UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
AMENDMENT NO. 1 TO FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2013 |
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ |
Commission File No. 333-180653 | ||
| CODESMART HOLDINGS, INC. | ||
| (Exact Name of Registrant as Specified in its Charter) | ||
| Florida | 45-4523372 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
5029 Apple Lane Mohnton, PA 19540 | (646)-248-8550 | |
| (Address of Principal Executive Offices and Zip Code) | (Registrant’s Telephone Number, Including Area Code) |
Securities registered pursuant to Section 12(b) of the Securities Exchange Act: None
Securities registered pursuant to Section 12(g) of the Securities Exchange Act: Common Stock, par value $.0001
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | o |
| Non-accelerated filer | o | Smaller reporting company | x |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x
The aggregate market value of the voting common equity held by non-affiliates based upon the price at which Common Stock was last sold as of June 28, 2013, the last business day of the registrant’s most recently completed second fiscal quarter was $37,241,053.
As of April 15, 2014, the number of shares of the registrant’s common stock outstanding was 22,635,455.
EXPLANATION NOTE
This Amendment No. 1 to the Annual Report on Form 10-K/A of CodeSmart Holdings, Inc. (the “Company”) for the year ended December 31, 2013 is being filed to amend the financial information contained in the Management’s Discussion and Analysis of Financial Condition and Plan of Operation in Part I and the financial statements in Part IV of the Company’s Annual Report on Form 10-K for year ended December 31, 2013 which was filed with the Securities and Exchange Commission (“SEC”) on April 21, 2014 (the “Form 10-K”).
In its previously filed financial statements for the year ended December 31, 2013 included in its annual report in Form 10-K, the Company recorded tuition and training related fees as revenue upon enrollment. The Company has restated its financial statements for the period ended December 31, 2013 to reflect all tuition and training related fees as deferred revenue to be amortized over a 12 to 18 month period. The Company provides online access to its students for a period of 12 to 18 months subsequent to enrollment in online courses. Therefore, the Company has established such period as the amortization period of deferred revenues recorded for the enrollment of online courses.
Except as described above, no other parts of the 10-K are being amended.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements that involve known and unknown risks, significant uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, or implied, by those forward-looking statements. You can identify forward-looking statements by the use of the words may, will, should, could, expects, plans, anticipates, believes, estimates, predicts, intends, potential, proposed, or continue or the negative of those terms. These statements are only predictions. In evaluating these statements, you should consider various factors which may cause our actual results to differ materially from any forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.
Plan of Operations
The Company has implemented operations and anticipates achieving its goals and objectives by reaching healthcare organizations including hospitals, private physician practices and specialty care centers in order to provide ICD-10 training, Clinical Documentation Software sales and consulting services. The Company intends to utilize a strong branding and marketing campaign to reach such organizations. The Company intends to utilize a multifaceted and aggressive marketing campaign including a direct marketing plan in order to build the CodeSmart brand.
Results of Operations for the year ended December 31, 2013 and the period October 3, 2012 (inception) to December 31, 2012
Revenue and Gross Profit
During the year ended December 31, 2013, the Company earned $122,260 in instructional revenue. The Company incurred $45,814 in costs associated with earning the revenue. In addition, the Company earned $146,620 in consulting revenue for ICD-10 implementation and analysis and incurred costs of $39,721 associated with earning the revenue. As a result, the Company’s gross profit for the year ended December 31, 2013 was $183,345. The Company had no revenue or costs associated with earning revenue during the period October 3, 2012 (inception) to December 31, 2012.
Operating Expenses
Operating expenses for the year ended December 31, 2013 consisted primarily of compensation and benefits of $3,550,423 and professional fees of $8,559,627. These expenses, aggregating $12,110,050, include share-based compensation of $9,676,278. Share based compensation was attributed primarily to the issuance of shares to executive officers, management personnel and consultants in exchange for consulting services, founders fees, financing costs and compensation. The Company does not expect these expenses to recur at this level in the future and therefore anticipates that the overall amount of compensation and benefits and professional fees for 2014 will decrease significantly. Professional fees were incurred primarily for legal, accounting and consulting costs in connection with the Company’s start-up and organizational costs, reverse acquisition and costs related to the sales of securities and convertible notes. The Company anticipates that it will continue to incur a significant amount of legal costs in the upcoming year as it continues to pursue financings for the Company in the form of sales of securities and convertible notes. The Company incurred $23,386 in general and administrative expenses for the period October 3, 2012 (inception) to December 31, 2012.
Loss from Operations
Loss from operations for the year ended December 31, 2013 and the period October 3, 2012 (inception) to December 31, 2012 was $12,959,304 and $23,386, respectively. The loss for the year ended December 31, 2013 was primarily attributable to the compensation and benefits and professional fees described above of $12,110,050, other operating expenses, including research and development, advertising and general and administrative expenses of $1,032,599, offset by gross profits earned from tuition and consulting revenue. The loss from operations for the period October 3, 2012 (inception) to December 31, 2012 was due to general and administrative expenses.
1
Net Loss
Net loss for the year ended December 31, 2013 and the period October 3, 2012 (inception) to December 31, 2012 was $16,138,003 and $23,386, respectively. The net loss was primarily attributable to the loss from operations, derivative expense and changes in the fair value of our derivative instrument liabilities of $1,889,868. The net loss for the period October 3, 2012 (inception) to December 31, 2012 was due to general and administrative expenses.
Inflation did not have a material impact on the Company’s operations for the period. The delay of the implementation of ICD-10 to October 1, 2015, announced on March 31, 2014 could have a material impact on the Company’s operations for the upcoming year. Other than the foregoing, management knows of no trends, demands, or uncertainties that are reasonably likely to have a material impact on the Company’s results of operations.
Liquidity and Capital Resources
Cash and Working Capital
As of December 31, 2013, we had a working capital deficit of $1,598,025. Our current liabilities of $1,960,716 exceeded our current assets of $362,691. We had an accumulated deficit of $22,369,229 from the period October 3, 2012 (inception) to December 31, 2013. However, we have no contingencies or long-term obligations.
As of December 31, 2012, we had working capital of $3,949. Our current assets of $6,074, consisting of cash exceeded our current liabilities of $2,125. We had an accumulated deficit of $23,386 from October 3, 2012 (inception) to December 31, 2012. However, we had no contingencies or long-term obligations.
We had a cash balance of $153,834 on December 31, 2013. Net cash used for operating activities for the year ended December 31, 2013 was $2,751,913. The net loss for the year ended December 31, 2013 was $16,138,003. Cash used in operating activities was for compensation, professional fees and marketing and advertising.
We had a cash balance of $6,074 on December 31, 2012. Net cash used for operating activities for the period October 3, 2012 (inception) to December 31, 2012 was $18,926. The net loss for the period October 3, 2012 (inception) to December 31, 2012 was $23,386. Cash used in operating activities was for general and administrative expenses.
Net cash obtained through all financing activities for the year ended December 31, 2013 was $2,904,673. This consisted of $3,571,173 in proceeds from the sale and issuance of common stock, $992,500 from the issuance of secured convertible notes, offset by payments of $231,000, $28,000 and $50,000 to cancel the outstanding shares of the predecessor’s restricted block of common stock outstanding as part of our recapitalization, payments for debt issuance costs and the repayment of a convertible note, respectively. An additional offset to the above, the Company issued the former non-controlling interest holder a dividend of $6,207,840, including a cash portion of $1,350,000, to convert his non-controlling interest in the Company’s operating subsidiary into shares of the Company’s common stock, enabling the Company to own 100% of the operating subsidiary. For the year ended December 31, 2013, we had net cash flows of $147,760.
Financings and Sources of Liquidity
During 2013, we issued seven convertible notes and debentures, with aggregate face values of approximately $1,070,000, resulting in net proceeds of approximately $992,500. Subsequent to December 31, 2013 and through April 15, 2014, the Company issued nine convertible notes to various investors, with aggregate face values of approximately $860,000, resulting in net proceeds of approximately $745,000. In addition, in January 2014, the Company sold 129,630 shares of the Company’s common stock to an investor for approximately $62,000 and in March 2014 sold 382,500 shares of common stock to various investors for approximately $153,000.
Over the next 12 months, we plan to continue to fund our operations through the sale of common stock, common stock warrants, convertible notes or a combination thereof. There is no guarantee that the Company will be able to raise sufficient capital.
Going Concern
As reflected in the accompanying consolidated financial statements, the Company had a net loss of $16,138,003 and net cash used in operations of $2,751,913, for the year ended December 31, 2013. In addition, the Company has an accumulated deficit of $22,369,229 and $23,386 as of December 31, 2013 and December 31, 2012, respectively.
The consolidated financial statements have been prepared on the going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of operations. The ability of the Company to continue its operations is dependent on management’s plans, which include the raising of capital through debt and/or equity markets with some 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 Company may need to incur additional liabilities with certain related parties to sustain the Company’s existence. If the Company were not to continue as a going concern, it would likely not be able to realize its assets at values comparable to the carrying value or the fair value estimates reflected in the our consolidated financial statements. There can be no assurances that the Company will be successful in generating additional cash from equity or other sources to be used for operations. The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
2
On March 31, 2014, the implementation of ICD-10 was once again delayed. As of today, the implementation is scheduled to take effect on October 1, 2015. Because of the delay, we do not anticipate generating any significant revenues or cash flows related to ICD-10 training.
To date, all of our funding has been generated from private investors. During the next 12 months, we anticipate obtaining additional funding to continue expansion and basic company operations. We do not have sufficient funds to fully implement our business plan until such time as we are able to raise additional funds, of which there is no guarantee. If we do not obtain the funds necessary for us to continue our business activities, we may need to curtail or cease our operations until such time as we have sufficient funds.
Recent Accounting Pronouncements
There are no recent accounting pronouncements that are expected to have an effect on the Company’s consolidated financial statements.
Critical Accounting Policies
In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), we have adopted various accounting policies. Our most significant accounting policies are disclosed in Note 2 to the consolidated financial statements. The preparation of the consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Our critical accounting estimates include the following:
Revenue Recognition
Revenues consist primarily of tuition and fees derived from online courses taught by CODESMART™ UNIVERSITY as well as from related educational resources that the University provides to its students, such as access to our online materials and learning management system. The Company provides online access to its students for a period of 12 to 18 months subsequent to enrollment in online courses. Therefore, the Company has established such period as the amortization period of deferred revenues recorded for the enrollment of online courses. Accordingly, tuition revenue and most fees from related educational resources are recorded as deferred revenue and amortized into revenue over a 12 to 18 month period. The University maintains an institutional tuition refund policy, which provides for a full refund within stated refund periods. Certain states in which students reside impose separate, mandatory refund policies, which override the University’s policy to the extent in conflict. If a student withdraws within the University’s allotted refund period, then in accordance with its revenue recognition policy, the University will immediately not recognize as revenue the tuition that was originally recorded.
Segment Information
ASC 280-10, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The method for determining what information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. The Company’s chief operating decision-maker is considered to be the Company’s chief executive officer (“CEO”). The CEO reviews financial information presented on an entity level basis accompanied by disaggregated information about revenues by product type and certain information about geographic regions for purposes of making operating decisions and assessing financial performance. The entity level financial information is identical to the information presented in the accompanying consolidated statements of operations. Currently Management believes that the business operations are all contained in one segment and Management will continue to evaluate their reporting in the future.
Exit from Development Stage
The Company was in the development stage as defined by ASC 915 “Development Stage Entities.” A development stage enterprise is one in which planned and principal operations have not commenced or, if its operations have commenced, there has been no significant revenue there from. The Company exited the development stage May 3, 2013.
Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
The Company accounts for share based payments to non-employees in accordance with ASC 505-50 “Accounting for Equity Instruments Issued to Non-Employees for Acquiring, or in Conjunction with Selling, Goods or Services”.
Transactions in which or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur. Common stock issued for services is valued based on quoted market prices for our common stock. The related expense is recognized when the services are provided or over the term of the agreement with the service provider.
Derivative Liabilities Valued at Fair Value
We generally do not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks. However, certain financial instruments, such as the embedded conversion option in our convertible notes and common stock warrants, which are indexed to our common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within our control. In such instances, net-cash settlement is assumed for financial accounting and reporting purposes, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded, and continuously carried, at fair value.
Determining the fair value of these instruments involves judgment and the use of certain relevant assumptions including, but not limited to, the volatility of our common stock, interest rates, anti-dilution provisions, and conversion/redemption privileges. The use of different assumptions or changes in those assumptions could have a material effect on the estimated fair value amounts.
3
Long-lived Assets
We review long-lived assets which are held and used, including investments and property and equipment, for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset over its expected useful life and are significantly impacted by estimates of future prices, capital needs, economic trends and other factors that are inherently difficult to forecast. If the asset is considered to be impaired, we record an impairment charge equal to the amount by which the carrying value of the asset exceeds its fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique.
Off Balance Sheet Arrangements:
We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) | Financial Statements |
The following are filed as part of this report:
| Financial Statements |
The consolidated financial statements of CodeSmart Holdings, Inc. and the Report of Independent Registered Public Accounting Firm are presented in the “F” pages of this Report.
| (b) | Exhibits |
The following exhibits are filed or “furnished” herewith:
Exhibit Number | Description | |
| 31.1 | Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002; * | |
| 31.2 | Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002; * | |
| 32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | |
| 101.INS | XBRL Instance Document. ** | |
| 101.SCH | XBRL Taxonomy Extension Schema Document. ** | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. ** | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. ** | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document.** | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document.** |
| * | Filed herewith |
| ** | Users of this data are advised pursuant to Rule 406T of Regulation S-X that this interactive data file is deemed not filed or part of a registration statement or prospectus for the purpose of section 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections |
5
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| CODESMART HOLDINGS, INC. | |||
Dated: June 19, 2014 | By: | /s/ Ira Shapiro | |
Ira Shapiro Chief Executive Officer | |||
Dated: June 19, 2014 | By: | /s/ Sharon Franey | |
Sharon Franey Chief Operating Officer | |||
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Dated: June 19, 2014 | By: | /s/ Ira Shapiro | |
Ira Shapiro Director | |||
Dated: June 19, 2014 | By: | /s/ Sharon Franey | |
Sharon Franey Director |
6
 | 114 West 47th Street, 19th Floor New York, NY 10036 Telephone: 212.785.9700 Fax: 212.785.0700 www.kbl.com |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
CodeSmart Holdings, Inc. and Subsidiaries
(fka First Independence Corp.)
We have audited the accompanying consolidated balance sheets of CodeSmart Holdings, Inc. and Subsidiaries (fka First Independence Corp.) (the “Company”), as of December 31, 2013 and 2012, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the year ended December 31, 2013, and for the period from inception (October 3, 2012 ) to December 31, 2012. CodeSmart Holdings, Inc. and Subsidiaries’ management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CodeSmart Holdings, Inc. and Subsidiaries as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the year ended December 31, 2013, and for the period from inception (October 3, 2012 ) to December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 3 to the financial statements, in its audited financial statements for the year ended December 31, 2013 the Company recorded tuition and training related fees as revenue upon enrollment. The Company is restating its financial statements to reflect all tuition and training related fees as deferred revenue to be amortized over a 12 to 18 month period.
Correction of the aforementioned presentation and disclosure has resulted in an increase in prepaid and other current assets of $56,075 and an increase in deferred revenue of $150,470. In addition, the correction has also resulted in an increase in net loss for the year ended December 31, 2013 as well as increase in the accumulated deficit at December 31, 2013 of $94,395. Finally, the disclosure related to the Company's revenue recognition and deferred revenue policies has been modified to reflect the change discussed in the previous paragraph.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations, and is dependent upon debt and equity financing to provide sufficient working capital to maintain continuity. These circumstances create substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
KBL, LLP
KBL, LLP
New York, NY
April 18, 2014, except for the effects of financial restatements described in Note 3, as to which the date is June 18, 2014.
F-1
CodeSmart Holdings, Inc. and Subsidiaries |
Fka First Independence Corp. Consolidated Balance Sheets |
December 31, 2013 | December 31, 2012 | |||||||
| (Restated) | ||||||||
| Assets | ||||||||
| Cash | $ | 153,834 | $ | 6,074 | ||||
| Accounts receivable | 37,597 | - | ||||||
| Prepaid expenses and other current assets | 171,260 | - | ||||||
| Total current assets | 362,691 | 6,074 | ||||||
| Property and equipment, net | 3,889 | - | ||||||
| Total assets | $ | 366,580 | $ | 6,074 | ||||
| Liabilities and Stockholders' Equity (Deficit) | ||||||||
| Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 591,378 | $ | 2,125 | ||||
| Secured convertible notes payable – net | 65,382 | - | ||||||
| Deferred revenue | 150,470 | - | ||||||
| Securities payable | 16,500 | - | ||||||
| Derivative liabilities - convertible notes | 991,148 | - | ||||||
| Derivative liabilities - warrants | 145,838 | - | ||||||
| Total current liabilities | 1,960,716 | 2,125 | ||||||
| Total liabilities | 1,960,716 | 2,125 | ||||||
| Stockholders' Equity (Deficit) | ||||||||
| Preferred stock, Series A, $0.0001 par value; 100,000,000 and 0 shares authorized; | ||||||||
| 1 share and 0 shares issued and outstanding, respectively | - | - | ||||||
| Common stock, $0.0001 par value; 500,000,000 and 100,000,000 shares authorized; | ||||||||
| 21,103,430 and 23,425,000 shares issued and outstanding, respectively | 2,110 | 2,343 | ||||||
| Additional paid in capital | 20,772,983 | 24,992 | ||||||
| Accumulated deficit | (22,369,229 | ) | (23,386 | ) | ||||
| Total Stockholders' Equity (Deficit) | (1,594,136 | ) | 3,949 | |||||
| Total Liabilities and Stockholders' Equity (Deficit) | $ | 366,580 | $ | 6,074 | ||||
The accompany notes are an integral part of the consolidated financial statements
F-2
CodeSmart Holdings, Inc. and Subsidiaries |
Fka First Independence Corp. Consolidated Statements of Operations |
For the year ended December 31, 2013 | The period October 3, 2012 (inception) to December 31, 2012 | |||||||
| (Restated) | ||||||||
| Revenue | $ | 268,880 | $ | - | ||||
| Cost of revenue | 85,535 | - | ||||||
| Gross profit | 183,345 | - | ||||||
| Operating expenses: | ||||||||
| Compensation | 3,550,423 | - | ||||||
| Professional fees | 8,559,627 | - | ||||||
| Research and development | 178,654 | - | ||||||
| Advertising and promotions | 339,629 | - | ||||||
| Other general and administrative expenses | 514,316 | 23,386 | ||||||
| Total operating expenses | 13,142,649 | 23,386 | ||||||
| Loss from operations | (12,959,304 | ) | (23,386 | ) | ||||
| Other income (expenses) | ||||||||
| Interest expense | (288,956 | ) | - | |||||
| Interest income | 125 | - | ||||||
| Change in fair value of derivative liability – convertible notes | (1,556,255 | ) | - | |||||
| Change in fair value of derivative liability – warrants | (9,464 | ) | - | |||||
| Derivative expense | (324,149 | ) | - | |||||
Loss on investment of Jasper Group Holdings, Inc. | (1,000,000 | ) | - | |||||
| Total other income (expense) | (3,178,699 | ) | - | |||||
| Loss before provision for income taxes | (16,138,003 | ) | (23,386 | ) | ||||
| Provision for income taxes | - | - | ||||||
| Net loss | $ | (16,138,003 | ) | $ | (23,386 | ) | ||
| Net loss per common share - basic and diluted | $ | (1.25 | ) | $ | (0.001 | ) | ||
| Weighted average common shares outstanding-basic and diluted | 12,898,463 | 23,365,169 | ||||||
The accompany notes are an integral part of the consolidated financial statements
F-3
Codesmart Holdings, Inc. and Subsidiaries |
Fka First Independence Corp. Consolidated Statement of Changes in Stockholders' Equity (Deficit) |
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders' Equity | |||||||||||||||||||||||
| Shares | Par | Shares | Par | Capital | Deficit | (Deficit) | |||||||||||||||||||||
| Balance at October 3, 2012 (inception) | - | $ | - | - | $ | - | $ | - | - | $ | - | ||||||||||||||||
| - | - | ||||||||||||||||||||||||||
| Founders stock issued for services, $0.0001 per share | - | - | 23,350,000 | 2,335 | - | - | 2,335 | ||||||||||||||||||||
| Stock sold through subscription agreements December 2012 at $0.33 per share | - | - | 75,000 | 8 | 24,992 | - | 25,000 | ||||||||||||||||||||
| Net loss | (23,386 | ) | (23,386 | ) | |||||||||||||||||||||||
| Balance, December 31, 2012 | - | $ | - | 23,425,000 | $ | 2,343 | $ | 24,992 | (23,386 | ) | $ | 3,949 | |||||||||||||||
| Stock sold through subscription agreements at $0.33 per share | - | - | 75,000 | 8 | 24,992 | - | 25,000 | ||||||||||||||||||||
| Net effect of recapitalization (May 3, 2013) | - | - | (8,567,000 | ) | (857 | ) | 7,126,303 | (6,207,840 | ) | 917,606 | |||||||||||||||||
| Stock sold through subscription agreements at $0.80 per share | - | - | 337,500 | 34 | 269,966 | - | 270,000 | ||||||||||||||||||||
| Stock sold through subscription agreements at $1.50 per share | - | - | 2,112,871 | 211 | 3,169,092 | - | 3,169,303 | ||||||||||||||||||||
| Stock sold through Securities Purchase Agreement at $0.483 per share | - | - | 240,500 | 24 | 106,846 | - | 106,870 | ||||||||||||||||||||
| Stock issued pursuant to issuance costs | - | - | 434,467 | 43 | 1,357,217 | - | 1,357,260 | ||||||||||||||||||||
| Stock issued for note issuance costs | - | - | 50,000 | 5 | 44,495 | - | 44,500 | ||||||||||||||||||||
| Stock issued pursuant to note conversions | - | - | 318,628 | 32 | 254,804 | - | 254,836 | ||||||||||||||||||||
| Stock issued for services rendered | - | - | 2,276,464 | 227 | 5,819,316 | - | 5,819,543 | ||||||||||||||||||||
| Preferred stock, Series A, issued for compensation expense | 1 | - | - | - | - | - | - | ||||||||||||||||||||
| Stock issued pursuant to Acquisition of 10% of Jasper | - | - | 400,000 | 40 | 999,960 | - | 1,000,000 | ||||||||||||||||||||
| Reclassification of derivative liability to additional paid in capital | - | - | - | - | 1,575,000 | - | 1,575,000 | ||||||||||||||||||||
| Net loss | - | - | - | - | - | (16,138,003 | ) | (16,138,003 | ) | ||||||||||||||||||
Balance, December 31, 2013 (Restated) | 1 | $ | - | 21,103,430 | $ | 2,110 | $ | 20,772,983 | $ | (22,369,229 | ) | $ | (1,594,136 | ) | |||||||||||||
The accompany notes are an integral part of the consolidated financial statements
F-4
Codesmart Holdings, Inc. and Subsidiaries | |
Fka First Independence Corp. Consolidated Statements of Cash Flows |
For the year ended December 31, 2013 | The period October 3, 2012 (inception) to December 31, 2012 | |||||||
| (Restated) | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (16,138,003 | ) | $ | (23,386 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 1,111 | - | ||||||
| Interest expense including OID and note issuance costs | 288,799 | - | ||||||
| Share-based compensation | 9,676,278 | 2,335 | ||||||
| Derivative expense and change in fair value of derivative liabilities | 1,889,868 | - | ||||||
| Loss on investment of Jasper Group Holdings, Inc. | 1,000,000 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Increase in accounts receivable | (37,597 | ) | - | |||||
| Increase in prepaid expenses and other current assets | (171,260 | ) | - | |||||
| Increase in deferred revenue | 150,470 | - | ||||||
| Increase in accounts payable and accrued expenses | 588,421 | 2,125 | ||||||
| Net Cash Used in Operating Activities | (2,751,913 | ) | (18,926 | ) | ||||
| CASH FLOWS USED IN INVESTING ACTIVITIES: | ||||||||
| Cash paid for equipment | (5,000 | ) | - | |||||
| Net Cash Used In Investing Activities | (5,000 | ) | - | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of common stock | 3,571,173 | 25,000 | ||||||
| Proceeds from the issuance of secured convertible notes | 992,500 | - | ||||||
| Debt issuance costs paid in cash | (28,000 | ) | - | |||||
| Cash paid for repayment of notes | (50,000 | ) | - | |||||
| Cash paid for dividends (through recapitalization) | (1,350,000 | ) | - | |||||
| Cash paid to cancel shares (through recapitalization) | (231,000 | ) | - | |||||
| Net Cash Provided By Financing Activities | 2,904,673 | 25,000 | ||||||
| Net Increase in Cash | 147,760 | 6,074 | ||||||
| Cash - Beginning of Period | 6,074 | - | ||||||
| Cash - End of Period | $ | 153,834 | $ | 6,074 | ||||
| SUPPLEMENTARY CASH FLOW INFORMATION: | ||||||||
| Cash Paid During the Period for: | ||||||||
| Income taxes | $ | - | $ | - | ||||
| Interest | $ | 157 | $ | - | ||||
| SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Conversion of convertible notes and interest into common stock | $ | 1,829,599 | $ | - | ||||
| Dividend paid in stock to non-controlling interest | $ | 4,857,840 | $ | - | ||||
| Shares issued for the acquisition of 10% of Jasper Holdings, Inc. | $ | 1,000,000 | $ | - | ||||
The accompany notes are an integral part of the consolidated financial statements
F-5
Fka First Independence Corp.
Notes to Consolidated Financial StatementsDecember 31, 2013 and 2012
Note 1 Nature of Operations
CodeSmart Holdings, Inc. (the “Company”) a Florida corporation was incorporated in the State of Florida on February 10, 2012 under the name “First Independence Corp.” On June 14, 2013, the Company amended its Articles of Incorporation to change its name to “CodeSmart Holdings, Inc.” The Company has two wholly-owned subsidiaries - The CodeSmart Group, Inc., a Nevada corporation (“CodeSmart NV”) and American Coding Quality Association, LLC, a Delaware limited liability company (“ACQA”). References to “CODESMART™,” “we,” “us,” or “our,” are references to the combined business of CodeSmart Holdings, CodeSmart NV and ACQA.
On May 3, 2013, the Company and the stockholders of The CodeSmart Group, Inc., a Nevada corporation incorporated on October 3, 2012, ( “CodeSmart NV”) who collectively owned 68.06% of the outstanding shares of CodeSmart NV (the “CodeSmart Stockholders”) completed a reverse acquisition transaction through a Share Exchange Agreement (the “Share Exchange Agreement,” such transaction referred to as the “Share Exchange Transaction”), whereby the Company issued to the CodeSmart Stockholders an aggregate of 6,125,000 shares of its common stock in exchange for the 68.06% of the equity interests of CodeSmart NV held by the CodeSmart Stockholders. As a result of the Share Exchange Transaction, CodeSmart NV became a subsidiary of the Company.
The Share Exchange Transaction was treated as a reverse acquisition for accounting purposes, with CodeSmart NV as the acquirer and the Company as the acquired party. Unless the context suggests otherwise, references in this report to business and financial information for periods prior to the consummation of the reverse acquisition refer to the business and financial information of CodeSmart NV and its predecessors. For accounting purposes, the acquisition of the Company has been treated as a recapitalization with no adjustment to the historical book and tax basis of the Company’s assets and liabilities.
Upon completion of the Share Exchange Transaction, the Company changed its name from First Independence Corp. to CodeSmart Holdings, Inc., changed its fiscal year end from February 28 to a calendar year ending December 31 and commenced trading under the symbol “ITEN” on the OTC QB. The OTC QB market tier of the OTC market helps investors identify companies that are current in their reporting obligations with the SEC. OTC QB securities are quoted on OTC Markets Group's quotation and trading system.
On May 7, 2013, International Alliance Solutions LLC (“IAS”) transferred and assigned the trademark “CODESMART™” to CodeSmart NV. In addition, on July 11, 2013, CodeSmart NV entered into an Assignment Agreement with IAS, whereby IAS agreed to transfer to CodeSmart NV its remaining assets, including but not limited to IAS's rights in any agreements to which it is a party.
On June 3, 2013, the Company entered into a Contribution Agreement with American Coding Quality Association, LLC, a Delaware corporation incorporated on June 3, 2013, (“ACQA”), whereby the sole owner of ACQA contributed 100% of the membership interests of ACQA to the Company and immediately after the effectiveness of the Contribution Agreement, ACQA became a wholly-owned subsidiary of the Company.
On August 20, 2013, the Company and Marc Kovens, who owned the 31.94% shares of the Common Stock of CodeSmart NV that did not participate in the reverse acquisition, entered into and consummated transactions pursuant to a Share Exchange Agreement whereby (i) the Company issued to Kovens an aggregate of 2,808,000 shares of the Company’s common stock and (ii) the Company paid Kovens cash in the amount of $1,350,000, in exchange for the 31.94% of the equity interests in CodeSmart NV owned by Kovens. As a result of the Share Exchange Transaction, CodeSmart NV became a wholly-owned subsidiary of the Company and a non-controlling interest in CodeSmart NV is no longer presented.
The Company was originally formed to private label pourable food products for start-ups, local and national supermarket chains and specialty stores. Since the acquisitions of CodeSmart NV and ACQA, the Company has changed its business direction and is currently engaged in providing training, consulting and other relevant services for ICD-10 preparation, education and implementation. ICD-10 is the 10th revision of the International Statistical Classification of Diseases and Related Health Problems, a medical classification list by the World Health Organization. In 2009, the United States Department of Health and Human Services mandated the transition from ICD-9, the existing coding system, to ICD-10, effective October 1, 2011. The implementation date has since been delayed numerous times and is now scheduled to take effect on October 1, 2015. The Company, through CODESMART™ UNIVERSITY, its online education solutions provider, offers training programs and consulting services to participants in the healthcare industry that need to transition their coding systems to ICD-10.
F-6
Fka First Independence Corp.
Notes to Consolidated Financial StatementsDecember 31, 2013 and 2012
Note 2 Summary of Significant Accounting Policies
Basis of presentation
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These principles require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, together with amounts disclosed in the related notes to the financial statements. Actual results and outcomes may differ from management’s estimates, judgments and assumptions. Significant estimates, judgments and assumptions used in these financial statements include, but are not limited to, those related to revenues, accounts receivable and related allowances, contingencies, useful lives and recovery of long-term assets, income taxes, and the fair value of stock-based compensation and derivative financial instrument liabilities. These estimates, judgments, and assumptions are reviewed periodically and the effects of material revisions in estimates are reflected in the consolidated financial statements prospectively from the date of the change in estimate.
Going Concern
As reflected in the accompanying consolidated financial statements, the Company had a net loss of $16,138,003 and $23,386 for the year ended December 31, 2013 and the period October 3, 2012 (inception) to December 31, 2012, respectively. As of December 31, 2013 and December 31, 2012, has an accumulated deficit of $22,369,229 and $23,386, respectively. Our consolidated 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. We have incurred losses from operations and have a significant accumulated deficit, as well as significant outstanding accounts payable and accrued expenses at December 31, 2013. On March 31, 2014, the United States Department of Health and Human Services once again delayed the implementation of ICD-10. The implementation date has now been scheduled to take effect on October 1, 2015. This delay will cause a significant delay in our ability to generate significant revenues. We currently do not have adequate resources, including cash on hand and expected revenues to meet our operating requirements. Management will look to secure additional funding through the sale of additional convertible Notes or Common Stock. However, there can be no guarantee that we will be successful in obtaining additional debt facilities or raising equity on favorable terms. In the event we are unable to fund our operations by additional borrowings or raising equity capital, we may be forced to reduce our expenses. Our consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, The CodeSmart Group, Inc. (CodeSmart NV), and American Coding Quality Association, LLC (ACQA), (collectively, the Company or we, our or us). All intercompany transactions and balances have been eliminated in consolidation.
F-7
Fka First Independence Corp.
Notes to Consolidated Financial StatementsDecember 31, 2013 and 2012
Risks and Uncertainties
The Company’s operations are subject to significant risk and uncertainties including financial, operational, technological, and regulatory risks including the potential risk of business failure.
Cash
The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. The Company held no cash equivalents at December 31, 2013 and December 31, 2012.
The Company seeks to minimize 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.
Financial Instruments and Concentration of Credit Risk
We believe the carrying values of our financial instruments consisting of cash, accounts receivable, accounts payable, accrued expenses, and other current liabilities approximate their fair values due to their short-term nature or because they are carried at fair value. For our convertible notes and debentures, the underlying instruments are carried at amortized cost and the embedded conversion feature is accounted for separately at fair value in accordance with FASB Accounting Standards Codification (“ASC”) 815 – Derivatives and Hedging.
Our cash balances in the United States periodically exceed federally insured limits. We have not experienced any losses in such accounts.
Fair Value of Financial Instruments
The Company follows the guidance of FASB ASC 825-10-50-10 for disclosures about the fair value of its financial instruments and FASB ASC 820-10-35-37 to measure the fair value of its financial instruments. FASB ASC 820-10-35-37 establishes a framework for measuring fair value and expands disclosures about fair value measurements.
The carrying amount of the Company’s financial assets and liabilities, such as cash, accounts receivable, prepaid expenses, accounts payable and accrued expenses, approximate their fair value because of the short maturity of those instruments. The Company’s secured convertible notes approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at December 31, 2013. The Company did not have any secured convertible notes issued as of December 31, 2012.
The Company’s derivative financial instruments, including warrants and the embedded conversion feature of our convertible notes and debentures, are carried at fair value. FASB ASC 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The Company uses Level 3 of the fair value hierarchy to measure the fair value of its derivative liabilities and revalues the derivative liabilities each reporting period and recognizes gains or losses attributable to the change in the fair value of the derivative liabilities in the consolidated statement of operations.
F-8
Fka First Independence Corp.
Notes to Consolidated Financial StatementsDecember 31, 2013 and 2012
The Company follows the guidance of FASB ASC 360-10-35-17 for its long-lived assets. The Company’s long-lived assets, which include property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
The Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives.
The impairment charges, if any, are included in operating expenses in the accompanying statements of operations.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation is computed by the straight-line method (after taking into account their respective estimated residual values) over the assets estimated useful life of three years. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the statements of operations.
Derivative Instruments
We generally do not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks. However, certain financial instruments, such as warrants and the embedded conversion features of our convertible promissory notes and debentures, which are indexed to our common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within our control. In such instances, net-cash settlement is assumed for financial accounting and reporting purposes, even when the terms of the underlying contracts do not provide for net-cash settlement. Derivative financial instruments are initially recorded, and continuously carried, at fair value.
Determining the fair value of these complex derivative financial instruments involves judgment and the use of certain relevant assumptions including, but not limited to, interest rates, volatility and conversion and redemption privileges. The use of different assumptions could have a material effect on the estimated fair value amounts.
Research and Development
Research and development is expensed as incurred. Research and development expenses for the year ended December 31, 2013 and the period October 3, 2012 (inception) to December 31, 2012 were $178,654 and $0, respectively.
Revenue Recognition and Deferred Revenue
Revenues consist primarily of tuition and fees derived from online courses taught by CODESMART™ UNIVERSITY as well as from related educational resources that the University provides to its students, such as access to our online materials and learning management system. The Company provides online access to its students for a period of 12 to 18 months subsequent to enrollment in online courses. Therefore, the Company has established such period as the amortization period of deferred revenues recorded for the enrollment of online courses. Accordingly, tuition revenue and most fees from related educational resources are recorded as deferred revenue and amortized into revenue over a 12 to 18 month period. The University maintains an institutional tuition refund policy, which provides for a full refund within stated refund periods. Certain states in which students reside impose separate, mandatory refund policies, which override the University’s policy to the extent in conflict. If a student withdraws within the University’s allotted refund period, then in accordance with its revenue recognition policy, the University will immediately not recognize as revenue the tuition that was originally recorded.
F-9
Fka First Independence Corp.
Notes to Consolidated Financial StatementsDecember 31, 2013 and 2012
Segment Information
ASC 280-10, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The method for determining what information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. The Company’s chief operating decision-maker is considered to be the Company’s chief executive officer (“CEO”). The CEO reviews financial information presented on an entity level basis accompanied by disaggregated information about revenues by product type and certain information about geographic regions for purposes of making operating decisions and assessing financial performance. The entity level financial information is identical to the information presented in the accompanying consolidated statements of operations. Currently Management believes that the business operations are all contained in one segment and Management will continue to evaluate their reporting in the future.
Exit from Development Stage
The Company was in the development stage as defined by ASC 915 “Development Stage Entities.” A development stage enterprise is one in which planned and principal operations have not commenced or, if its operations have commenced, there has been no significant revenue there from. The Company exited the development stage on May 3, 2013.
Stock-Based Employee Compensation
On December 9, 2013, the Board of Directors of the Company adopted the 2013 Stock Incentive Plan. However, no equity compensation has yet been granted under the Plan. When granted, the Company will follow the guidance of FASB ASC 718 Compensation – Stock Compensation to account for options issued under the Plan. The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.
F-10
Fka First Independence Corp.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services in accordance with the guidance of FASB ASC 505-50-30. Transactions in which there is issuance of equity instruments for goods or services are accounted for based on the fair value of the consideration received for the fair value of the equity instrument issued, or whichever is more reliably measureable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.
Loss Per Share
We compute loss per share in accordance with FASB ASC 260: Earnings Per Share. Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted loss per share is computed by dividing net income (loss), adjusted for changes in loss that resulted from the assumed conversion or exercise of potentially dilutive securities, by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period. Potentially dilutive securities consist of shares potentially issuable pursuant to stock options and warrants as well as shares that would result from full conversion of all outstanding convertible notes and debentures. During periods of net loss per share, these potentially dilutive securities are excluded from diluted net loss per share calculations because they are anti-dilutive. As a result, basic and diluted net loss per share are equivalent.
As of December 31, 2013, our convertible notes and debentures were convertible into 2,004,816 shares of common stock and we had 204,999 common stock warrants outstanding, all of which have been excluded from the computation of diluted loss per share because their effect is anti-dilutive. There were no common stock equivalents as of December 31, 2012.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC 740 - Income Taxes. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.
The Company follows the guidance of FASB ASC 740-10-25 to determine whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company did not take any uncertain tax positions and had no adjustments to its income tax liabilities or benefits for the year ended December 31, 2013 and the period October 3, 2012 (inception) to December 31, 2012.
The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying consolidated balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its consolidated balance sheets and provides valuation allowances as management deems necessary.
Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
F-11
Fka First Independence Corp.
Notes to Consolidated Financial StatementsDecember 31, 2013 and 2012
Recently Issued Accounting Pronouncements
The FASB has recently issued the following Accounting Standards Updates:
Update No. 2014-07—Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (a consensus of the Private Company Council)
Update No. 2014-06—Technical Corrections and Improvements Related to Glossary Terms
Update No. 2014-05—Service Concession Arrangements (Topic 853) (a consensus of the FASB Emerging Issues Task Force)
Update No. 2014-04—Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)
Update No. 2014-03—Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach (a consensus of the Private Company Council)
Update No. 2014-02—Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill (a consensus of the Private Company Council)
Update No. 2014-01—Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force)
We have reviewed the above pronouncements, as well all other recently issued standards, and have determined that they will not have a material impact on our consolidated financial statements, or do not apply to our operations.
Note 3 Restatement – Revenue Recognition and Deferred Revenue
As discussed in Note 2, the Company provides online access to its students for a period of 12 to 18 months subsequent to enrollment in online courses. Therefore, the Company has established such period as the amortization period of deferred revenues recorded for the enrollment of online courses. Accordingly, tuition revenue and most fees from related educational resources are recorded as deferred revenue and amortized into revenue over a 12 to 18 month period. In its previously filed financial statements for the year ended December 31, 2013 included in its annual report in Form 10-K, the Company recorded tuition and training related fees as revenue upon enrollment. Accordingly, the Company has restated its financial statements for the period ended December 31, 2013 to reflect all tuition and training related fees as deferred revenue to be amortized over a 12 to 18 month period. The table below reflects individual line items changed in the restated financial statements.
| Net loss prior to restatement | $ | (16,043,608 | ) | ||
| (1 | ) | (150,470 | ) | ||
| (2 | ) | 56,075 | |||
| Net loss after restatement | $ | (16,138,003 | ) | ||
| Accumulated deficit - prior to restatement | $ | (22,274,834 | ) | ||
| (1 | ) | (150,470 | ) | ||
| (2 | ) | 56,075 | |||
| Accumulated deficit - after restatement | $ | (22,369,229 | ) | ||
| (1) Reflects correction of revenue amount recorded based on deferred revenue to be amortized over 12 to 18 month period | ||||
| (2) Reflects correction of cost of revenue amount recorded and to be amortized over a 12 to 18 month period. |
The tables below reflect the effect of restatement of the Company’s financial statements for the year ended December 31, 2013 as described above.
| Balance Sheet | As originally | 12/31/2013 | 12/31/2013 | |||||||||
| December 31, 2013 | reported | Adjustments | As Restated | |||||||||
| Prepaid and other current assets | $ | 115,185 | $ | 56,075 | $ | 171,260 | ||||||
| Deferred revenue | - | 150,470 | 150,470 | |||||||||
| Accumulated deficit | (22,274,834 | ) | (94,395 | ) | (22,369,229 | ) | ||||||
F-12
| Statement of Operations | As originally | 12/31/2013 | 12/31/2013 | |||||||||
| For the Year Ended December 31, 2013 | reported | Adjustments | As Restated | |||||||||
| Revenue | $ | 419,350 | $ | (150,470 | ) | $ | 268,880 | |||||
| Cost of revenue | 141,610 | (56,075 | ) | 85,535 | ||||||||
| Gross margin | 277,740 | (94,395 | ) | 183,345 | ||||||||
| Net loss | (16,043,608 | ) | (94,395 | ) | (16,138,003 | ) | ||||||
| Statement of Cash Flows | As originally | 12/31/2013 | 12/31/2013 | |||||||||
| For the Year Ended December 31, 2013 | reported | Adjustments | As Restated | |||||||||
| Net loss | $ | (16,043,608 | ) | $ | (94,395 | ) | $ | (16,138,003 | ) | |||
| Increase in prepaid expenses and other assets | (115,185 | ) | (56,075 | ) | (171,260 | ) | ||||||
| Increase in deferred revenue | - | 150,470 | 150,470 | |||||||||
Statement of Changes in Stockholders’ Equity (Deficit) | As originally | 12/31/2013 | 12/31/2013 | |||||||||
| For the Year Ended December 31, 2013 | reported | Adjustments | As Restated | |||||||||
| Net loss | $ | (16,043,608 | ) | $ | (94,395 | ) | $ | (16,138,003 | ) | |||
| Accumulated deficit | (22,274,834 | ) | (94,395 | ) | (22,369,229 | ) | ||||||
F-13
Note 4 Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation:
December 31, 2013 | December 31, 2012 | |||||||
| Computer equipment | $ | 5,000 | $ | - | ||||
| Less: Accumulated depreciation and amortization | (1,111 | ) | - | |||||
| $ | 3,889 | $ | - | |||||
Depreciation expense, which is recognized over the estimated useful life of the equipment of three years, was $1,111 and $0 for the year ended December 31, 2013 and the period October 3, 2012 (inception) to December 31, 2012, respectively.
Note 5 Secured Convertible Promissory Notes and Warrants
From time to time during 2013, and continuing in 2014, the Company has sold secured convertible promissory notes or debentures (the “Notes”) in private placements to various investors. These Notes are convertible, at the holder's option, into shares of our common stock, generally at variable conversion prices based on a percentage of recent market prices for our common stock. The Notes bear interest at stated rates, have specific due dates and contain customary events of default and provide for increased interest rates in the event of default. Certain of the Notes also include down-round anti-dilution adjustments, whereby if we sell common stock or common share indexed financial instruments below the stated or variable conversion price of the Note, the conversion price adjusts to that lower amount. In connection with these financings, we have paid placement agent and other fees and certain Notes were issued with original issue discount. In certain instances, we have also issued warrants, exercisable for our common stock, to the investors or the placement agents. None of the Notes that we have issued require us to register the shares of our common stock underlying their conversion or the exercise of any warrants, except for certain Notes that have piggy-back registration rights in the event we otherwise file a registration statement.
F-14
Fka First Independence Corp.
Notes to Consolidated Financial StatementsDecember 31, 2013 and 2012
The terms of the embedded conversion options in these Notes, as well as the terms of the warrants, do not meet all of the established criteria for equity classification in FASB ASC 815-40, Derivatives and Hedging - Contracts in Entity's Own Equity. Accordingly, the embedded derivative instruments in the Notes, consisting primarily of the conversion option, are accounted for separately from the host contract, and are recorded at fair value. The warrants are initially recorded at fair value and, together with the embedded derivative instruments that have been separated from the Notes, are re-valued each reporting period, with any changes in their fair values recognized as a gain or loss in our income statement.
The allocation of the proceeds received for the Notes issued in 2013 is summarized below:
| Issued | Due Date | Face Amount | Fees Deducted and OID recorded as interest expense | Net Proceeds | Embedded Derivative Recognized | Investor Warrants Issued | Derivative Expense | Initial Carrying Amount | ||||||||||||||||||||||
| April 15, 2013 | July 14,2013 | $ | 140,000 | $ | - | $ | 140,000 | $ | 47,075 | $ | - | $ | - | $ | 92,925 | |||||||||||||||
| April 24, 2013 | July 23, 2013 | $ | 110,000 | $ | - | $ | 110,000 | $ | 36,988 | $ | - | $ | - | $ | 73,012 | |||||||||||||||
| August 29, 2013 | August 29, 2014 | $ | 150,000 | $ | 12,000 | $ | 138,000 | $ | 290,994 | $ | - | $ | 140,994 | $ | 0 | |||||||||||||||
| November 26, 2013 | February 24, 2014 | $ | 100,000 | $ | 44,500 | $ | 55,500 | $ | 118,558 | $ | - | $ | 18,558 | $ | 0 | |||||||||||||||
| December 13, 2013 | December 12, 2014 | $ | 194,444 | $ | 63,782 | $ | 130,662 | $ | 185,037 | $ | - | $ | 54,375 | $ | 0 | |||||||||||||||
| December 19, 2013 | September 19, 2014 | $ | 225,000 | $ | 41,000 | $ | 184,000 | $ | 217,629 | $ | 124,537 | $ | 117,166 | $ | 0 | |||||||||||||||
| December 19, 2013 | September 20, 2014 | $ | 153,500 | $ | 3,500 | $ | 150,000 | $ | 113,613 | $ | - | $ | - | $ | 36,387 | |||||||||||||||
In circumstances where the fair values of the separated embedded derivative instrument recognized and/or the warrants issued, exceeded the net proceeds received, a derivative expense is recognized. The initial carrying amounts of the Notes are then accreted to their redemption values, including accrued interest thereon at the stated rate, using an effective interest method.
The Notes issued on April 15, 2013 and April 24, 2013 bore interest at 10% per annum and were converted, together with accrued interest, by the holders on July 10, 2013 and June 14, 2013, respectively, into 179,180 and 139,448 shares, respectively, of our common stock.
For the Note issued on November 26, 2013, the fees deducted and original issue discount (“OID”) shown above includes 50,000 shares of our common stock, valued at $44,500, which were issued to the lender as a fee. In addition, on December 19, 2013 and January 13, 2014, we made payments of $50,000 each to repay the full principal amount of the Note. For the Note issued on December 13, 2013, the fees deducted and OID shown above includes $11,838 for the fair value of 17,499 common stock warrants issued to the placement agent.
During the first quarter of 2014, we issued nine convertible Notes to various investors, with aggregate face values of approximately $860,000, resulting in net proceeds of approximately $745,000, net of fees and OID.
F-15
Fka First Independence Corp.
Notes to Consolidated Financial StatementsDecember 31, 2013 and 2012
The Notes outstanding at December 31, 2013, their interest rates, accrued interest and carrying amounts were as follows:
| Issued | Due Date | Face Amount | Accrued Interest Due | Effective Interest Recognized | Carrying Amount | Stated Interest Rate | Default Interest Rate | |||||||||||||||||||
| August 29, 2013 | August 29, 2014 | $ | 150,000 | $ | 4,110 | $ | 7,471 | $ | 7,471 | 8 | % | 18 | % | |||||||||||||
| November 26, 2013 | February 24, 2014 | 50,000 | 1,616 | 80,736 | 14,236 | 20 | % | 20 | % | |||||||||||||||||
| December 13, 2013 | December 12, 2014 | 194,444 | 19,444 | 2,521 | 2,521 | 10 | % | 18 | % | |||||||||||||||||
| December 19, 2013 | September 19, 2014 | 225,000 | 789 | 2,678 | 2,678 | 10 | % | 22 | % | |||||||||||||||||
| December 19, 2013 | September 20, 2014 | 153,500 | 437 | 2,089 | 38,476 | 8 | % | 22 | % | |||||||||||||||||
| $ | 65,382 | |||||||||||||||||||||||||
As of December 31, 2013, the fair value of the embedded derivative instrument in each Note, the effective conversion price of each Note and the number of common shares into which each Note, including accrued interest, was convertible were as follows:
| Issued | Due Date | Face Amount | Embedded Derivative | Conversion Price | Conversion Shares | Conversion Price | |||||||||||||
| August 29, 2013 | August 29, 2014 | $ | 150,000 | $ | 170,151 | $ | 0.4273 | 360,687 | Lower of $5.00 or 65% of average of 3 lowest closing bid prices in the 15 trading day period prior to conversion | ||||||||||
| November 26, 2013 | February 24, 2014 | 50,000 | 74,290 | $ | 0.3224 | 160,092 | 52% of average of 3 lowest trading prices in the preceding 10 trading days | ||||||||||||
| December 13, 2013 | December 12, 2014 | 194,444 | 278,885 | $ | 0.4000 | 534,722 | Lower of 65% of lowest trading price in the preceding 25 trading days or $0.40 | ||||||||||||
| December 19, 2013 | September 19, 2014 | 225,000 | 278,084 | $ | 0.4000 | 564,472 | Lower of 65% of lowest trading price in the preceding 25 trading days or $0.40 | ||||||||||||
| December 19, 2013 | September 20, 2014 | 153,500 | 189,738 | $ | 0.4000 | 384,843 | 65% of average of 3 lowest trading prices in the preceding 10 trading days | ||||||||||||
| $ | 991,148 | 2,004,816 | |||||||||||||||||
In connection with the issuance of the Notes, we also issued common stock warrants to investors or to the placement agents, as follows:
| Financing Date | Warrants Issued To | Number of Warrants | Expiration Date | Fair Value at Issuance | Fair Value at December 31, 2013 | Exercise Price | |||||||||||||
| December 13, 2013 | Placement agent | 17,499 | December 13, 2016 | $ | 11,838 | $ | 10,321 | $ | 1.00 | ||||||||||
| December 19, 2013 | Investors | 187,500 | December 31, 2018 | $ | 118,379 | $ | 135,517 | $ | 0.40 | ||||||||||
| $ | 130,217 | $ | 145,838 | ||||||||||||||||
The warrants are exercisable for one share of common stock. The warrants include down-round anti-dilution adjustments, whereby if we sell common stock or common share indexed financial instruments below the initial exercise price of the warrants, the exercise price adjusts to that lower amount. For the placement agent warrants, the down-round anti-dilution protection applies only to subsequent issuances occurring more than one year after the warrants were issued. For the investor warrants, which had an initial exercise price of $1.20, our subsequent sale of common stock at a lower price has reduced the exercise price to $0.40.
F-16
Fka First Independence Corp.
Notes to Consolidated Financial StatementsDecember 31, 2013 and 2012
The embedded conversion options in the Notes, which are accounted for separately as derivative instruments, and the warrants are valued using a binomial lattice model because that model embodies all of the significant relevant assumptions that address the features underlying these instruments. Significant assumptions used in the model as of the dates the Notes and warrants were issued and as of December 31, 2013 included an expected life equal to the remaining term of the Notes or warrants, an expected dividend yield of zero, estimated volatility ranging from 127% to 143%, and risk-free rates of return of 0.05% to 0.72%. For the risk-free rates of return, we use the published yields on zero-coupon Treasury Securities with maturities consistent with the remaining term of the Notes or warrants. Volatility is based upon our expected common stock price volatility over the remaining term of the Notes or warrants. The volatility used for the Notes is based on the Company’s 100-day volatility, which is considered a reasonable surrogate for the volatility to be expected over the life of the Notes. That volatility has generally ranged from 120% to 140%. As a result of the anti-dilution provisions, the fixed exercise price of the warrants has been reset equal to the lowest price of any subsequently issued common share indexed instruments with a conversion price below the previously stated exercise price of the warrant.
Reconciliation of changes in fair value – FASB ASC 825 Fair Value Measurements and Disclosures establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to Level 3 - unobservable inputs. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. Our derivative financial instruments that are measured at fair value on a recurring basis are all measured at fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following represents a reconciliation of the changes in fair value of financial instruments measured at fair value using Level 3 inputs during the year ended December 31, 2013:
Compound Embedded Derivatives | Warrant Derivatives | |||||||
| Balance – December 31, 2012 | $ | - | $ | - | ||||
| Issuances: | ||||||||
| April 15, 2013 | 47,075 | |||||||
| April 24, 2013 | 36,988 | |||||||
| August 29, 2013 | 290,994 | |||||||
| November 26, 2013 | 118,558 | |||||||
| December 13, 2013 | 185,037 | 11,838 | ||||||
| December 19, 2013 | 217,628 | 124,536 | ||||||
| December 19, 2013 | 113,613 | |||||||
| Fair value adjustments: | ||||||||
| Compound embedded derivatives | 1,556,255 | |||||||
| Warrant derivatives | 9,464 | |||||||
| Conversions: | ||||||||
| April 15, 2013 financing | (519,750 | ) | ||||||
| April 24, 2013 financing | (1,055,250 | ) | ||||||
| Balance – December 31, 2013 | $ | 991,148 | $ | 145,838 | ||||
F-17
Fka First Independence Corp.
Notes to Consolidated Financial StatementsDecember 31, 2013 and 2012
Note 6 – Capital Stock
Common Stock - We are authorized to issue 500 million shares of common stock, par value $0.001 per share. Holders of common stock are entitled to one vote for each share held of record on each matter submitted to a vote of shareholders. Holders of our common stock do not have a cumulative voting right, which means that the holders of more than one half of our outstanding shares of common stock, subject to the rights of the holders of preferred stock, can elect all of our directors, if they choose to do so. In this event, the holders of the remaining shares of common stock would not be able to elect any directors. Subject to the prior rights of any class or series of preferred stock which may from time to time be outstanding, if any, holders of common stock are entitled to receive ratably, dividends when, as, and if declared by our Board of Directors out of funds legally available for that purpose and, upon our liquidation, dissolution, or winding up, are entitled to share ratably in all assets remaining after payment of liabilities and payment of accrued dividends and liquidation preferences on the preferred stock, if any. Holders of common stock have no preemptive rights and have no rights to convert their common stock into any other securities. The outstanding common stock is duly authorized and validly issued, fully-paid, and non-assessable. Except as otherwise required by Florida law, and subject to the rights of the holders of preferred stock, all stockholder action is taken by the vote of a majority of the outstanding shares of common stock present at a meeting of shareholders at which a quorum consisting of a majority of the outstanding shares of common stock is present in person or by proxy. Shares repurchased are held as treasury shares and used for general corporate purposes including, but not limited to, satisfying obligations under our employee benefit plans.
Preferred Stock - We are authorized to issue 100 million shares of preferred stock, par value $0.001 per share. We may issue preferred stock in one or more series and having the rights, privileges, and limitations, including voting rights, conversion rights, liquidation preferences, dividend rights and preferences and redemption rights, as may from time to time be determined by our Board of Directors. Preferred stock may be issued in the future in connection with acquisitions, financings, or other matters, as our Board of Directors deems appropriate. In the event that we determine to issue any shares of preferred stock, a certificate of designation containing the rights, privileges, and limitations of this series of preferred stock will be filed with the Secretary of State of the State of Florida. The effect of this preferred stock designation power is that our Board of Directors alone, subject to Federal securities laws, applicable blue sky laws, and Florida law, may be able to authorize the issuance of preferred stock which could have the effect of delaying, deferring, or preventing a change in control of our company without further action by our shareholders, and may adversely affect the voting and other rights of the holders of our common stock. The issuance of preferred stock with voting and conversion rights may also adversely affect the voting power of the holders of our common stock, including the loss of voting control to others.
Series A Preferred Stock - The Company’s authorized Series A Preferred Stock consists of 1 share and has the following powers, designations, preferences and other special rights;
| · | The holder(s) of the Series A Preferred Stock shall not be entitled to dividends, except that in the event that a dividend is declared on the Company’s Common Stock, the holder(s) of the Series A Preferred Stock shall receive the dividends that would be payable if all then outstanding shares were converted into Common Stock immediately prior to the declaration of the dividend. |
| · | No Liquidation Preference |
| · | The Series A Preferred Stock has a super voting right in that it votes together with the common stock and any other class of stock entitled to vote with the common stock all as a single class, with the total number of issued and outstanding shares of Series A Preferred Stock entitled to 60% of all votes to be cast on any matter; |
| · | Conversion upon Class Consent – All outstanding shares of Series A Preferred Stock may be converted into Common Stock at the election of the holder(s) of all the Series A Preferred Stock. Automatic Conversion of all of the outstanding shares of Series A Preferred Stock shall take place in the event of a Change in Control of the Company. |
| · | Additional Rights – the Company shall not, without obtaining written approval from the holders of the Series A Preferred Stock, alter of change the powers, preferences, privileges, or rights of the Series A Preferred Stock. |
F-18
Fka First Independence Corp.
Notes to Consolidated Financial StatementsDecember 31, 2013 and 2012
Note 7 Stockholders’ Equity
(A) Common Stock Transactions
The following sales and issuances of Common Stock were made the period October 3, 2012 (inception) to December 31, 2012:
On October 3, 2012, the Company issued four founders of the Company 23,350,000 shares of the Company’s Common Stock. The Company valued the aggregate number of shares issued at a total amount of $2,335.
On December 13, 2012, the Company sold 75,000 shares of Common Stock for $0.33 per share.
The following sales and issuances of Common Stock were made during the year ended December 31, 2013:
Common Stock sold for cash:
During the period from January 2013 to December 2013, the Company sold a total of 2,765,871 shares of Common Stock to various investors for prices ranging from $0.33 per share to $1.50 per share for $3,571,173.
Common Stock issued pursuant to reverse acquisition and Share Exchange Agreement:
As a result of the reverse acquisition, the legal acquirer maintained 6,000,000 shares of the Company’s Common Stock. The outstanding restricted shares of the Company’s Common Stock were acquired from the previous controlling shareholder for $231,000 and subsequently cancelled.
On May 3, 2013, the Company issued two founders of the Company and key consultants the aggregate of 12,500,000 shares of the Company’s Common Stock. Subsequent to the issuance, the Company, founders and key consultants and prior shareholders entered into a Shares Exchange Agreement, to include all the shares of Common Stock issued by the then subsidiary. The net effect of the transaction is as follows: (i) the founders, key consultants and prior shareholders received 6,125,000 shares of the Company’s Common Stock in exchange for 24,500,000 shares of the subsidiary’s Common Stock; and (ii) a founder retained 11,500,000 shares of the subsidiary’s Common Stock. As part of the transaction, the Company recorded approximately $2,500,000 to stock based compensation or $0.80 per share, for the shares issued to the founders and key consultants. The Company concluded that $0.80 per share was the best indicator of fair value. On the same day, the Company sold shares at $0.80 per share through a private placement of its common stock.
Common Stock issued for financing fees and note issuance costs:
During the period from August 2013 to September 2013, the Company issued 434,467 shares of the Company’s Common Stock for issuance fees in association with the Company’s capital raises. The Company recorded a charge of $1,357,260 in connection with this transaction.
On November 26, 2013, the Company issued 50,000 shares of the Company’s common stock to an investor pursuant to a convertible promissory note executed on the same day. The Company recorded a charge of $44,500 as interest. The shares were valued using the Company’s closing share price on the OTCQB. The value per share was $0.89.
Common Stock issued for acquisition of 31.94% of subsidiary:
On August 20, 2013, the Company entered into and consummated a transaction pursuant to a Share Exchange Agreement whereby (i) the Company issued to Kovens an aggregate of 2,808,000 shares of the Company’s Common Stock and (ii) the Company paid Kovens a cash dividend of $1,350,000 in exchange for the remaining 31.94% of the equity interests in CodeSmart NV.
Common Stock issued for conversion of Convertible Notes:
On June 14, 2013, a secured convertible note issued by CodeSmart NV with principal and interest of $111,537 was converted into 139,448 shares of the Company’s Common Stock.
On July 10, 2013, a secured convertible note issued by CodeSmart NV with principal and interest of $143,299 was converted into 179,180 shares of the Company’s Common Stock.
F-19
Fka First Independence Corp.
Notes to Consolidated Financial StatementsDecember 31, 2013 and 2012
Common Stock issued for services rendered:
On May 3, 2013, the Company issued employees and key consultants 626,668 shares of the Company’s Common Stock. The Company recorded a charge of $501,334 or $0.80 per share. The Company concluded that $0.80 per share was the best indicator of fair value. On the same day, the Company sold shares at $0.80 per share through a private placement of its common stock.
On June 14, 2013, the Company issued employees and key consultants 337,332 shares of the Company’s Common Stock. The Company recorded a charge of $1,499,182 or $4.58 per share in connection with this transaction.
On July 8, 2013, the Company issued 44,964 shares of the Company’s Common Stock to a consultant of the Company for services rendered. The Company recorded a charge of $297,212. The shares were valued using the Company’s closing share price on the OTCQB. The value per share was $6.61.
On August 27, 2013, the Company issued 375,000 shares of the Company’s Common Stock to a consultant of the Company in connection with an agreement for advisory services. The Company recorded a charge of $1,087,500. The shares were valued using the Company’s closing share price on the OTCQB. The value per share was $2.90.
On October 18, 2013, the Company issued 842,500 shares of the Company’s Common Stock to various consultants of the Company for services rendered. The Company recorded a charge of $2,323,615. The shares were valued using the Company’s closing share price on the OTCQB. The value per share was $2.76.
On October 29, 2013, the Company issued 30,000 shares of the Company’s Common Stock to the Company’s former legal representative as settlement for prior legal services rendered. The Company recorded a charge of $80,700. The shares were valued using the Company’s closing share price on the OTCQB. The value per share was $2.69.
On November 25, 2013, the Company issued 30,000 shares of the Company’s common stock to a consultant of the Company for services rendered. The Company recorded a charge of $30,000. The shares were valued using the Company’s closing share price on the OTCQB. The value per share was $1.00.
Common Stock issued for 10% acquisition of Jasper Group Holdings, Inc.
On October 31, 2013, the Company consummated and closed a Share Exchange Transaction with Jasper Group Holdings, Inc. pursuant to a Share Exchange Agreement originally dated October 7, 2013 and amended as of October 31, 2013, whereby the Company received 1,106,678 shares of Jasper’s common stock, which constituted 10% of the outstanding shares of Jasper on a fully-diluted basis and, as consideration for the Jasper common stock, the Company issued to Jasper a total of 400,000 shares of the Company’s common stock, subject to potential adjustments (see Note 10).
(B) Preferred Stock Transactions
On May 3, 2013, the Company issued to its Chief Executive Officer and Chairman, one share of the Company’s Series A Preferred Stock. Because the Series A preferred stock has the right to cast 60% of all votes entitled to be made by the shareholders, it has a “super voting power” which enables it to decide all matters submitted to the shareholders for a vote or action by consent.
Note 8 Non-controlling Interest and Dividend Paid
In connection with the reverse acquisition described in Note 1 and Note 6a, Marc Kovens, a shareholder who owned 31.94% of the CodeSmart NV common shares did not participate in the exchange of his shares for shares of Common Stock of the Company. His interest was recognized as a non-controlling interest in the Company’s consolidated financial statements in accordance with FASB ASC 805-40-25-2.
On August 20, 2013, the Company entered into and consummated a transaction pursuant to a Share Exchange Agreement whereby (i) the Company issued to Kovens an aggregate of 2,808,000 shares of the Company’s Common Stock and (ii) the Company paid Kovens a cash dividend of $1,350,000 in exchange for the remaining 31.94% of the equity interests in CodeSmart NV. As a result of the Share Exchange Transaction, CodeSmart NV became a wholly-owned subsidiary of the Company and a non-controlling interest in CodeSmart NV is no longer presented.
In accordance with FASB ASC 810-10, the Company recorded a dividend in the amount of $6,207,840, comprised of $4,857,840, representing the change in the fair value of the 2,808,000 shares of the Company’s Common Stock from May 3, 2013, the date of the reverse merger, to August 20, 2013, the date of the issuance), and a cash payment of $1,350,000. The closing share prices for the Company’s common stock on the Over the Counter Bulletin Board on May 3, 2013 and August 20, 2013 were $0.80 and $2.53 per share, respectively.
F-20
Fka First Independence Corp.
Notes to Consolidated Financial StatementsDecember 31, 2013 and 2012
Note 9 Commitments and Contingencies
Litigations, Claims and Assessments
From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. The Company is currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
Operating Lease
The Company leases office space pursuant to an annual lease agreement that expires May 31, 2015. The table reflects the future minimum lease payments are as follows;
| 2014 | $ | 78,324 | ||
| 2015 | $ | 32,635 |
Rent expense for the year ended December 31, 2013 and the period from October 3, 2012 (inception) to December 31, 2012 was a total of $46,883 and $0, respectively.
Note 10 Investment in Jasper Group Holdings, Inc.
On October 31, 2013, the Company consummated and closed a Share Exchange Agreement with Jasper Group Holdings, Inc. pursuant to a Share Exchange Agreement originally dated October 7, 2013 and amended as of October 31, 2013, whereby the Company received 1,106,678 shares of Jasper’s common stock, which constituted 10% of the outstanding shares of Jasper on a fully-diluted basis and, as consideration for the Jasper common stock, the Company issued to Jasper a total of 400,000 shares of the Company’s common stock, subject to potential adjustments as described below.
Pursuant to the Share Exchange Agreement, on the 120th day following the closing date of the Share Exchange Transaction (that is, on February 28, 2014, the Measurement Date), the aggregate value of the 400,000 shares of the Company’s common stock issued to Jasper will be determined, based on the volume weighted average trading price of the common stock during the preceding 10 trading days. If that aggregate value exceeds $1,250,000, then Jasper will return to the Company a number of the shares so that the aggregate value of the remaining shares retained by Jasper as of the Measurement Date will be $1,000,000. However, if on the Measurement Date the aggregate value is less than $750,000, then the Company will be obligated to issue additional shares of common stock to Jasper so that the aggregate value of the 400,000 shares of the Company’s common stock held by Jasper, together with the additional shares to be issued to Jasper, will be $1,000,000.
Due to the decline in the Company’s stock price between October 31, 2013 and February 28, 2014, the Company is obligated to issue additional shares to Jasper. As of December 31, 2013, the aggregate value of the 400,000 shares issued to Jasper had declined to $312,000, obligating the Company to issue additional shares valued at $688,000. As of February 28, 2014, the aggregate value of the 400,000 shares issued to Jasper further deceased in value to $288,000, increasing the Company’s obligation to issue additional shares to Jasper to $712,000. The Company had been attempting to re-negotiate its agreement with Jasper but was not successful. The additional shares due to Jasper, valued at $712,000 on the Measurement Date, were issued on April 11, 2014.
The Company’s initial investment in Jasper was valued at $1,000,000, based on the estimated fair value of $2.50 per share for the 400,000 shares of common stock originally issued to Jasper. To date, the Company has not received any value from its investment in Jasper. Jasper is a private company and therefore, since it is not publically traded, there is no active trading market for the 1,106,678 shares received from Jasper. Due to Jaspers position as a development stage company, the future of its financial condition is uncertain. Due to the uncertainty of the Company’s ability to realize any value from its investment or the ability to realize value from the underlying assets of Jasper, as of December 31, 2013, the Company has written off its cost-based investment in Jasper of $1,000,000.
Pursuant to the Share Exchange Agreement and based on the calculation for the obligation at the measurement date above, the Company is liable to issue to Jasper additional shares of the Company’s common stock, valued at $712,000. These shares have not been accrued at year end due to the write off of the investment but will be expensed as of the Measurement Date. On April 11, 2014, the Company issued Jasper 994,895 shares of its Common Stock, with a value of $0.716 per share, to satisfy its obligation pursuant to the Share Exchange Agreement.
F-21
Fka First Independence Corp.
Notes to Consolidated Financial StatementsDecember 31, 2013 and 2012
Note 11 Standby Equity Securities Purchase Agreement
On December 9, 2013, the Company and Seaside 88, LP (“Seaside”) entered into a Securities Purchase Agreement, (the “Seaside SPA”). The Seaside SPA provides the Company with the ability to effect, at our option, monthly volume of our Common Stock until the earlier of December 9, 2014 or such time as an aggregate 3,000,000 shares of the Company’s Common Stock (the “Cap”) have been purchased by Seaside. For each closing, the per share purchase price for the Common Stock is an amount equal to the average of the high and low trading prices (measured in hundredths of cents) of the Common Stock on the OTCQB during normal trading hours for the five consecutive business days immediately prior to a closing date, multiplied by 50%. The per share purchase price is subject to a floor of $0.40 and if such floor is not met with respect to any particular closing, such closing will not occur. The failure to hold a closing as a result of not meeting the floor will not impact any subsequent closing. For each closing, the number of shares of Common Stock to be purchased by Seaside is equal to 10% of the total number of shares of Common Stock traded during normal trading hours during the 20 business days immediately preceding such closing. In no event will Seaside purchase shares in excess of the Cap, or if such purchase will cause Seaside’s beneficial ownership of shares to exceed 9.9% of the Company’s outstanding shares of Common Stock immediately subsequent to a closing. The Company may terminate the Agreement upon prior written notice to Seaside at any time.
Note 12 Stock Incentive Plan
On December 9, 2013, the Board of Directors of the Company adopted the 2013 Stock Incentive Plan to enhance the profitability and value of the Company for the benefit of its shareholders by enabling the Company to offer certain eligible employees, consultants and non-employee directors cash and stock-based incentives in the Company to attract, retain and reward such individuals and strengthen the mutuality of interests between such individuals and the Company’s shareholders.
The aggregate number of shares of our common stock that may be issued under the Plan is 3,100,000 shares, which may be increased at the end of each fiscal year of the Company in the same proportion as the issued and outstanding stock of the Company during such fiscal year subject to a maximum of 15%. Currently, no equity compensation has been granted under the Plan.
Note 13 Provision for Income Taxes
Deferred income taxes are determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company’s assets and liabilities. Deferred income taxes are measured based on the tax rates expected to be in effect when the temporary differences are included in the Company’s tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.
As of December 31, 2013 and for the period October 3, 2012 (inception) to December 31, 2012 there is no provision for income taxes, current or deferred.
For the Period from Inception (October 3, 2012) to | ||||||||
December 31, 2013 | December 31, 2012 | |||||||
| Net operating losses | $ | 5,487,000 | $ | 7,922 | ||||
| Valuation allowance | (5,487,000 | ) | (7,922 | ) | ||||
| $ | - | $ | - | |||||
F-22
At December 31, 2013 and for the period October 3, 2012 (inception) to December 31, 2012, the Company had net operating loss carry forwards in the amount of approximately $16,000,000 and $23,300, respectively available to offset future taxable income through 2033. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.
A reconciliation of the Company’s effective tax rate as a percentage of income before taxes and federal statutory rate for the year ended December 31, 2013 is summarized below.
Federal statutory rate | (34.0 | )% | ||
State income taxes, net of federal | 0.0 | |||
Valuation allowance | 34.0 | |||
| 0.0 | % |
Note 14 Subsequent Events
Subsequent to December 31, 2013 and through April 15, 2014, the Company issued nine convertible Notes to various investors, with aggregate face values of approximately $913,000, resulting in net proceeds of approximately $740,000.
On January 9, 2014, the Company sold 129,630 shares of the Company’s common stock to Seaside for $0.48 per share for a total value of $62,546 (see Note 10).
On March 12, 2014, the Company issued 25,000 shares which represents an interest payment for the Convertible Note sold by the Company on November 26, 2013, with a value of $16,500.
During March 2014, the Company sold 382,500 shares of the Company’s common stock to various investors for $0.40 per share and a total value of $153,000.
On April 11, 2014, the Company issued 994,895 shares of the Company’s common stock to Jasper Group Holdings, Inc. pursuant to the Share Exchange Agreement executed on October 31, 2013 (see Note 9) at $0.715 per share and a total value of $712,000.
F-23