with completing and financing the Acquisition. As a result of the issuance of such notes, it is anticipated that interest expense will increase in future periods.
Income tax provision for the nine months ended September 30, 2018 was $92,434, as compared to $-0- for the nine months ended September 30, 2017.
The Company has calculated the impact of the Act, which was signed into law in December 2017, in the year end income tax provision in accordance with management’s understanding of the Act and guidance available as of the date of this report. The income tax benefit of $124,295 for the nine months ended September 30, 2017 was fully reserved.
The Company had net income for the nine months ended September 30, 2018 of $263,578, as compared to a net loss of $460,353 for the nine months ended September 30, 2017. The change from net loss in the 2017 period to net income in the 2018 period, was entirely due to post-Acquisition operations of CCI and SCLLC.
Liquidity and Capital Resources
As of September 30, 2018, total assets were $9,668,383, as compared to $9,483,169 on December 31, 2017, with the increase attributable to expanded business operations. Total current liabilities as of September 30, 2018 were $1,400,540, as compared to $1,827,025 as of December 31, 2017 and as of September 30, 2018 and December 31, 2017, the Company had long-term liabilities of $7,406,046 and $7,057,925, respectively. The decrease changes in the foregoing were due to amortization of the note discounts.
Net cash provided by operating activities increased to $727,966 for the nine months ended September 30, 2018, as compared to net cash used in operating activities of $404,236 in the 2017 period, resulting from cash generated by the post-Acquisition operations of CCM and SCL.
Net cash used in investing activities was $43,740 for the nine months ended September 30, 2018, as compared to $3,518,641 for the nine months ended September 30, 2017, reflecting purchases of property and equipment and cash used for the CCM and SCL acquisitions in the 2018 period.
Net cash used in financing activities was $33,512 for the nine months ended September 30, 2018, representing the repayment of shareholder loans by the Company during the 2018 period. Net cash provided by financing activities for the nine months ended September 30, 2017 was $4,671,421, representing the proceeds from shareholder loans and various lenders to the Company during the 2017 period for the acquisitions.
Prior to completion of the Acquisition, our primary sources of capital to develop and implement our business plan were private placements of our securities and shareholder loans.
In order to finance the Acquisition, at Closing, we entered into the GPB Purchase Agreement with GPB, pursuant to which we sold and issued to GPB the $5,000,000 principal amount GPB Note for an aggregate purchase price of $4,900,000 (a 2.0% original issue discount). In addition, Health-Right issued to GPB the 3,584,279 GPB Shares.
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The GPB Note, which matures on the Maturity Date (the third anniversary of issuance, provides for monthly payments of interest only, which accrues at the rate of 12.75% per annum. In addition, the GPB Note also provides for an annual payment of paid in kind interest at the rate of 3.0% per annum.
The GPB Note (including accrued and unpaid interest) may be prepaid, in whole or in part, so long as a minimum of $500,000 is prepaid each time a repayment is made, at any time prior to the Maturity Date, upon thirty (30) days’ prior written notice;provided, however, that during such notice period, GPB may exercise its conversion rights described below with respect to the portion of the GPB Note to be repaid. Upon a prepayment, in whole or in part, the Company shall pay GPB an additional success fee equal to (a) 2% of any such payment if such payment is paid prior to the first anniversary of issuance; (b) 4% of any such payment if such amount is paid on or after the first anniversary of issuance; and (c) 6% of any such payment if such amount is paid on or after the second anniversary of issuance, but prior to the Maturity Date.
The GPB Note is convertible at any time, in whole or in part, at GPB’s option, into HRD Shares at a conversion price of $0.44 per GPB Share, with customary adjustments for stock splits, stock dividends and other recapitalization events and anti-dilution provisions set forth in the GPB Note, including adjustments in the event the Company sells HRD Shares or HRD Share equivalents at an effective purchase price lower than the conversion price then in effect.
The GPB Note (a) provides for customary affirmative and negative covenants, including restrictions on Health-Right incurring subsequent debt, and (b) contains customary event of default provisions with a default interest rate of the lesser of 17.75% for the cash interest and 8.0% for the paid in-kind interest or the maximum rate permitted by law. Upon the occurrence of an event of default, GPB may require the Company to redeem the GPB Note at 120% of the then outstanding principal balance. The GPB Note is secured by a lien on all of the assets of the Company, including its intellectual property, pursuant to the Security Agreement entered into between the Company and GPB at Closing.
There can be no assurance that, notwithstanding completion of the Acquisition, that the Company will not require additional financing to achieve sustained profitability. While we believe additional financing will be available to us, if required, there can be no assurance that equity or debt financing will be available on commercially reasonable terms or otherwise, when, as and if needed. Moreover, any such additional financing may dilute the interests of existing shareholders. The absence of additional financing, when needed, could substantially harm the Company, its business, results of operations and financial condition.
Critical Accounting Policies
Revenue Recognition
As of January 1, 2018, the Company adopted ASU 2014-09 and all subsequent ASUs that modified ASC 606. As part of the implementation process the Company performed an analysis to identify accounting policies that needed to change and additional disclosures that are required. The Company considered factors such as customer contracts with unique revenue recognition considerations, the nature and type of goods and services offered, the degree to which contracts include multiple performance obligations or variable consideration, and the pattern in which revenue is currently recognized, among other things. All of the Company’s revenue streams were evaluated, and similar performance obligations resulted under the new standard. In addition, the Company considered recognition under the new standard and concluded the timing of the Company’s revenue recognition will remain the same. The Company has also evaluated the changes in controls and processes that are necessary to implement the new standard, and no material changes were required.
CCI’s revenue predominantly represents consulting services agreements, which included providing services to physicians for billing insurance companies. The amounts reported as revenue are net of amounts remitted.
SCLLC’s revenue from the sale of products are recognized when the sale is consummated and title is transferred. The Company and customer enter into an agreement which outlines the place and date of sale, purchase price, payment terms, and the assignment of rights and warranties from the Company to the customer. Management has identified the promise in the sale contract to be the transfer of ownership of the asset. Management believes the asset holds standalone value to the customer as it is not dependent on any other services for functionality purposes and therefore is distinct within the context of the contract and as described in ASC 606-10. As such, management has identified the transfer of the asset as the performance obligation. The transaction price is set at a fixed dollar amount per fixed quantity (number of assets) and is explicitly stated in each contract. Sales revenue is based on a set price for a set number of assets, which is allocated to the performance obligation discussed above, in its entirety. The Company has determined the date of transfer to the customer to be the date the customer obtains control and title over the asset and the date which revenue is to be recognized and payment is due. As such, there is no impact to the timing and amounts of revenue recognized for equipment sales related to the implementation of ASC 606.
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Intangible Assets
Intangible assets consist primarily of the Tradenames, IP Technologies, Customer list, and a Non-compete agreement resulting from the acquisition referred to in Note 3. These intangible assets have finite lives and are amortized over the periods in which they provide benefit. The Company assesses the impairment of long-lived assets, including identifiable intangible assets subject to amortization, whenever significant events or significant changes in circumstances indicate the carrying value may not be recoverable. Intangible assets with indefinite lives, are subject to impairment testing in accordance with accounting standards governing such on an annual basis, or more frequently if an event or change in circumstances indicates that the fair value of a reporting unit has been reduced below its carrying value. See Note 3 for acquisition to the consolidated financial statements for disclosure on intangible assets.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates included deferred revenue, costs incurred related to deferred revenue, the useful lives of property and equipment, the useful lives of intangible assets and accounting for the business combination.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Accounting for Income Taxes, as clarified by ASC 740-10, Accounting for Uncertainty in Income Taxes. Under this method, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which the Company operates, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria of ASC 740.
ASC 740-10 requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the “more-likely-than-not” threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
| Item 3. | Quantitative Disclosures About Market Risks. |
As a “smaller reporting company,” we are not required to provide the information required by this Item.
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| Item 4. | Controls and Procedures. |
Management’s Report on Disclosure Controls and Procedures
Our President and Chief Executive Officer, as our sole executive officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, as of March 31, 2018, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms adopted by the Securities and Exchange Commission (the “SEC”), including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our President, as our Principal Executive, Financial and Accounting Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our President has concluded that as of September 30, 2018, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described inItem 9A(b) of our Annual Report on Form 10-K for the year ended December 31, 2017.
Our President and Chief Executive Officer, as our sole executive officer, does not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive officer has determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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| Item 1. | Legal Proceedings. |
In August 2018, we were served with a complaint (which was amended in September 2018 to include David Hopkins, our CEO, as a defendant), filed in Miami-Dade County, Florida Circuit Court by the seller of Complete Claim Management, Inc. f/k/a Common Compounds, Inc. and Script Connection, LLC f/k/a EZPharmaRx, LLC, the two Arkansas-based companies that we acquired in September 2017. In the complaint, the seller alleges breach of contract and fraud in that we allegedly failed to pay him excess working capital as of the closing of the acquisition of approximately $381,000 and failed to reimburse him for certain credit card expenses. We believe that the seller’s claims are without merit, as his calculation of working capital does not follow the methodology provided for in the Securities Purchase Agreement for the transaction (the “SPA”) and that in fact, there was a working capital shortfall at closing of approximately $725,000 (for which we have demanded payment). Moreover, the seller has refused to submit the working capital dispute to the resolution process provided for in the SPA. Accordingly, we have filed a motion to dismiss the amended complaint. Seller’s counsel is expected to file a response to our motion, after which we will await a ruling from the Court.
In addition to the foregoing, from time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business.
| Item 1A. | Risk Factors. |
As a “smaller reporting company,” we are not required to provide the information required by this Item.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
| Item 4. | Mine Safety Disclosures. |
Not applicable.
| Item 5. | Other Information. |
None.
| Item 6. | Exhibits. |
| Exhibit Number | Description of Exhibit | |
| 31.1 | Section 302 Certification | |
| 32.1 | Section 906 Certification |
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.
| HEALTH-RIGHT DISCOVERIES, INC. | ||
| Dated: November 9, 2018 | By: | /s/ David Hopkins |
| David Hopkins, President and Chief Executive Officer | ||
| (Principal Executive, Financial and Accounting Officer) | ||
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