Restatement of Previously Issued Financial Statements | 12 Months Ended |
Dec. 31, 2013 |
Restatement of Previously Issued Financial Statements [Abstract] | ' |
Restatement of previously issued financial statements | ' |
14. Restatement of previously issued financial statements |
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The Company has made adjustments to its consolidated financial statements for the years ended December 31, 2012, December 31, 2011 and December 31, 2010 due to various adjustments arising from the re-audit of the Company’s financial statements from inception (August 16, 2010) through December 31, 2012. On March 11, 2014, the Company received notification from the SEC that the Company’s then current auditing firm had been suspended from auditing public companies due to an adverse opinion received from the PCAOB. Accordingly, the Company immediately engaged the firm of Kingery & Crouse, P.A (“K & C”) on March 21, 2014 and began the 2013 audit. As part of the stipulations made by the SEC in their correspondence, the Company was required to have a re-audit of any comparative period issued with its current year annual report on Form 10-K. As part of their engagement, K & C requested all work papers from the prior auditor but received deficient information. This resulted in a need to re-audit multiple prior periods. The re-audit of the financial statements from inception (August 16, 2010) through December 31, 2012 resulted in multiple adjustments related to the valuation of common stock issued, stock-based compensation and the classification of certain expenses (e.g. rent payments). |
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The comparative periods presented in the current year annual report on Form 10-K are the (i) balance sheet as of December 31, 2012, (ii) the statement of operations for the year ended December 31, 2012 and (iii) the statement of cash flows for the year ended December 31, 2012. The affects of the restatement for these periods are summarized below. |
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The following table presents the balance sheet as previously reported, restatement adjustments and the balance sheet as restated at December 31, 2012: |
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| | Previously | | | Restatement | | | Restated | | | | | | | | | |
Reported | Adjustments | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | | |
Cash | | $ | 84,187 | | | $ | — | | | $ | 84,187 | | | | | | | | | |
Deposits and prepaids | | | 11,389 | | | | — | | | | 11,389 | | | | | | | | | |
Total current assets | | | 95,576 | | | | — | | | | 95,576 | | | | | | | | | |
Property and intangible assets, net of accumulated depreciation | | | 13,731 | | | | — | | | | 13,731 | | | | | | | | | |
Total assets | | $ | 109,307 | | | $ | — | | | $ | 109,307 | | | | | | | | | |
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LIABILITIES AND STOCKHOLDERS’ DEFICIENCY | | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | |
Accounts payable | | $ | 119,239 | | | $ | — | | | $ | 119,239 | | | | | | | | | |
Accrued liabilities | | | 109,061 | | | | — | | | | 109,061 | | | | | | | | | |
Notes payable, net of discount (1) | | | 422,646 | | | | (34,483 | ) | | | 388,163 | | | | | | | | | |
Convertible bridge loans, less related discount (2) | | | 199,471 | | | | (70,241 | ) | | | 129,230 | | | | | | | | | |
Total current liabilities | | | 850,417 | | | | (104,724 | ) | | | 745,693 | | | | | | | | | |
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Stockholders’ deficiency | | | | | | | | | | | | | | | | | | | | |
Preferred stock, $0.0001 par value, 2,000,000 shares authorized, no shares issued and outstanding | | | — | | | | — | | | | — | | | | | | | | | |
Common stock, $0.00001 par value, 30,000,000 shares authorized, 10,994,823 shares issued and outstanding at December 31, 2012 (3) | | | 109 | | | | 2 | | | | 111 | | | | | | | | | |
Additional paid-in capital (3) | | | 1,083,585 | | | | 1,198,505 | | | | 2,282,090 | | | | | | | | | |
Deficit accumulated during the development stage (3) | | | (1,824,804 | ) | | | (1,093,783 | ) | | | (2,918,587 | ) | | | | | | | | |
Total stockholders’ deficiency | | | (741,110 | ) | | | 104,724 | | | | (636,386 | ) | | | | | | | | |
Total liabilities and stockholders’ deficiency | | $ | 109,307 | | | $ | — | | | $ | 109,307 | | | | | | | | | |
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| (1) Common stock was issued in connection with the notes payable issued in 2011 resulting in a debt discount. The common stock was originally valued at approximately $0.53 per share resulting in a total discount of $33,224. However, it was determined that the proper value was $0.38 per share resulting in a revised discount of $155,936. The revised value of $0.38 per share was based on stock sales during 2012. The restatement adjustment relates to the correction in amortization related to the debt discount. | | | | | | | | | | | | | | | | | | | |
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| (2) Warrants were issued in connection with the convertible bridge loans in 2012 resulting in a debt discount. The warrants were originally assigned an aggregate fair value of $8,106 based on a fair value range per share between $0.017 and $0.025. It was determined the inputs used in the fair value calculations were not correct. After revaluing the warrants, the revised aggregate fair value was $90,893 based on a fair value range per share between $0.29 and $0.30. | | | | | | | | | | | | | | | | | | | |
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| (3) The restatement adjustment to common stock at par value, to additional paid-in capital and to deficit accumulated during the development stage relates to the revaluation of options, warrants and stock issued in exchange for services. The revaluation of options, warrants and stock issued in exchange for services is described in detail below. | | | | | | | | | | | | | | | | | | | |
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The following table presents the statement of operations as previously reported, restatement adjustments and the statement of operations as restated for the year ended December 31, 2012: |
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| | Previously | | | Restatement | | | Restated | | | | | | | | | |
Reported | Adjustments | | | | | | | | |
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REVENUE | | $ | 117,733 | | | $ | — | | | | 117,733 | | | | | | | | | |
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COST OF SALES | | | (4,000 | ) | | | — | | | | (4,000 | ) | | | | | | | | |
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GROSS PROFIT | | | 113,733 | | | | — | | | | 113,733 | | | | | | | | | |
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OPERATING EXPENSES | | | | | | | | | | | | | | | | | | | | |
Research and development (1) | | | 2,340 | | | | 28,083 | | | | 30,423 | | | | | | | | | |
Professional fees (2) | | | 264,045 | | | | 150,349 | | | | 414,394 | | | | | | | | | |
Selling (2) | | | 214,901 | | | | 439,809 | | | | 654,710 | | | | | | | | | |
General and administrative (2) | | | 660,198 | | | | (112,720 | ) | | | 547,478 | | | | | | | | | |
TOTAL EXPENSES | | | 1,141,484 | | | | 505,521 | | | | 1,647,005 | | | | | | | | | |
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NET OPERATING LOSS | | | (1,027,751 | ) | | | 505,521 | | | | (1,533,272 | ) | | | | | | | | |
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OTHER EXPENSE: | | | | | | | | | | | | | | | | | | | | |
Interest expense (3) | | | (72,620 | ) | | | (64,483 | ) | | | (137,103 | ) | | | | | | | | |
TOTAL OTHER EXPENSE | | | (72,620 | ) | | | (64,483 | ) | | | (137,103 | ) | | | | | | | | |
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NET LOSS | | $ | (1,100,371 | ) | | $ | (570,004 | ) | | $ | (1,670,375 | ) | | | | | | | | |
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Net loss per weighted share, basic and fully diluted | | $ | (0.10 | ) | | $ | — | | | $ | (0.16 | ) | | | | | | | | |
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Weighted average number of common shares outstanding, basic and fully diluted | | | 10,721,012 | | | | — | | | | 10,721,012 | | | | | | | | | |
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| (1) Payments related to research and development were reclassified from general and administrative to research and development. | | | | | | | | | | | | | | | | | | | |
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| (2) The restatement adjustments to professional fees, selling expenses and general and administrative expenses relate to the revaluation of options, warrants and stock issued in exchange for services which is described in more detail below. | | | | | | | | | | | | | | | | | | | |
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| (3) The restatement adjustments to interest expense relates to the revaluation of options, warrants and stock issued in exchange for services which is described in more detail below. | | | | | | | | | | | | | | | | | | | |
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The following table presents the statement of cash flows as previously reported, restatement adjustments and the statement of cash flows as restated for the year ended December 31, 2012: |
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| | Previously | | | Restatement | | | Restated | | | | | | | | | |
Reported | Adjustments | | | | | | | | |
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Cash flows from operating activities: | | | | | | | | | | | | | | | | | |
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Net loss | | $ | (1,100,371 | ) | | $ | (570,040 | ) | | $ | (1,670,375 | ) | | | | | | | | |
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Adjustment to reconcile net loss to net cash: | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 12,384 | | | | — | | | | 12,384 | | | | | | | | | |
Stock-based compensation (1) | | | 411,366 | | | | 423,772 | | | | 835,138 | | | | | | | | | |
Stock, options and warrants issued for services (1) | | | 21,800 | | | | 81,750 | | | | 103,550 | | | | | | | | | |
Interest expense (1) | | | 38,601 | | | | 64,484 | | | | 103,085 | | | | | | | | | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | | | | |
Accounts receivable | | | 5,050 | | | | — | | | | 5,050 | | | | | | | | | |
Deposits and prepaid expenses | | | (3,489 | ) | | | — | | | | (3,489 | ) | | | | | | | | |
Accounts payable and accrued expenses | | | 143,396 | | | | | | | | 143,343 | | | | | | | | | |
Net cash used for operating activities | | | (471,263 | ) | | | | | | | (471,263 | ) | | | | | | | | |
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Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Proceeds from the sale of common stock | | | 294,200 | | | | — | | | | 294,200 | | | | | | | | | |
Net proceeds from borrowings on notes payable | | | 206,250 | | | | — | | | | 206,250 | | | | | | | | | |
Net cash used for financing activities | | | 500,450 | | | | — | | | | 500,450 | | | | | | | | | |
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Net increase (decrease) in cash | | | 29,187 | | | | | | | | 29,187 | | | | | | | | | |
Cash, beginning of period | | | 55,000 | | | | — | | | | 55,000 | | | | | | | | | |
Cash, end of period | | $ | 84,187 | | | $ | — | | | $ | 84,187 | | | | | | | | | |
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Supplemental Disclosures: | | | | | | | | | | | | | | | | | | | | |
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Cash paid during the year for: | | | | | | | | | | | | | | | | | | | | |
Interest | | $ | — | | | $ | — | | | $ | — | | | | | | | | | |
Income taxes | | $ | — | | | $ | — | | | $ | — | | | | | | | | | |
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| (1) The restatement to the cash flow statements arises from the revaluation of options, warrants and stock issued for services which is described below. | | | | | | | | | | | | | | | | | | | |
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The following table presents the consolidated statement of stockholders’ deficit as previously reported, restatement adjustments and the consolidated statement of cash flows as restated for the year ended December 31, 2012: |
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| | Shares | | | Amount | | | Additional Paid-In Capital | | | Deficit Accumulated During Development Stage | | | Total | |
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Balance, December 31, 2012, as previously reported | | | 10,994,823 | | | $ | 109 | | | $ | 1,083,585 | | | $ | (1,824,804 | ) | | $ | (741,110 | ) |
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Restatement adjustments (1) | | | — | | | | 2 | | | | 1,198,505 | | | | (1,093,783 | ) | | | 104,724 | |
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Balance, December 31, 2012, as restated | | | 10,994,823 | | | $ | 111 | | | $ | 2,282,090 | | | $ | (2,918,587 | ) | | $ | (636,386 | ) |
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| (1) The restatement adjustments to the statement of stockholders’ equity relates to the revaluation of options, warrants and stock issued for services which is described below. | | | | | | | | | | | | | | | | | | | |
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| Revaluation of Options, Warrants and Stock issued for Services | | | | | | | | | | | | | | | | | | | |
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Stock issued for services |
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During 2011, stock issued for services was originally valued at $0.08 per share resulting in an aggregate fair value of $3,448. The stock was revalued at $0.38 per share to be consistent with stock sales during 2011 resulting in an aggregate fair value of $107,735. The difference in fair value before and after the revaluation amounted to $104,287. Stock issued for services during 2012 was originally valued at $0.08 per share resulting in an aggregate fair value of $21,800. The stock was revalued at $0.38 per share to be consistent with stock sales during 2012 resulting in an aggregate fair value of $103,550. The difference in fair value before and after the revaluation amounted to $81,750. |
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Warrants |
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Warrants which were issued in 2012 were originally assigned an aggregate fair value of $8,106 based on a fair value range per warrant between $0.017 and $0.025. It was determined the inputs used in the fair value calculations were not correct. After revaluing the warrants, the revised aggregate fair value was $90,893 based on a fair value range per warrant between $0.29 and $0.30. The difference in fair value before and after the revaluation amounted to $82,787. The difference in inputs related to the fair value calculation is detailed in the following table: |
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| | Original Inputs | | | Revised Inputs | | | | | | | | | | | | | |
Underlying price | | $ | 0.38 | | | $ | 0.38 | | | | | | | | | | | | | |
Strike price | | $ | 0.5 | | | $ | 0.5 | | | | | | | | | | | | | |
Range of contractual term to expiration | | 0.70 – 0.99 Years | | | 6.70 – 6.99 Years | | | | | | | | | | | | | |
Volatilities | | | 40 | % | | | 100 | % | | | | | | | | | | | | |
Risk-free rates | | | 0.13% - 0.18 | % | | | 1.01% - 1.24 | % | | | | | | | | | | | | |
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Stock Options |
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Stock options issued in 2011 were originally assigned an aggregate fair value of $55,837 based on a fair value per option of $0.3102. It was determined the inputs used in the fair value calculations were not correct. After revaluing the options, the revised aggregate fair value was $439,034 based on a fair value per option of $2.44. The difference in fair value before and after the revaluation amounted to $383,197. Stock options issued in 2012 were originally assigned an aggregate fair value of $411,366 based on a fair value per option of $0.1387. It was determined the inputs used in the fair value calculations were not correct. After revaluing the options, the revised aggregate fair value was $835,138 based on a fair value per option of $0.2817. The difference in fair value before and after the revaluation amounted to $423,772. The difference in inputs related to the fair value calculation is detailed in the following tables: |
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| | 2011 Options | | | | | | | | | | | | | |
| | Original Inputs | | | Revised Inputs | | | | | | | | | | | | | |
Underlying price | | $ | 0.37 | | | $ | 0.38 | | | | | | | | | | | | | |
Exercise price | | $ | 0.08 | | | $ | 0.08 | | | | | | | | | | | | | |
Expected term | | 10 Years | | | 4.92 Years | | | | | | | | | | | | | |
Volatilities | | | 40 | % | | | 100 | % | | | | | | | | | | | | |
Risk-free rates | | | 1.8 | % | | | 0.97 | % | | | | | | | | | | | | |
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| | 2012 Options | | | | | | | | | | | | | |
| | Original Inputs | | | Revised Inputs | | | | | | | | | | | | | |
Underlying price | | $ | 0.31 | | | $ | 0.38 | | | | | | | | | | | | | |
Exercise price | | $ | 0.38 | | | $ | 0.38 | | | | | | | | | | | | | |
Expected term | | 10 Years | | | 5 Years | | | | | | | | | | | | | |
Volatilities | | | 40 | % | | | 100 | % | | | | | | | | | | | | |
Risk-free rates | | | 0.72 | % | | | 0.72 | % | | | | | | | | | | | | |
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Common stock issued in connection with note purchase agreement |
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During 2011, stock issued in connection with a note purchase agreement was originally valued at approximately $0.53 per share resulting in an aggregate fair value of $33,226. The stock was revalued at $0.38 per share to be consistent with stock sales during 2011 resulting in an aggregate fair value of $155,938. The difference in fair value before and after the revaluation amounted to $122,712. |
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Summary |
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The aggregate change in fair value before and after the revaluations amounted to $1,198,505 which is the direct restatement adjustment to additional paid-in capital. The restatement adjustment to deficit accumulated during development stage amounted to $1,093,783. The difference between the adjustments to additional paid-in capital and deficit accumulated during development stage amounted to $104,772, which is directly related to debt discount arising from common stock issued in connection with the note purchase agreement. |