HITC Healthcare Integrated Technologies Inc (PK)

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

We are a healthcare technology company whose primary operations are through our IndeLiving subsidiary, which we acquired in March 2018. With the acquisition of IndeLiving, our core focus changed, and our operations through our Grasshopper Colorado subsidiary ceased in February 2019. We also changed our name to Healthcare Integrated Technologies, Inc. (the “Company”), to better reflect our new operations. As a result, our operations, management and board of directors, and our business in general have undergone a substantial change and we have experienced a change in control since the closing of the IndeLiving acquisition.

Founded in 2016 and based in Knoxville, Tennessee, IndeLiving has developed a health monitoring system for assisted living centers and private homes. IndeLiving is a development stage company that uses proprietary technology to monitor seniors in real time by both caregivers and family without the need for the senior to wear any type of monitoring device. The monitoring system is customized to the needs of the individual senior and, if applicable, to assisted living facility requirements. It provides real-time information to monitoring stations at the assisted living facilities. It also can be set up to provide real time information via text, voice, email, and a mobile phone application to family members or other caregivers. The residential model called “Inde Companion” is a monitoring concept with custom modifications that can be applied to individual seniors in a variety of applications including seniors living independently in their own home, with family members, or in an assisted living or retirement community.

The accounting policies used by us and our subsidiaries reflect industry practices and conform to U.S. generally accepted accounting principles (“GAAP”). Significant policies are discussed below.

Basis of Presentation

The accompanying interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited interim consolidated financial statements contain all of the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of April 30, 2020 and the results of operations and cash flows for the periods presented. The results of operations for the nine months ended April 30, 2020 are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited interim consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2019 filed with the SEC on March 20, 2020.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Healthcare Integrated Technologies, Inc. and our subsidiaries (collectively, the “Company”). All intercompany balances and transactions are eliminated in the consolidation.

Reclassifications

Certain prior period amounts have been reclassified to conform to current period presentation.

Risk and Uncertainties

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

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s future financial condition, liquidity, and results of operations. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity1 for fiscal year 2020.

Use of Estimates

The preparation of consolidated 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 date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We base our estimates on experience and various other assumptions that are believed to be reasonable under the circumstances. We evaluate our estimates and assumptions on a regular basis and actual results may differ from those estimates.

Cash and Cash Equivalents

We consider all highly liquid short-term investments with a maturity of three months or less at the time of purchase to be cash equivalents. The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits. The Company held no cash equivalents at April 30, 2020 and July 31, 2019. 

Accounts Receivable

Accounts receivable are stated at their historical carrying amount net of write-offs and allowance for uncollectible accounts. We routinely assess the recoverability of all customer and other receivables to determine their collectability and record a reserve when, based on the judgement of management, it is probable that a receivable will not be collected and the amount of the reserve may be reasonably estimated. When collection is no longer pursued, we charge uncollectable accounts receivable against the reserve. All our accounts receivable relates to our Grasshopper Staffing, Inc. subsidiary which eased operations in February 2019. At April 30, 2020 and July 31, 2019, all accounts receivable were deemed uncollectable and are fully reserved.

Property and Equipment

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

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

Fair Value of Financial Instruments

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

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

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

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

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

Revenue Recognition

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

Prior to the discontinuance of its operations in February 2019, Grasshopper Colorado earned revenue by providing specialized temporary staffing solutions to the cannabis industry. We provided temporary labor at an agreed upon rate per hour. Billings were invoiced on a per-hour basis as the temporary staffing services were delivered to the customer. Revenue from most of our temporary staffing services was recognized at a point in time. We applied the practical expedient to recognize revenue for these services at various intervals based on the number of hours completed and the agreed upon rate per hour at that time.

Advertising

Advertising costs are expensed as incurred in accordance with ASC 720-35, “Advertising Costs.” We incurred advertising costs of $50,300 and $8,746 for the nine months ended April 30, 2020 and 2019, respectively, which are included in selling, general and administrative expenses on the interim consolidated financial statements.

Net Loss Per Common Share

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

Stock Based Compensation

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

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

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

Business Combinations

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

Income Taxes

Under ASC 740, “Income Taxes,” deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when it is more likely than not that some or all the deferred tax assets will not be realized. As of April 30, 2020 and July 31, 2019, there were no deferred taxes due to the uncertainty of the realization of net operating loss carry forwards prior to their expiration.

Recently Adopted Accounting Pronouncements

In June 2018, the FASB issued Accounting Standards Update (ASU) No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. Under the new standard, companies will no longer be required to value non-employee awards differently from employee awards. Companies will value all equity classified awards at their grant-date under ASC 718 and forgo revaluing the award after the grant date. ASU 2018-07 is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within that reporting period. Early adoption is permitted, but no earlier than the Company’s adoption date of Topic 606, Revenue from Contracts with Customers (as described above under “Revenue Recognition”). The adoption of the new standard did not have a significant impact on our consolidated financial statements.

Recent Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”. This update is to improve the effectiveness of disclosures in the notes to the financial statements by facilitating clear communication of the information required by U.S. GAAP that is most important to users of each entity’s financial statements. The amendments in this update apply to all entities that are required, under existing U.S. GAAP, to make disclosures about recurring or nonrecurring fair value measurements. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating this guidance and the impact of this update on its consolidated financial statements.

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

Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying consolidated financial statements.

NOTE 2 - GOING CONCERN

The accompanying interim consolidated financial statements have been prepared in conformity with GAAP, which contemplates continuation of the Company as a going concern. We have a history of losses, an accumulated deficit, have negative working capital and have not generated cash from our operations to support a meaningful and ongoing business plan. It is management’s opinion that these conditions raise substantial doubt about the Company’s ability to continue as a going concern.

In view of these matters, our ability to continue as a going concern is dependent upon the development, marketing and sales of a viable product to achieve a level of profitability. We intend on financing our future development activities and our working capital needs largely from the sale of private and public equity securities with additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. The interim consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should we be unable to continue as a going concern.

NOTE 3 - DISCONTINUED OPERATIONS

In February 2019, due to continuing operating losses, negative cash flow, limited prospects for future growth and a desire to focus on our healthcare technology products, management elected to discontinue the operations of its Grasshopper Colorado subsidiary. The loss from the operations from the subsidiary is presented separately on the interim consolidated income statement as discontinued operations.

Discontinued operations consisted of the following for the nine months ended April 30, 2020 and 2019:

There was no bad debt expense recorded for the nine months ended April 30, 2020 and 2019.

Depreciation expense for the nine months ended April 30, 2020 and 2019 was $4,214 and $6,204, respectively.

5% Convertible Promissory Notes

On various dates during the month of March 2018 we issued a series of 5% Convertible Promissory Notes (collectively, the “5% Notes”) totaling $750,000 in net proceeds to the Company. We incurred no costs related to the issuance of the 5% Notes. The 5% Notes bear interest at the rate of five percent (5%) per annum, compounded annually, and the notes matured one-year from the date of issuance. At April 30, 2020 and July 31, 2019, accrued but unpaid interest on the 5% Notes was $82,044 and $52,266, respectively.

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

The 5% Notes with a face amount of $300,000 that matured on various dates during March 2019 and are currently in default and are not convertible under the conversion terms. The 5% Notes with face amounts totaling $450,000 mature on March 31, 2021 and are convertible under the conversion terms. Management continues to negotiate amendments to the remaining notes in default to extend the maturity dates of such notes.

Paycheck Protection Program Loan

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

Ford Credit Note

The Ford Credit note was assumed in the IndeLiving acquisition on March 13, 2018. The original retail installment contract was entered into on June 15, 2016 in the amount of $11,766. The note bears interest at 9.99% per annum and requires sixty (60) monthly installments of $251 per month. The installment note is collateralized by a 2013 Ford pickup truck. Effective February 21, 2020, the Company transferred the 2013 Ford pickup truck and other equipment in exchange for the assumption of the Ford Credit note.

The components of the net deferred tax asset as of April 30, 2020 and July 31, 2019 are as follows:

In assessing the realizable value of deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which these temporary differences become tax deductible. Based on management’s assessment of objective and subjective evidence, we have concluded at this time it is more likely than not that all of our deferred tax asset will not be realized and we have provided a valuation allowance for the entire amount of the deferred tax asset. At April 30, 2020 we have approximately $2.3 million in federal and state net operating loss carryovers that begin expiring in fiscal 2037.

We conduct business solely in the United States and file income tax returns in the United States federal jurisdiction as well as in the states of Tennessee and Colorado. The taxable years ended July 31, 2019, 2018 and 2017 remain open to examination by the taxing jurisdictions to which we are subject.

NOTE 10 - RELATED PARTY TRANSACTIONS

To continue operations and meet operating cash requirements, we have periodically relied on advances from related parties, primarily shareholders, until such time as our cash flow from operations meets our cash requirements or we are able to obtain adequate financing through sales of our equity securities and/or traditional debt financing. There is no formal written commitment for continued support by shareholders. Amounts advanced primarily relate to amounts paid to vendors. The advances are considered temporary in nature and have not been formalized by any written agreement. As of April 30, 2020, and July 31, 2019, related parties have advanced the Company $201,859 and $203,581, respectively. The advances are payable on demand and carry no interest.

In addition, we have accrued expenses related to the January 15, 2016 consulting and advisory agreement with Platinum Equity Advisors, LLC (the “Platinum Agreement”), a related party. The Platinum Agreement was terminated on March 12, 2018 (the “Termination Date”) when Scott M. Boruff, the Chief Manager of Platinum, was appointed Chief Executive Officer of the Company. As of April 30, 2020 and July 31, 2019, the accrued amount owed under the Platinum Agreement is $132,285 and $138,216, respectively.

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

NOTE 11 - COMMON STOCK

At April 30, 2020 and July 31, 2019, we had 33,937,500 and 32,487,500 shares of common stock outstanding, respectively. We issued 1,450,000 shares during the nine months ended April 30, 2020, of which 1,200,000 shares were issued for cash and 250,000 shares were issued for services. No shares were issued during the year ended July 31, 2019.

On February 11, 2020, we completed a private placement of 1,000,000 shares of our common stock at a price of $0.10 per share resulting in net proceeds to the Company of $100,000. We incurred no cost related to the private placement.

On March 18, 2020, we completed a private placement of 200,000 shares of our common stock at a price of $0.10 per share resulting in net proceeds to the Company of $20,000. We incurred no cost related to the private placement.

On March 21, 2020, we executed an agreement with BrandMETTLE, LLC (“BrandMETTLE”) to serve as our advertising agency for IndeLiving. Pursuant to the terms of the agreement, we issued 250,000 shares of our common stock to certain principals of BrandMETTLE at an estimated value of $0.18 per share.

On April 22, 2020, we executed an agreement with Jurgen Vollrath to act as our outside counsel for Intellectual Property (“IP”). Pursuant to the terms of the agreement, we issued 1,250,000 warrants to purchase the Company’s common stock at an exercise price of $0.23 per share with 250,000 warrants immediately vested and exercisable on the grant date and the remaining options vesting equally over a period of three (3) years from the grant date.

NOTE 12 - STOCK-BASED COMPENSATION

During the nine months ended April 30, 2020 and 2019, we recorded $235,444  and $220,882, respectively, of compensation expense related to stock options and warrants. The grant date fair value of stock options and warrants granted during the nine months ended April 30, 2020 was $307,965. No stock options or warrants were granted during the nine months ended April 30, 2019. We estimated the grant date fair value of stock options and warrants using the Black-Scholes pricing model with the following weighted average range of assumptions for the periods presented:

Expected Volatility

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

Expected Term

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

Risk-Free Interest Rate

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

Dividend Yield

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

The following table summarizes our stock-based compensation activities for the nine months ended April 30, 2020 and fiscal year ended July 31, 2019: