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EX-99.1 - EXHIBIT 99.1 - UPD HOLDING CORP.ex99_1.htm
EX-32.1 - EXHIBIT 32.1 - UPD HOLDING CORP.ex32_1.htm
EX-31.2 - EXHIBIT 31.2 - UPD HOLDING CORP.ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - UPD HOLDING CORP.ex31_1.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

 

OR

 

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from          to        

 Commission file number: 001-13621

 

UPD HOLDING CORP.

(Exact name of Registrant as specified in its charter)

 

Nevada 13-3465289
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

 

75 Pringle Way, 8th Floor, Suite
804 Reno, Nevada 89502

(Address of principal executive offices, including zip code)

 

775-829-7999 x112

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes o No þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o Accelerated filer o
Non-accelerated filer o Smaller reporting company þ  
  Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No þ

 

 

As of June 30, 2020, the issuer had 171,459,556 shares of Common Stock outstanding, par value $.005 per share.

 

 

  
 


UPD HOLDING CORP.

 

TABLE OF CONTENTS

 

  Page No.
Cautionary Note Regarding Forward-Looking Statements 1
   
PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements 2
   
Consolidated Balance Sheets- Unaudited 2
Consolidated Statements of Operations- Unaudited 3
Consolidated Statements of Changes in Stockholders’ Deficit- Unaudited 4
Consolidated Statements of Cash Flows- Unaudited 5
Notes to Consolidated Financial Statements- Unaudited 6
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
   
PART II. OTHER INFORMATION  
   
Item 1. Legal Proceedings 13
Item 1A. Risk Factors 13
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Mine Safety Disclosures 14
Item 5. Other Information 14
Item 6. Exhibits 14
   
SIGNATURES 15
   

 

  

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

 

The statements contained in this Quarterly Report on Form 10-Q that are not historical fact are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements contained herein are based on current expectations that involve a number of risks and uncertainties. These statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” or “anticipates,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. Investors are cautioned that these forward-looking statements that are not historical facts are only predictions. No assurances can be given that the future results indicated, whether expressed or implied, will be achieved. Because of the number and range of assumptions underlying the Company’s projections and forward-looking statements, many of which are subject to significant uncertainties and contingencies that are beyond the reasonable control of the Company, some of the assumptions inevitably will not materialize, and unanticipated events and circumstances may occur subsequent to the date of this report. These forward-looking statements are based on current expectations and the Company assumes no obligation to update this information. Therefore, the actual experience of the Company and the results achieved during the period covered by any particular projections or forward-looking statements may differ substantially from those projected. The inclusion of projections and other forward-looking statements should not be regarded as a representation by the Company or any other person that these estimates and projections will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate.

 

 1 

 

PART I.

FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

UPD HOLDING
CORP. AND
SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

   March 31,   June 30, 
   2020   2019 
ASSETS          
Current assets:          
Cash and cash equivalents  $2,999   $7,215 
Other current assets   755     
Total current assets   3,754    7,215 
Property and equipment, net       74,617 
Total assets  $3,754   $81,832 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
Current liabilities:          
Accounts payable  $172,517   $179,671 
Accrued interest   87,271    75,698 
Convertible notes payable   230,129    155,000 
Due to shareholders   72,225    71,074 
Notes payable   115,560    485,560 
Total current liabilities   677,702    967,003 
           
Commitments and contingencies          
Stockholders' deficit          
Preferred stock, $0.01 par value; 10,000,000 authorized and none issued and outstanding        
Common stock, $0.005 par value; 200,000,000 shares authorized and 171,459,556 and 171,008,684 issued and
outstanding at March 31, 2020 and June 30, 2019, respectively
   857,298    855,044 
Additional paid-in-capital   1,752,535    1,709,731 
Accumulated deficit   (3,283,781)   (3,449,946)
Total stockholders' deficit   (673,948)   (885,171)
Total liabilities and stockholders' deficit  $3,754   $81,832 

  

The accompanying notes are an integral part of the unaudited consolidated financial statements.


 2 

 

UPD HOLDING
CORP. AND
SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   For the Three Months Ended   For the Nine Months Ended 
   March 31,   March 31,   March 31,   March 31, 
   2020   2019   2020   2019 
Revenues:                
Product sales  $   $   $   $14,274 
                     
Operating costs and expenses:                    
Cost of revenue               85,863 
Professional fees   29,092    8,865    113,838    45,519 
Impairment of goodwill               2,170,124 
General and administrative   595    3,613    4,111    60,588 
Total operating costs and expenses   29,687    12,478    117,949    2,362,094 
                     
Operating loss   (29,687)   (12,478)   (117,949)   (2,347,820)
                     
Interest expense, net   (5,837)   (38,360)   (40,708)   (121,850)
Other income, net   301,383        324,822    17,771 
Income (loss) from continuing operations, before income taxes   265,859    (50,838)   166,165    (2,451,899)
Provision for income taxes                
Net income (loss)   265,859    (50,838)   166,165    (2,451,899)
                     
                     
Basic and diluted earnings (loss) per share from:  $0.00   $0.00  $0.00   $(0.02)
                     
                     
Weighted average shares outstanding                    
Basic and diluted   169,545,852    162,566,772    169,414,938    162,566,772 

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

 3 

 

UPD HOLDING
CORP. AND
SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

FOR THE PERIODS ENDED

 

                   Additional       Total 
   Preferred Stock   Common Stock   Paid-in   Accumulated   Stockholders' 
   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
BALANCE, June 30, 2019      $    171,008,684   $855,044   $1,709,731   $(3,449,946)  $(885,171)
Issuance of common stock for conversion of debt and interest           113,833    569    10,814        11,383 
Net loss                       (20,243)   (20,243)
BALANCE, September 30, 2019      $     171,122,517   $855,613   $1,720,545   $(3,470,189)  $(894,031)
Issuance of common stock for conversion of debt and interest           337,039    1,685    31,990        33,675 
Net loss                       (79,451)   (79,451)
BALANCE, December 31, 2019      $     171,459,556   $857,298   $1,752,535   $(3,549,640)  $(939,807)
Net income                       265,859    265,859 
BALANCE, March 31, 2020      $    171,459,556   $857,298   $1,752,535   $(3,283,781)  $(673,948)
                                    
BALANCE, June 30, 2018      $    162,566,772   $812,834   $949,552   $(950,022)  $812,364 
Stock based compensation                   8,542        8,542 
Net loss                       (82,137)   (82,137)
BALANCE, September 30, 2018      $     162,566,772   $812,834   $958,094   $(1,032,159)  $738,769 
Net loss                       (2,318,924)   (2,318,924)
BALANCE, December 31, 2018          162,566,772   $812,834   $958,094   $(3,351,083)  $(1,580,155)
Net loss                       (50,838)   (50,838)
BALANCE, March 31, 2019      $    162,566,772   $812,834   $958,094   $(3,401,921)  $(1,630,993)

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

 4 

  

UPD HOLDING
CORP. AND
SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   For the Nine Months Ended 
   March 31,   March 31, 
   2020   2019 
Cash flows from operating activities:        
Net income (loss)  $166,165   $(2,451,899)
Adjustments to reconcile net income (loss) to net cash used in operating activities:          
Stock-based compensation       8,542 
Gain on settlement of debt   (324,822)    
Impairment of goodwill       2,170,124 
Changes in operating assets and liabilities:          
Accounts receivable       2,783 
Inventory       76,475 
Other current assets   (755)    
Accrued interest   42,631    79,080 
Accounts payable   (6,003)   (10,242)
Net cash used in operating activities   (122,784)   (125,137)
           
Cash flows from financing activities:          
Proceeds from related party notes payable   10,000    74,560 
Proceeds from issuance of convertible notes payable   115,129    71,000 
Principal payments on notes payable   (6,561)   (33,750)
Net cash provided by financing activities   118,568    111,810 
           
Net decrease in cash and cash equivalents   (4,216)   (13,327)
Cash and cash equivalents at beginning of period   7,215    13,806 
Cash and cash equivalents at end of period  $2,999   $479 
           
Cash paid for income taxes  $   $ 
Cash paid for interest  $4,000   $30,769 
           
           
Non-Cash Supplemental Disclosures          
 Common stock issued for debt settlement  $40,000   $ 
 Notes payable forgiven for asset disposition  $350,000   $ 

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

 5 

 

UPD HOLDING
CORP. AND
SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – BUSINESS AND ORGANIZATION

 

UPD Holding Corp. (“UPD”, “Company”), incorporated in the State of Nevada, is a holding Company seeking to acquire assets and businesses to provide a competitive advantage through cost-sharing and other synergies. The Company currently operates in the food and beverage industry through Record Street Brewing (“RSB”) and weight and health management with its distribution and marketing agreement with iMetabolic (“IMET”). The Company is pursuing business development opportunities in the food and beverage industry and other product licensing agreements.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Unaudited Interim Financial Statements

 

The accompanying unaudited interim consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with generally accepted accounting principles (“GAAP”), pursuant to the rules and regulations of the Securities and Exchange Commission and are unaudited. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the results for the interim periods presented have been made. The results for the three and nine-month period ended March 31, 2020, may not be indicative of the results for the entire year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019 filed with the Securities and Exchange Commission on March 17, 2020.

 

The preparation of the Company’s unaudited interim consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from these estimates.

 

Principles of Consolidation

 

The Company consolidates the assets, liabilities, and operating results of its wholly owned and majority-owned subsidiaries; Net Edge Devices, LLC, an Arizona Limited Liability Company, iMetabolic Corp, (“IMET”) a Nevada corporation, and Record Street Brewing Co. a Nevada corporation. All intercompany accounts and transactions have been eliminated in consolidation.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of cash and highly liquid investments with original maturities of 90 days of less at the date of purchase. The Company is exposed to credit risk in the event of default by the financial institutions or the issuers of these investments to the extent the amounts on deposit or invested are in excess of amounts that are insured. As of March 31, 2020 and June 30, 2019 the Company did not have any cash equivalents or cash deposits in excess of the federally insured limits.

 

Use of Estimates

 

The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from these estimates.

 

Revenue Recognition

 

The Company sells beer and beverage products to its customers. The product sales represent revenue earned under contracts in which the Company bills and collects charges for delivery of products. The Company determines the measurement of revenue and the timing of revenue recognition utilizing the following core principles:

 

1.Identifying the contract with a customer;
2.Identifying the performance obligations in the contract;

 

 6 

 

3.Determining the transaction price;
4.Allocate the transaction price to the performance obligations in the contract; and
5.Recognize revenue when (or as) the Company satisfies its performance obligations.

 

Revenues from product sales are recognized when the Company’s performance obligations are satisfied upon delivery. The Company primarily invoices its customers when orders are received and does not provide any refunds, rights of return, or warranties to its customers. The Company has not recognized any revenue since the quarter ended September 30, 2018.

 

Recently Adopted Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02 – Leases (Accounting Standards Codification (“ASC” )Topic 842). Under the new guidance a lessee will be required to recognize assets and liabilities for leases with lease terms more than 12 months, whether that lease be classified as a capital or operating lease. This update is effective in annual reporting periods beginning after December 15, 2018 and the interim periods within that year. On the Company’s adoption date, July 1, 2019, there were no non-cancelable leases. As a result, the adoption of ASC 842 did not have a material impact on the Company’s financial statements.

 

Going Concern

 

The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and allow it to continue as a going concern, has reoccurring net losses and net capital deficiency. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plans to obtain such resources for the Company include (i) obtaining capital from management and significant stockholders sufficient to meet its minimal operating expenses; (ii) obtaining funding from outside sources through the sale of its debt and/or equity securities; and (iii) completing a merger with or acquisition of an existing operating company. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.

 

NOTE 3 – NOTES AND CONVERTIBLE NOTES PAYABLE 

 

The Company’s notes payable consist of the following:

 

Note Description  March 31,
2020
   June 30,
2019
 
Notes Payable:          
Notes Payable matured in December 2018 a nominal interest rate
of 12%
  $31,000   $281,000 
Notes Payable matured in December 2018 a nominal interest rate
of 18%
       100,000 
Related Party Note Payable due October 2020 a nominal interest
rate of 6%
   84,560    74,560 
Note payable issued with a maturity date of December 2019 and a
nominal interest rate of 12%.
       30,000 
 Total Notes payable  $115,560   $485,560 
Accrued interest   26,215    3,000 
Total convertible and other notes payable, net  $141,775   $488,560 

 

Throughout the nine months ended March 31, 2020 the Company did not have the financial resources to make current payments on these notes payable. The Company is in negotiations with the note holders and has not incurred significant penalties associated with the current default.

 

In August 2019, the Company settled a previously outstanding note payable totaling $30,000 with a cash payment of $6,561 and recognized a gain on settlement of $23,439.

 

In January 2020, the Company settled a total of $250,000 previously outstanding notes payable with a nominal interest rate of 12% and $100,000 previously outstanding notes payable with a nominal interest rate of 18% in exchange for property and equipment and other assets with a net book value totaling $74,617. As a result of the settlement the Company recognized a gain of $301,383 during the three and nine months ended March 31, 2020.

 

 7 

 

The Company’s convertible notes payable consist of the following:

  

 

Convertible Note Description  March 31, 2020   June 30, 2019 
         
Notes payable convertible into common stock at $0.10 per share;          
nominal interest rate of 12%; and matured in April 2018 (related          
party)  $65,000   $65,000 
Notes payable convertible into common stock at $0.10 per share;          
nominal interest rate of 12%; and matured in the fourth quarter of          
fiscal 2019   5,000    40,000 
Notes payable convertible into common stock at $0.10 per share;          
nominal interest rate of 12%; and matured in the first quarter          
of fiscal 2020   10,000    10,000 
Notes payable convertible into common stock at $0.10 per share;          
nominal interest rate of 15%; and matured in the third quarter of          
fiscal 2020   5,000    5,000 
Notes payable convertible into common stock at $0.10 per share;          
nominal interest rate of 12%; and matures in the fourth quarter of          
fiscal 2020   30,000    30,000 
Notes payable convertible into common stock at $0.10 per share;          
nominal interest rate of 12%; and matures in the first quarter of          
fiscal 2021   35,000     
Notes payable convertible into common stock at $0.10 per share;          
nominal interest rate of 12%; and matures in the second quarter of          
fiscal 2021   15,000     
Notes payable convertible into common stock at $0.10 per share;          
nominal interest rate of 12%; and matures in the second quarter of          
fiscal 2020       5,000 
Notes payable convertible into common stock at $0.10 per share; nominal interest          
rate of 12%; and matures in the third quarter of fiscal 2021   65,129     
Total Convertible notes payable  $230,129   $155,000 
Accrued interest   61,056    72,698 
Total convertible and other notes payable, net  $291,185   $227,698 

 

The Company’s outstanding convertible notes, with the exception of the related party notes as further discussed in Note 5, automatically convert to shares of common stock and $0.10 per share upon maturity if not paid in full prior to maturity. The Company did not make monthly and interest payments on its outstanding convertible notes payable. During the nine months ended March 31, 2020, the Company settled previously outstanding convertible note principal and interest totaling approximately $45,000 via the issuance of 450,872 shares of restricted and unregistered common stock.

 

During the nine months ended March 31, 2020 and 2019 the Company recognized interest expense on all outstanding notes and convertible notes payable totaling approximately $41,000 and $122,000, respectively. During the three months ended March 31, 2020 and 2019 the Company recognized interest expense on all outstanding notes and convertible notes payable totaling approximately $6,000 and $38,000, respectively.

 

 

NOTE 4 – STOCKHOLDERS’ EQUITY

 

At March 31, 2020, the Company’s authorized capital stock consists of 200,000,000 shares of common stock, par value of $.005, and 10,000,000 shares of preferred stock, par value $.01. At March 31, 2020, there were 171,459,556 shares of common stock issued and outstanding, respectively, and no shares of preferred stock issued and outstanding.

 

The following provides a description of the shares issued during the nine months ended March 31, 2020:

 

 8 

 

During the three months ended December 31, 2019 the Company issued 337,039 shares of common stock for the settlement of convertible notes and accrued interest totaling $33,675.

 

During the three months ended September 30, 2019 the Company issued 113,833 shares of common stock for the settlement of convertible notes and accrued interest totaling $11,383.

 

 

NOTE 5 – RELATED PARTY TRANSACTIONS

 

In February 2020 the Company’s CEO entered into a promissory note payable in which the Company received cash proceeds totaling $10,000. The note carries a nominal interest rate of 6% and matures in October 2020.

 

From time to time the Company has received working capital advances from shareholders. These advances are used to settle the Company’s on-going operating expenses. The shareholders have agreed to not accrue interest on the notes, and they are due on demand. Through March 31, 2020 the shareholders have informally agreed to defer payment until the Company’s operations are generating sufficient cash flows, however, they are under no obligation to do so in the future.

 

 

NOTE 6 – SUBSEQUENT EVENTS

 

In June 2020 the Company, through its Record Street Brewing subsidiary, entered into a licensing agreement whereby its beer brands will be produced and distributed by a third-party. The third party operates a gastropub in Reno, Nevada under the Record Street Brewery name. The licensing agreement has an effective date of July 1, 2020 and is set to receive 25% of the gross profits sold and distributed outside of the gastropub premises.

 

In May 2020 the Company entered into a convertible promissory note payable for cash proceeds totaling $50,000. The note carries 12% interest, matures in one year from the date of issuance, and is convertible into common stock at a price of $0.10 per share.

 

 9 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following management discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited interim consolidated financial statements and related notes which are included in Item 1 of this Quarterly Report on Form 10-Q, and with our audited financial statements included in our Form 10-K for the fiscal year ended June 30,2019, filed with the Securities and Exchange Commission on March 17, 2020.

 

This discussion and analysis provides information that management believes is relevant to an assessment and understanding of our results of operations and financial condition for the periods presented. The following selected financial information is derived from our historical consolidated financial statements and should be read in conjunction with such consolidated financial statements and notes thereto set forth elsewhere herein and the “Forward- Looking Statements” explanation included herein.

 

Overview of Business

 

We are a health and wellness company with a focus on nutraceutical and alternative and specialty beverages. Our past development efforts have included weight loss and weight management products marketed under our iMetabolic® brand and craft beer offerings under our Record Street™ brand. Current development efforts are focused on alternative and specialty beverages that leverage and combine the Company’s regulated nutraceutical and beverage manufacturing experience to create novel and trending beverages that have health benefits, such as waters infused with hemp-based nootropics, cannabinoids, and terpenes. We also are pursuing the franchising and licensing of the Record Street™ brand for live music venues and brewpubs throughout the United States.

 

Effective December 31, 2017 we acquired the “Record Street” brand and its contract brewing and distribution operations for its three flagship ales. In the quarter ending March 31, 2018, RSB entered into a production relationship with Brew Hub and launched the new Stylus lager in all formats as well as blonde and pale ales in cans along with the Company’s existing 1/6 and 1/2-barrel kegs and 12 oz bottles. RSB ceased contract brewing with Brew Hub in April 2018 and ceased beer sales in September 2018. Effective as of December 31, 2019, RSB determined to cease pursuing contract brewing operations in an effort to stem future losses from the exit of RSB’s primary distributor, Young’s Market Distribution Company, from the beer business. The loss of Young’s Market Distribution Company as RSB’s California statewide beer distributor contributed to a significant impairment to the value of the Company’s acquisition of RSB.

 

On June 10, 2020, RSB entered into a license of the Record Street™ and Stylus™ brands with a related-party private entity, Alpine Group Inc. (the “Licensee”), that recently opened a brewpub located in Reno, Nevada. Effective as of July 1, 2020, the Licensee will have the exclusive right to brew and distribute Record Street™ and Stylus™ brand beers in the State of Nevada.

 

RSB shall be entitled to receive 25% of the gross profits from all sales of Record Street™ and Stylus™ branded products by the Licensee for an initial term of five (5) years and a five (5) year renewal term. The license will renew in perpetuity after the first renewal term if the Licensee achieves gross sales of licensed products of $2,000,000 during the initial term and first renewal term, collectively. The president and principal shareholder of the Licensee is Jesse Corletto, a related party to the Company, who ceased to hold any officer or director positions with the Company or RSB as of December 31, 2019.

 

In addition to brewing and off-premise distribution licensing opportunities, RSB also is developing a taproom, restaurant, and lounge business model that can be franchised under the Record Street™ brand. RSB taprooms will focus on the sale of Record Street™ branded beers and are envisioned as music and sports lounges that sell RSB’s beers, affordable fast casual cuisine, and related merchandise. With RSB’s beers displayed on a prominently featured tap system, beer sales will be the primary revenue driver. The economic strategy of the tap rooms will be value pricing, high margins, and high volumes. The flagship location for the first RSB taproom is intended for Reno, Nevada.

 

RSB intends to utilize the excess brewing capacity of the Licensee to restart its beer distribution business and support taproom franchise locations. The Licensee intends to commence off-premise beer distribution in July 2020.

 

With fewer barriers to entry, such as reduced minimum order quantities (MOQs), lower costs of goods sold (COGS), and reduced regulatory licensing requirements, the Company has determined to focus its brand extensions and product innovations in the health and wellness beverage category. We believe there is increasing consumer demand for enhanced and functional (value-added) beverages and expect to capitalize on this and potential consumer demand with the development and launch of new products focused on growing trends in the beverage space, particularly infused beverages. 

 

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Going Concern

 

Our financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We have not yet established an ongoing source of revenues sufficient to cover our operating costs and to allow us to continue as a going concern. Our ability to continue as a going concern is dependent on our company obtaining adequate capital to fund operating losses until we become profitable. If we are unable to obtain adequate capital, we could be forced to significantly curtail or cease operations.

 

In its report on our financial statements for the year ended June 30, 2019, our independent registered public accounting firm included an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

We will need to raise additional funds to finance continuing operations. However, there are no assurances that we will be successful in raising additional funds. Without sufficient additional financing, it would be unlikely for us to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to successfully accomplish the plans described in this annual report and eventually secure other sources of financing and attain profitable operations.

 

 

RESULTS OF OPERATIONS

 

The Company’s revenue is generated through the sale of its beer products. In September 2018 the Company made its last sales under its previous distribution arrangements. Since September 2018, the Company has not recognized any revenue nor did it have any inventory. Effective July 1, 2020 the Company entered into a licensing agreement in which the Company will receive 25% of beer sales distributed outside the gastropub operated my licensee. The licensee began its gastropub operations in late April 2020.

 

During the second quarter of fiscal 2019, the Company determined that its initial beer products for sale spoiled resulting in the Company fully impairing its previously held inventory. As a result of the impairment, the Company recognized an obsolescence loss of $65,653 during the nine months ended March 31, 2019 included in cost of revenue in the accompanying consolidated statements of operations.

 

Professional Fees

 

During the three and nine months ended March 31, 2020, the Company recognized professional fees of approximately $29,000 and $114,000, respectively, representing increases of approximately 228% and 150%, respectively, from the prior comparable periods. These increases are the result of the Company engaging accounting consultants and auditors to assist in meeting the Company’s financial reporting obligations which were delinquent during the comparable periods in fiscal 2019.

 

The Company expects its professional fees to decline throughout the remainder of fiscal 2020 and into the first half of fiscal 2021 as it expects to meet its compliance obligations on a timely basis.

 

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Goodwill Impairment

 

Due to the Company’s need for additional funding and lack of firm funding commitments to execute its business plans, the Company was unable to continue to develop its RSB branding, grow its market share, and produce additional inventory. These facts and circumstances triggered the Company to perform an impairment test on its RSB assets in the second quarter of the fiscal year ended June 30, 2019. As a result of the uncertainties surrounding its capital resources and corresponding impacts on forecasted undiscounted cash flows, the Company fully impaired its goodwill during the nine months ended March 31, 2019, totaling $2,170,124.

 

General and Administrative Expenses

 

The Company incurred general and administrative expenses totaling approximately $600 and $4,000 for the three and nine months ended March 31, 2020, respectively representing decreases of approximately 84% and 93%, respectively from the comparable periods of fiscal 2019. Similar to other operational items, our funding challenges have resulted in overall declines in activity and corresponding expenses incurred.

 

We expect these items to increase over the next several periods with the success of our business plans and will primarily consist of facilities costs, management and other salaries, travel, and other corporate overhead.

 

Interest Expense

 

Throughout fiscal 2020 we settled several of our previously outstanding promissory notes and convertible promissory notes payable. As a result interest expense decreased approximately 85% to approximately $6,000 from the prior three month period ended March 31 and approximately 67% to approximately $41,000 from the prior nine months ended March 31.

 

Through March 31, 2020 we successfully settled over $400,000 in previously outstanding obligations. Our future interest expense obligations are dependent on the types of financing arrangements we are successful in arranging over the next twelve months, if any.

 

Gain on Settlement of Debt

 

During the three and nine months ended March 31, 2020 we were able to settle previously outstanding obligations for less than their carrying values on the date of settlement. As a result, we recognized non-recurring gains on debt settlements of approximately $301,000 and $325,000 for the three and nine months ended March 31, 2020, respectively.

 

 

Liquidity and Capital Resources

 

As of March 31, 2020, the Company had a working capital deficit of approximately $674,000. We estimate that, over the next twelve months, in order to maintain reporting company status as defined under the Securities Exchange Act of 1934, we will require cash for general and administrative expenses and professional fees, which include accounting, legal and other professional fees, as well as filing fees. We believe we will be able to meet these costs through the use of existing cash and cash equivalents or additional amounts, as necessary, to be loaned by or invested in us by our stockholders, management or other investors. However, no assurance can be given that we will be able to raise additional capital, when needed or at all, or that such capital, if available, will be on acceptable terms. In the absence of obtaining additional financing, we may be unable to fund our operations.

 

During the nine months ended March 31, 2020, the Company’s operational cash flows primarily consisted of incurring expenses in the normal course of business at levels commensurate with its funding levels and resulting inabilities to commence commercially viable operations. Net of the non-cash and non-recurring gains on debt settlements of approximately $322,000, the Company’s operational cash uses primarily consisted of the incurrence of on-going general and administrative expenses for the nine months ended March 31, 2020. The Company expects these operational cash uses to continue until sufficient capital is raised, if any.

 

The Company does not have sufficient resources to engage in significant investing activities. As funding permits, the Company expects to invest in expanding its beer production and related products.

 

During the nine months ended March 31, 2020, the Company generated approximately $125,000 of cash from financing activities through the issuance of convertible debt totaling $115,000 and related party promissory notes totaling $10,000 partially off-set by making an approximate $7,000 payment on its other outstanding notes payable.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements as set forth in Item 303(a)(4) of the Regulation S-K.

 

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Critical Accounting Policies

 

Our Unaudited Financial Statements and Notes to Unaudited Financial Statements have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates, judgments, and assumptions that affect reported amounts of assets, liabilities, revenues, and expenses. We continually evaluate the accounting policies and estimates used to prepare the condensed financial statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended June 30, 2019.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

As a "smaller reporting company" (as defined by Item 10 of Regulation S-K), the Company is not required to provide the information required by this item.

 

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2020 our disclosure controls and procedures were not effective due to the size and nature of the existing business operation. Given the size of our current operation and existing personnel, the opportunity to implement internal control procedures that segregate accounting duties and responsibilities is limited. Until the organization can increase in size to warrant an increase in personnel, formal internal control procedure will not be implemented until they can be effectively executed and monitored. As a result of the size of the current organization, there will not be significant levels of supervision, review, independent directors nor formal audit committee.

 

Changes in Internal Control Over Financial Reporting

 

During the nine months ended March 31, 2020, there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.

OTHER INFORMATION

 

Item 1. Legal Proceedings

 

As of the date of this report, the Company is not currently involved in any legal proceedings.

 

Item 1A. Risk Factors

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item. However, the risks associated with our Company are set forth in the "Risk Factors" section of our Form 10-K filed with the SEC on March 17, 2020.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

There are no recent sales of unregistered equity securities that were not previously disclosed.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

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Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

The exhibits listed below are filed herewith.

 

 

Exhibit

Number

Description
   
31.1* Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1* Certification of President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2* Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1* License Agreement
101.INS* XBRL Instance Document**
101.CAL* XBRL Extension Calculation Linkbase Document**
101.SCH* XBRL Extension Schema Document**
101.DEF* XBRL Extension Definition Linkbase Document**
101.LAB* XBRL Extension Labels Linkbase Document**
101.PRE* XBRL Extension Presentation Linkbase Document**

 

_________________
* Filed herewith.

**In accordance with Rule 406T of Regulation S-T, this information is deemed not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

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SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

UPD HOLDING CORP. 

   
     
Dated:     July 10, 2020 By: /s/ Mark W. Conte
    Mark W. Conte
    President and Chief Executive Officer
    (Principal Executive Officer)
     
     
Dated:    July 10, 2020 By: /s/ Kevin J. Pikero
    Kevin J. Pikero
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

 

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