UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO FORM 10-Q
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission File Number 333-180653
CODESMART HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Florida | 45-4523372 | |
(State of incorporation) | (I.R.S. Employer Identification No.) |
5029 Apple Lane
Mohnton, PA 19540
(Address of principal executive offices)646-248-8550
(Registrant’s telephone number)
Indicate by check mark whether the issuer (1) 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 (§232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | ¨ |
Non-accelerated filer | o | Smaller reporting company | x |
Do not check if a smaller reporting company |
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
APPLICABLE ONLY TO CORPORATE ISSUERS
As of May 27, 2014, the registrant had 23,413,636 shares of common stock, par value $.0001 per share issued and outstanding.
EXPLANATION NOTE
This Amendment No. 1 to the Quarterly Report on Form 10-Q/A of CodeSmart Holdings, Inc. (the “Company”) for the three months ended March 31, 2014 is being filed to amend the financial statements in Item 1 and the financial information contained in the Management’s Discussion and Analysis of Financial Condition and Plan of Operation of Item 2 of the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2014 which was filed with the Securities and Exchange Commission (“SEC”) on May 27, 2014 (the “Form 10-Q”).
In its previously filed financial statements for the three months ended March 31, 2014 included in its Quarterly Report on Form 10-Q, the Company recorded tuition and training related fees as revenue upon enrollment. The Company has restated its financial statements for the three months ended March 31, 2014 and the year 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 Form 10-Q are being amended.
Special Note Regarding Forward-Looking Statements
Information included in this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). This information may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of CodeSmart Holdings, Inc. (the “Company”), to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that the projections included in these forward-looking statements will come to pass. Actual results of the Company could differ materially from those expressed or implied by the forward-looking statements as a result of various factors. Except as required by applicable laws, the Company has no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
*Please note that throughout this Quarterly Report, and unless otherwise noted, the words "we," "our," "us," the "Company," or "CodeSmart" refers to: (i) CodeSmart Holdings, Inc., a Florida corporation, (ii) The CodeSmart Group, Inc., a Nevada corporation, and (iii) American Coding Quality Association, LLC, a Delaware limited liability company.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CodeSmart Holdings, Inc. and Subsidiaries |
Fka First Independence Corp. |
Condensed Consolidated Balance Sheets |
March 31, 2014 | December 31, 2013 | |||||||
(Unaudited) (Restated) | (Restated) | |||||||
Assets | ||||||||
Cash | $ | 180,793 | $ | 153,834 | ||||
Accounts receivable | 84,472 | 37,597 | ||||||
Prepaid expenses and other current assets | 173,639 | 171,260 | ||||||
Total current assets | 438,904 | 362,691 | ||||||
Property and equipment, net | 3,472 | 3,889 | ||||||
Total assets | $ | 442,376 | $ | 366,580 | ||||
Liabilities and Stockholders' Equity (Deficit) | ||||||||
Liabilities | ||||||||
Accounts payable and accrued expenses | $ | 555,647 | $ | 591,378 | ||||
Deferred revenue | 438,000 | 150,470 | ||||||
Secured convertible notes payable - net | 322,422 | 65,382 | ||||||
Securities payable | - | 16,500 | ||||||
Derivative liabilities - convertible notes | 1,851,226 | 991,148 | ||||||
Derivative liabilities - warrants | 140,360 | 145,838 | ||||||
Total current liabilities | 3,307,655 | 1,960,716 | ||||||
Total liabilities | 3,307,655 | 1,960,716 | ||||||
Stockholders' Equity (Deficit) | ||||||||
Preferred stock, $0.0001 par value; 100,000,000 shares authorized; no shares issued and outstanding, respectively | - | - | ||||||
Common stock, $0.0001 par value; 500,000,000 shares authorized; 21,640,560 and 21,103,430 shares issued and outstanding, respectively | 2,164 | 2,110 | ||||||
Additional paid in capital | 21,002,476 | 20,772,983 | ||||||
Accumulated deficit | (23,869, 919 | ) | (22,369,229 | ) | ||||
Total Stockholders' Equity (Deficit) | (2,865,279 | ) | (1,594,136 | ) | ||||
Total Liabilities and Stockholders' Equity (Deficit) | $ | 442,376 | $ | 366,580 |
The accompanying notes are an integral part of these financial statements.
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CodeSmart Holdings, Inc. and Subsidiaries |
Fka First Independence Corp. |
Condensed Consolidated Statement of Operations |
(Unaudited) |
For the three months ended | For the three months ended | |||||||
March 31, 2014 | March 31, 2013 | |||||||
(Unaudited) (Restated) | (Unaudited) | |||||||
Revenue | $ | 164,670 | $ | 7,600 | ||||
Cost of sales | 90,435 | 3,177 | ||||||
Gross profit | 74,235 | 4,423 | ||||||
Operating expenses | ||||||||
Compensation | 561,702 | 28,410 | ||||||
Professional fees | 186,993 | 47,500 | ||||||
Research and development | 70,925 | - | ||||||
Advertising and promotions | 104,360 | 5,629 | ||||||
Other general and administrative expenses | 208,197 | 2,639 | ||||||
Total operating expenses | 1,132,177 | 84,178 | ||||||
Loss from operations | (1,057,942 | ) | (79,755 | ) | ||||
Other income (expenses) | ||||||||
Interest expense | (296,431 | ) | - | |||||
Change in fair value of derivative liability - convertible notes | 399,884 | - | ||||||
Change in fair value of derivative liability - warrants | 23,895 | - | ||||||
Derivative expense | (570,096 | ) | - | |||||
Total other income (expense) | (442,748 | ) | - | |||||
Net loss before provision for income taxes | (1,500,690 | ) | (79,755 | ) | ||||
Provision for income taxes | - | - | ||||||
Net loss | $ | (1,500,690 | ) | $ | (79,755 | ) | ||
Net loss per common share - basic and diluted | $ | (0.06 | ) | $ | (0.01 | ) | ||
Weighted average common shares outstanding - basic and diluted | 24,658,158 | 5,872,292 |
The accompanying notes are an integral part of these financial statements.
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CodeSmart Holdings, Inc. and Subsidiaries |
Fka First Independence Corp. |
Condensed Consolidated Statements of Cash Flows |
For the three months ended | For the three months ended | |||||||
March 31, 2014 | March 31, 2013 | |||||||
(Unaudited) (Restated) | (Unaudited) | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (1,500,690 | ) | $ | (79,755 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation | 417 | - | ||||||
Interest expense including debt issue costs and OID costs | 296,015 | - | ||||||
Derivative expense | 570,096 | - | ||||||
Change in fair value of derivative liability | (423,779 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
Increase in accounts receivable | (46,875 | ) | (4,423 | ) | ||||
Increase in prepaid expenses and other current assets | (2,379 | ) | - | |||||
Increase in deferred revenue | 287,530 | - | ||||||
Decrease in accounts payable and accrued expenses | (37,923 | ) | 53,104 | |||||
Net Cash Used in Operating Activities | (857,588 | ) | (31,074 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from issuance of common stock | 213,047 | 25,000 | ||||||
Proceeds from the issuance of convertible notes, net of debt issuance costs of $36,000 | 721,500 | - | ||||||
Cash paid for repayment of notes | (50,000 | ) | - | |||||
Net Cash Provided By Financing Activities | 884,547 | 25,000 | ||||||
Net Increase (Decrease) in Cash | 26,959 | (6,074 | ) | |||||
Cash - Beginning of Period | 153,834 | 6,074 | ||||||
Cash - End of Period | $ | 180,793 | $ | - | ||||
SUPPLEMENTARY CASH FLOW INFORMATION: | ||||||||
Cash Paid During the Period for: | ||||||||
Income taxes | $ | - | $ | - | ||||
Interest | $ | 416 | $ | - |
The accompanying notes are an integral part of these financial statements.
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CodeSmart Holdings, Inc. and Subsidiaries
Fka First Independence Corp.
Notes to Condensed Consolidated Financial Statements
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.
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CodeSmart Holdings, Inc. and Subsidiaries
Fka First Independence Corp.
Notes to Condensed Consolidated Financial Statements
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.
In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of March 31, 2014, and the results of its operations, and cash flows for the three months ended March 31, 2014. Although management believes that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America have been condensed of omitted pursuant to the rules and regulations of the Securities and Exchange Commission.
The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2014. The accompanying consolidated financial statements should be read in conjuction with the more detailed financial statements, and the related footnotes thereto, filed with the Company’s Annual Report on Form 10K for the year ended December 31, 2013 and filed on April 21, 2014.
Going Concern
As reflected in the accompanying consolidated financial statements, the Company had a net loss of $1,500,690 and $79,755 for the three months ended March 31, 2014 and 2013, respectively. As of March 31, 2014 and December 31, 2013, the Company had accumulated deficits of $23,869,919 and $22,369,229, 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 March 31, 2014. 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. On April 24, 2014 we announced a plan of restructuring as a result of the Company being unable to fund our operations. In the event that we are unable to fund the Company by additional borrowings or raising equity capital, we may be forced to reduce our expenses further. 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.
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.
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CodeSmart Holdings, Inc. and Subsidiaries
Fka First Independence Corp.
Notes to Condensed Consolidated Financial Statements
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 March 31, 2014 and December 31, 2013.
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 March 31, 2014 and December 31, 2013.
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.
Carrying Value, Recoverability and Impairment of Long-Lived Assets
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.
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CodeSmart Holdings, Inc. and Subsidiaries
Fka First Independence Corp.
Notes to Condensed Consolidated Financial Statements
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 three months ended March 31, 2014 and 2013 were $70,925 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.
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.
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CodeSmart Holdings, Inc. and Subsidiaries
Fka First Independence Corp.
Notes to Condensed Consolidated Financial Statements
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.
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 March 31, 2014 and December 31, 2013, our convertible notes and debentures were convertible into 4,309,495 and 2,004,816 shares of common stock, respectively. On March 31, 2014 and December 31, 2014 we had 222,498 and 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.
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.
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CodeSmart Holdings, Inc. and Subsidiaries
Fka First Independence Corp.
Notes to Condensed Consolidated Financial Statements
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 three months ended March 31, 2014 and the year ended December 31, 2013.
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.
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.
11
CodeSmart Holdings, Inc. and Subsidiaries
Fka First Independence Corp.
Notes to Condensed Consolidated Financial Statements
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 three months ended March 31, 2014 included in its annual report in Form 10-Q, the Company recorded tuition and training related fees as revenue upon enrollment. Accordingly, the Company has restated its financial statements for the three months ended March 31, 2014 and the year 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 | $ | (1,475,624 | ) | ||
(1 | ) | (18,263 | ) | ||
(2 | ) | (6,803 | ) | ||
Net loss after restatement | $ | (1,500,690 | ) | ||
�� | |||||
Accumulated deficit - prior to restatement | $ | (23,750,458 | ) | ||
(1 | ) | (18,263 | ) | ||
(2 | ) | (6,803 | ) | ||
(3 | ) | (94,395 | ) | ||
Accumulated deficit - after restatement | $ | (23,869,919 | ) |
(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. (3) Effect of restatement of year ended December 31, 2013. |
The tables below reflect the effect of restatement of the Company’s financial statements for the three months ended March 31, 2014 as described above.
Balance Sheet | As originally | 12/31/2013 | 3/31/2014 | 3/31/2014 | ||||||||||||
March 31, 2014 | reported | Adjustments | Adjustments | As Restated | ||||||||||||
Prepaid and other current assets | $ | 124,086 | $ | 56,075 | $ | (6,522 | ) | $ | 173,639 | |||||||
Deferred revenue | 269,267 | 150,470 | 18,263 | 438,000 | ||||||||||||
Accounts payable and accrued liabilities | 555,366 | - | 281 | 555,647 | ||||||||||||
Accumulated deficit | (23,750,458 | ) | (94,395 | ) | (25,066 | ) | (23,869,919 | ) |
12
CodeSmart Holdings, Inc. and Subsidiaries
Fka First Independence Corp.
Notes to Condensed Consolidated Financial Statements
Statement of Operations | As originally | 3/31/2014 | 3/31/2014 | |||||||||
For the Three Months Ended March 31, 2014 | reported | Adjustments | As Restated | |||||||||
Revenue | $ | 182,933 | $ | (18,263 | ) | $ | 164,670 | |||||
Cost of revenue | 83,632 | 6,803 | 90,435 | |||||||||
Gross margin | 99,301 | (25,066 | ) | 74,235 | ||||||||
Net loss | (1,475,624 | ) | (25,066 | ) | (1,500,690 | ) |
Statement of Cash Flows | As originally | 3/31/2014 | 3/31/2014 | |||||||||
For the Three Months Ended March 31, 2014 | reported | Adjustments | As Restated | |||||||||
Net loss | $ | (1,475,624 | ) | $ | (25,066 | ) | $ | (1,500,690 | ) | |||
Increase in prepaid expenses and other assets | (8,901 | ) | 6,522 | (2,379 | ) | |||||||
Increase in deferred revenue | 269,267 | 18,263 | 287,530 | |||||||||
Decrease in accounts payable and accrued expenses | 38,204 | (281 | ) | 37,923 |
Note 4 Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation:
March 31, 2014 | December 31, 2013 | |||||||
(Unaudited) | ||||||||
Computer equipment | $ | 5,000 | $ | 5,000 | ||||
Less: Accumulated depreciation and amortization | (1,528 | ) | (1,111 | ) | ||||
$ | 3,472 | $ | 3,889 |
Depreciation expense, which is recognized over the estimated useful life of the equipment of three years, was $417 and $0 for the three months ended March 31, 2014 and 2013, 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.
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 2014 and 2013 is summarized below:
March 31, 2014 | December 31, 2013 | |||||||
(Unaudited) | ||||||||
Total principal amounts | $ | 866,819 | $ | 1,072,944 | ||||
Less: OID & lender fees recorded as interest | (78,819 | ) | (44,444 | ) | ||||
Less: 3rd party fees paid (legal and issuance costs recorded as interest) | (66,500 | ) | (64,000 | ) | ||||
Less: non-cash investor and third party fees paid: (stock and warrants) | (18,417 | ) | (83,375 | ) | ||||
Net proceeds | 703,083 | 881,125 | ||||||
Less: embedded derivative recognized | (1,259,962 | ) | (1,009,894 | ) | ||||
Derivative expense | 570,096 | 331,093 | ||||||
Initial carrying amounts | $ | 13,217 | $ | 202,324 |
13
CodeSmart Holdings, Inc. and Subsidiaries
Fka First Independence Corp.
Notes to Condensed Consolidated Financial Statements
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.
We issued Notes on April 15, 2013 and April 24, 2013 which bore interest at 10% per annum. On July 10, 2013 and June 14, 2013 the total amounts due for the Notes including accrued interest were converted by the holders into 179,180 and 139,448 shares of our common stock, respectively.
A Note issued to Gerald Hickson on November 26, 2013, included above, was repaid with payments of $50,000 on December 19, 2013 and January 13, 2014. On January 9, 2014, the Company issued 25,000 shares of its common stock which represented interest due as of December 26, 2013.
We issued Notes on December 13, 2013 and January 10, 2014. The fees deducted and OID included above consists of $11,838 and $47,358 for the fair value of 17,499 and 17,499 common stock warrants issued to the placement agent, respectively.
The Notes outstanding at March 31, 2014, 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 | $ | 7,068 | $ | 23,681 | $ | 23,681 | 8 | % | 18 | % | |||||||||||||
December 13, 2013 | December 12, 2014 | 194,444 | 19,444 | 7,983 | 7,983 | 10 | % | 18 | % | |||||||||||||||||
December 19, 2013 | September 19, 2014 | 225,000 | 6,704 | 8,605 | 8,605 | 10 | % | 22 | % | |||||||||||||||||
December 19, 2013 | September 20, 2014 | 153,500 | 3,465 | 19,495 | 55,883 | 8 | % | 22 | % | |||||||||||||||||
January 10, 2014 | July 10, 2014 | 194,444 | 19,444 | 72,007 | 72,007 | 10 | % | 18 | % | |||||||||||||||||
January 10, 2014 | January 10, 2015 | 110,000 | 2,441 | 26,403 | 26,403 | 10 | % | 20 | % | |||||||||||||||||
January 23, 2014 | January 23, 2016 | 118,000 | 14,160 | 30,963 | 30,963 | 10 | % | 24 | % | |||||||||||||||||
February 3, 2014 | October 30, 2014 | 100,000 | 1,583 | 17,315 | 30,532 | 9 | % | 24 | % | |||||||||||||||||
February 6, 2014 | February 6, 2015 | 55,000 | 976 | 11,385 | 11,385 | 12 | % | 18 | % | |||||||||||||||||
February 19, 2014 | February 19, 2015 | 55,556 | 749 | 11,878 | 11,878 | 12 | % | 24 | % | |||||||||||||||||
February 20, 2014 | November 18, 2014 | 110,000 | 1,121 | 29,185 | 29,185 | 12 | % | 24 | % | |||||||||||||||||
March 5, 2014 | March 5, 2015 | 55,556 | 329 | 10,197 | 10,197 | 8 | % | 22 | % | |||||||||||||||||
March 21, 2014 | December 17, 2014 | 63,000 | 152 | 3,721 | 3,721 | 8 | % | 22 | % | |||||||||||||||||
$ | 322,422 |
14
CodeSmart Holdings, Inc. and Subsidiaries
Fka First Independence Corp.
Notes to Condensed Consolidated Financial Statements
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 March 31, 2014, 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 | |||||||||||||
August 29, 2013 | August 29, 2014 | $ | 150,000 | $ | 149,316 | $ | 0.4073 | 378,338 | ||||||||||
December 13, 2013 | December 12, 2014 | 194,444 | 254,583 | $ | 0.3770 | 567,345 | ||||||||||||
December 19, 2013 | September 19, 2014 | 225,000 | 259,370 | $ | 0.3770 | 614,599 | ||||||||||||
December 19, 2013 | September 20, 2014 | 153,500 | 175,853 | $ | 0.3770 | 416,354 | ||||||||||||
January 10, 2014 | July 10, 2014 | 194,444 | 225,253 | $ | 0.3770 | 567,344 | ||||||||||||
January 10, 2014 | January 10, 2015 | 110,000 | 136,378 | $ | 0.3770 | 298,252 | ||||||||||||
January 23, 2014 | January 23, 2016 | 118,000 | 161,572 | $ | 0.3770 | 350,557 | ||||||||||||
February 3, 2014 | October 30, 2014 | 105,263 | 86,839 | $ | 0.4713 | 226,730 | ||||||||||||
February 6, 2014 | February 6, 2015 | 55,000 | 62,693 | $ | 0.4030 | 138,899 | ||||||||||||
February 19, 2014 | February 19, 2015 | 55,556 | 69,918 | $ | 0.3770 | 149,349 | ||||||||||||
February 20, 2014 | November 18, 2014 | 110,000 | 130,425 | $ | 0.3770 | 295,613 | ||||||||||||
March 5, 2014 | March 5, 2015 | 55,556 | 69,931 | $ | 0.3770 | 148,235 | ||||||||||||
March 21, 2014 | December 17, 2014 | 63,000 | 69,095 | $ | 0.4000 | 157,880 | ||||||||||||
$ | 1,851,226 | 4,309,495 |
15
CodeSmart Holdings, Inc. and Subsidiaries
Fka First Independence Corp.
Notes to Condensed Consolidated Financial Statements
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 March 31, 2014 | Exercise Price | |||||||||||||
December 13, 2013 | Placement agent | 17,499 | December 13, 2016 | $ | 11,838 | $ | 8,402 | $ | 1.00 | ||||||||||
December 19, 2013 | Investors | 187,500 | December 31, 2018 | 118,379 | 123,453 | 0.40 | |||||||||||||
January 10, 2014 | Placement agent | 17,499 | January 10, 2017 | 18,417 | 8,505 | 0.40 | |||||||||||||
$ | 154,792 | $ | 140,360 |
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.
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 March 31, 2014 and 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.
16
CodeSmart Holdings, Inc. and Subsidiaries
Fka First Independence Corp.
Notes to Condensed Consolidated Financial Statements
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 and the three months ended March 31, 2014:
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 | ||||||
Issuances: | ||||||||
Compound embedded derivatives | 1,259,962 | - | ||||||
Warrant derivatives | - | 18,417 | ||||||
Fair value adjustments: | ||||||||
Compound embedded derivatives | (399,884 | ) | - | |||||
Warrant derivatives | - | (23,895 | ) | |||||
Balance – March 31, 2014 | $ | 1,851,226 | $ | 140,360 |
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.
17
CodeSmart Holdings, Inc. and Subsidiaries
Fka First Independence Corp.
Notes to Condensed Consolidated Financial Statements
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. |
18
CodeSmart Holdings, Inc. and Subsidiaries
Fka First Independence Corp.
Notes to Condensed Consolidated Financial Statements
Note 7 Stockholders’ Equity
During the period from January 2014 to March 2014, the Company sold a total of 512,130 shares of Common Stock to various investors for prices ranging from $0.40 per share to $0.4825 per share for $213,047.
On January 9, 2014, the Company issued 25,000 shares of its common stock which represented interest due as of December 26, 2013.
Note 8 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 | $ | 58,743 | ||
2015 | $ | 32,635 |
Rent expense for the three months ended March 31, 2014 and 2013 was a total of $17,935 and $0, respectively.
19
CodeSmart Holdings, Inc. and Subsidiaries
Fka First Independence Corp.
Notes to Condensed Consolidated Financial Statements
Note 9 Investment in Jasper Group Holdings, Inc.
On October 31, 2013, the Company consummated and closed a Share Exchange Agreement with Jasper Group Holdings, Inc. (“Jasper”) 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 March 31, 2014 due to the write off of the investment but will be expensed as of the date of issuance. On April 11, 2014, the Company issued Jasper 994,895 shares of its Common Stock, with a value of $0.715 per share, to satisfy its obligation pursuant to the Share Exchange Agreement. The Company will record a charge in the amount of $711,350 related to this transaction.
Note 10 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.
20
CodeSmart Holdings, Inc. and Subsidiaries
Fka First Independence Corp.
Notes to Condensed Consolidated Financial Statements
Note 11 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 12 Subsequent Events
Subsequent to March 31, 2014 and through May 20, 2014, the Company issued two convertible Notes to various investors, with an aggregate face value of approximately $144,000, resulting in net proceeds of approximately $105,000.
On April 2, 2014, the Company issued 51,000 shares of the Company’s common stock pursuant to an agreement with ECPC Capital LLC. The Company will record a charge to stock financing expense of $20,400 or $0.40 per share for the placement agent fees in connection with the private placement to raise $153,000 in cash in March 2014.
On April 10, 2014, the Company issued 100,000 shares of the Company's common stock to Lyon’s Capital LLC pursuant to a consulting agreement. The shares were valued at a total of $62,000 or $0.62 per share.
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 $711,350.
On April 22, 2014, the Company issued 150,000 shares of the Company’s common stock to David Patterson pursuant to an advisory agreement with Mr. Patterson. The shares were valued at a total of $45,750 or $0.305 per share.
On April 29, 2014, the Company issued 10,000 shares of the Company’s common stock to WHC Capital LLC (“WHC”). The shares were issued pursuant to a Convertible Note sold by the Company to WHC on March 5, 2014. The Company will record a charge to interest in the amount of $3,100 or $0.31 per share.
On April 29, 2014, the Company, Group 10 Holdings, LLC (“Group 10”), Magna Group, LLC (“Magna”) entered into an Assignment Agreement (the “Assignment Agreement”), where Group 10 sold and assigned to Magna the convertible debenture (the “Original Debenture”) that it originally acquired on August 29, 2013. Pursuant to the Assignment Agreement, the Company agreed to issue a new form of note (the “Assignment Note”) in replacement of the Original Debenture. The Assignment Note is of the principal amount of $228,750.41 which is the sum of the original principal amount, prepayment penalty and accrued interest of the Original Debenture. The Assignment Note accrues interest at 12% per annual and will be due on April 22, 2015. Magna will have the right to convert the Assignment Note at the conversion price which equals to 62% of the volume-weighted average price for the Common Stock during the three (3) trading day period prior to conversion. From May 5, 2014 to May 22, 2014, Magna converted the Assignment Note to 467,181 shares of the Company’s common stock.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
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 exceptions 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. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
The Company plans to implement operations and reaching their goals and objectives by hiring qualified personnel to play key roles throughout the organization. The Company utilizes a hiring process with a long term successful track record. It has a philosophy in hiring the most qualified personnel along with a strong branding and marketing campaign. The marketing campaign will be multifaceted and include a very aggressive direct marketing campaign along with building strong distribution partnerships as it has already begun to do. The majority of the funds received in offerings of the Company's securities will be put into marketing, branding, and sales activities along with operational support activities. The success of the Company is directly related to marketing and sales campaigns and support. Building a national brand and creating market awareness will be critical. Supporting sales and customers will also be important from an operational perspective.
Results of Operations for the three months ended March 31, 2014
Revenue and Gross Profit
During the three months ended March 31, 2014, the Company earned $164,670 in instructional revenue as compared to $7,600 for the three months ended March 31, 2013. The increase of $157,070 was due to the Company’s ICD-10 training program enrollments increasing as the deadline for the implementation of ICD-10 approached. The Company incurred $90,435 in costs associated with earning the revenue during the three months ended March 31, 2014 as compared to $3,177 for the three months ended March 31, 2013. The increase of $87,258 was due to the increase of revenue.
Operating Expenses
During the three months ended March 31, 2014, the Company incurred total operating expenses in the amount of $1,132,177 as compared to $84,178 for the three months ended March 31, 2013. The increase of $1,047,999 was due to increases in compensation and benefits expenses in the amount of $533,292, professional fees in the amount of $139,493, research and development expenses in the amount of $70,925, advertising and promotions of $98,731 and other general and administrative expenses in the amount of $205,558.
Loss from Operations
Loss from operations for the three months ended March 31, 2014 was $1,057,942 as compared to $79,755 for the three months ended March 31, 2013. The increase of $978,187 was due to the increase of general and administrative expenses as detailed above.
Net Loss
Net loss from operations for the three months ended March 31, 2014 was $1,500,690 as compared to $79,755 for the three months ended March 31, 2013. The increase in net loss was attributable to the operating expenses as detailed above. In addition, during the three months ended March 31, 2014, the Company sold several convertible debentures for the aggregate net proceeds of $757,500. The convertible debentures contained embedded features that the Company had to bifurcate and account for at fair value. On the dates of issuance, the Company recorded derivative expenses of $570,096 in total. As of March 31, 2014, the Company re-valued all derivative instruments, including those sold prior to the three months ended March 31, 2014 and recorded a gain of $423,779. Inflation did not have a material impact on the Company’s operations for the period. On March 31, 2014, the implementation of ICD-10 was once again delayed until October 1, 2015. The Company anticipates that the delay of the implementation date will delay the Company’s ability to generate significant revenues and will have a material impact on the Company’s results of operations. 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.
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Liquidity and Capital Resources
At March 31, 2014, we had a working capital deficit of $2,868,751. The Company recorded $164,670 of earned revenue for the three months ended March 31, 2014. Net cash used for operating activities for the three months ended March 31, 2014 was $857,588 as compared to $31,074 during the three months ended March 31, 2013. The increase was due to (i) depreciation of $417 during the 3 months ended March 31, 2014 as compared to $0 during the 3 months ended March 31, 2013; (ii) derivative and interest expenses of $570,096 and $296,015 offset by the net change in fair market value of derivative liabilities of $423,779 directly related to the various Notes sold by the Company during the three months ended March 31, 2014 as compared to $0 for any Note related transactions during the three months ended March 31, 2013; (iii) increases in accounts receivable, prepaid expenses and deferred revenue of $46,875, $2,379 and $287,530, respectively during the three months ended March 31, 2014 as compared to $4,423, $0 and $0, respectively during the three months ended March 31, 2013; (iv) the decrease of accounts payable and accrued expenses of $37,923 during the three months ended March 31, 2014 as compared to the increase of $53,104 during the three months ended March 31, 2013; and (v) the net loss for the three months ended March 31, 2014 was $1,500,690 as compared to $79,755 for the three months ended March 31, 2013. Cash used in operating activities was primarily for compensation, professional fees and marketing and advertising. Net cash provided by financing activities for the three months ended March 31, 2014 was $884,547 as compared to $25,000 during the three months ended March 31, 2013. This increase was primarily due to $213,047 in proceeds from the sale and issuance of common stock during the three months ended March 31, 2014 as compared to $25,000 during the three months ended March 31, 2013, $757,500 in sale and issuance of secured convertible notes offset by a $50,000 payment to repay an outstanding convertible note and payments of $36,000 for debt issuance costs directly related to the various Notes sold by the Company during the three months ended March 31, 2014 as compared to $0 for any Note related transactions during the three months ended March 31, 2013.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit Number | Description of Exhibit | Filing Reference | ||
31.01 | Certification of Principal Executive Officer Pursuant to Rule 13a-14. | Filed herewith. | ||
31.02 | Certification of Principal Executive Officer Pursuant to Rule 13a-14. | Filed herewith. | ||
32.01 | CEO and COO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act. | Filed herewith. | ||
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 |
* The XBRL-related information in Exhibits 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CODESMART HOLDINGS, INC. | |
Dated: June 19, 2014 | /s/ Ira Shapiro |
By: Ira Shapiro | |
Title: Chief Executive Officer | |
Dated: June 19, 2014 | /s/ Sharon Franey |
By: Sharon Franey | |
Title: Chief Operating Officer |
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