The accompanying notes are an integral part of these consolidated financial statements
For the years ended December 31 2013 and 2012, there were 1,580,000 warrants outstanding, which could potentially dilute basic earnings per share in the future, but which were not included in diluted loss per share as their effect was anti-dilutive.
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
(Amounts expressed in US dollars)
NOTE 1 - ORGANIZATION AND GOING CONCERN
Organization
On January 14, 2011, Kallo Inc. (the "Company" or "Kallo") was incorporated in Nevada and merged into Diamond Technologies Inc., at which point the Company changed its name to Kallo Inc.
Kallo Inc. develops software designed to taking medical information from many sources, and then depositing it into a single source as an electronic medical record for each patient.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The amounts of assets and liabilities in the consolidated financial statements do not purport to represent realizable or settlement values. The Company has incurred operating losses since inception and has an accumulated deficit of $18,969,046 at December 31, 2013. The Company is expected to incur additional losses as it develops its products and marketing channels.
The Company has met its historical working capital requirements from the sale of common shares and related party loans. In order to not burden the Company, the officer/stockholder has agreed to provide funding to the Company to pay its annual audit fees, filing costs and legal fees as long as the board of directors deems it necessary. However, there can be no assurance that such financial support shall be ongoing or available on terms or conditions acceptable to the Company. This raises substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 2 - ACCOUNTING POLICIES AND OPERATIONS
Basis of Presentation
The consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America as applicable to a development stage enterprise under Financial Accounting Standards Board Accounting Standards Codification 915-205.
Basis of Consolidation
The consolidated financial statements include the accounts of Kallo and its wholly-owned subsidiary, Rophe Medical Technologies Inc. Significant inter-company transactions and balances have been eliminated on consolidation.
Cash
Cash includes cash on hand and highly liquid investments with a maturity of three months or less at acquisition.
KALLO INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
(Amounts expressed in US dollars)
NOTE 2 - ACCOUNTING POLICIES AND OPERATIONS (continued)
Earnings Per Share
The Company computes basic net loss per share in accordance with ASC 260,
Earnings Per Share
, by dividing the net loss for the period by the weighted average number of common shares outstanding during the year. Diluted loss per share is computed by dividing the net loss for the year by the weighted average number of common and potentially dilutive common shares outstanding during the year, adjusted by any effects of warrants and options outstanding, if dilutive, that may add to the number of common shares during the year
.
Use of Estimates
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Key estimates include the fair value of common stock issued for services received by the Company, valuation of financial instruments, useful life of equipment, impairment of long lived assets, measurement of non-monetary transactions and provision for penalties and interest on estimated payroll tax liabilities.
Equipment
Equipment comprises computer equipment and is stated at cost less accumulated depreciation. The cost of computer equipment is depreciated using the straight-line method over the estimated useful life of the related assets of between 3 - 5 years.
Software Development Costs
Software development costs are accounted for in accordance with ASC 985-20,
Costs of Software to be Sold, Leased or Marketed
. Software development costs incurred internally in creating computer software products are expensed until technological feasibility has been established upon completion of a detailed program design. Based on the Company's product development process, technological feasibility is established upon completion of a working model. The determination of technological feasibility and the ongoing assessment of the recoverability of these costs require considerable judgment by management with respect to certain external factors including anticipated future gross product revenues, estimated economic life and changes in hardware and software technology.
Thereafter, all software development costs incurred through the software's general release date are capitalized and subsequently reported at the lower of amortized cost or net realizable value. Capitalized costs are amortized based on current and expected future revenue for each software solution with minimum annual amortization equal to the straight-line amortization over the estimated economic life of the solution. No costs have been capitalized to date as the Company has not completed a working model as of yet.
KALLO INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
(Amounts expressed in US dollars)
NOTE 2 – ACCOUNTING POLICIES AND OPERATIONS (continued)
Intangible Assets - Copyrights
Copyrights are stated at cost. According to the Canadian Intellectual Property laws in Canada, the life of a copyright is the author's life, the remainder of the calendar year in which the author dies, and a period of 50 years following the end of that calendar year. As a result, the useful life of the copyrights are determined to be indefinite are not amortized but subject to testing for impairment. The Company reviews the value of the copyrights on an annual basis to determine if the value has been impaired. Based on its evaluations, there was no impairment of copyrights as at December 31, 2013 and 2012.
Impairment of Long-lived Assets
Long-lived assets comprise of equipment and copyrights. The Company accounts for impairment of long-lived assets in accordance with the guidance established in ASC 360, Accounting for the Impairment or Disposal of Long-Lived Assets, which requires the Company to evaluate a long-lived asset for recoverability when there is an event or circumstance that indicates the carrying value of the asset may not be recoverable. The Company follows the guidance of ASU 2012-02 and first assesses qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. An impairment loss is recognized when the carrying amount of a long-lived asset or asset group is not recoverable (when carrying amount exceeds the gross, undiscounted cash flows from use and disposition) and is measured as the excess of the carrying amount over the asset's (or asset group's) fair value. Management evaluated whether there are any adverse qualitative factors in respect to copyrights and equipment indicating that they might be impaired. Since there were indicators of impairment, Management reviewed its long-lived intangible assets and has determined that no impairment exists that relate to these assets through December 31, 2013.
Research and Development
The Company accounts for research and development costs in accordance with ASC 730-10, Research and Development. Accordingly, all research and development costs are charged to expense as incurred as software development costs.
Foreign Currency Translation
The Company's functional and reporting currency is the United States dollar. Occasional transactions may occur in Canadian dollars which are accounted for under ASC 830,
Foreign Currency Matters
. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are translated at rates of exchange in effect at the date of the transaction. Average monthly rates are used to translate revenues and expenses. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the Statements of Operations. The Company has not, to the date of these consolidated financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.
KALLO INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
(Amounts expressed in US dollars)
NOTE 2 – ACCOUNTING POLICIES AND OPERATIONS (continued)
Income Taxes
The Company accounts for income taxes under 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 and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. 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. 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 Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which a change in judgement occurs, as a result of information that arises or when a tax position is effectively settled. Interest and penalties related to income tax matters are recognized in general and administrative expense.
The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of FASB ASC 740.
Fair Value of Financial Instruments
The Company used a three-level hierarchy that prioritizes the inputs used in valuation techniques for determining fair value of investments and liabilities. The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities recorded in the accompanying consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1
– Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the company has the ability to access at the measurement date (examples include active exchange-traded equity securities, listed derivatives and most United States Government and agency securities).
KALLO INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
(Amounts expressed in US dollars)
NOTE 2 – ACCOUNTING POLICIES AND OPERATIONS (continued)
Fair Value of Financial Instruments
(continued)
Level 2
– Financial assets and liabilities whose values are based on quoted prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. Level 2 inputs include the following:
|
•
|
Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds which trade infrequently);
|
|
|
|
|
•
|
Inputs other than quoted prices that are observable for substantially the full term of the asset or liability (examples include interest rate and currency swaps); and
|
|
|
|
|
•
|
Inputs that are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability (examples include certain securities and derivatives).
|
Level 3
– Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or liability.
An asset or liability's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Availability of observable inputs can vary and is affected by a variety of factors. The Company uses judgment in determining fair value of assets and liabilities and Level 3 assets and liabilities involve greater judgment than Level 1 and Level 2 assets or liabilities.
The following is a summary of our financial instruments that are accounted for at fair value by level within the fair value hierarchy at December 31, 2013 and 2012:
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
27,448
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
27,448
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
318,445
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
318,445
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory notes
|
|
$
|
200,767
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
200,767
|
|
Stock-Based Compensation
The Company accounts for share-based compensation in accordance with ASC 718,
Stock Compensation
. Under the provisions of ASC 718, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense for services rendered and over the employee's requisite service period (generally the vesting period of the equity grant).
KALLO INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
(Amounts expressed in US dollars)
NOTE 2 - ACCOUNTING POLICIES AND OPERATIONS (continued)
Contingencies
The Company accrues estimates for resolution of any legal and other contingencies when losses are probable and estimable, in accordance with ASC 450,
Contingencies.
Legal defense costs are accrued as incurred. See Note 13.
Stock Issued in Exchange for Services
The valuation of the Company's common stock issued to non-employees in exchange for services is valued at an estimated fair market value as determined by Management of the Company based upon trading prices of the Company's common stock on the dates of the stock transactions. The corresponding expense of the services rendered is recognized over the employee's requisite service period (generally the vesting period of the equity grant).
Common Stock Purchase Warrants
The Company accounts for common stock purchase warrants at fair value in accordance with ASC 815-40 "DERIVATIVES AND HEDGING." The Black-Scholes option pricing valuation method is used to determine fair value of these warrants consistent with ASC 718, "COMPENSATION - STOCK COMPENSATION." Use of this method requires that the Company make assumptions regarding stock volatility, dividend yields, expected term of the warrants and risk-free interest rates.
Convertible promissory note
Convertible promissory note is accounted for under FASB Codification ASC 815-15-25-4 (formerly SFAS 155). In accordance with the standard, the Company performs a fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. The fair value has been defined as the common stock equivalent value, enhanced by the fair value of the default put plus the present value of the coupon. See Note 10.
Non-monetary transactions
The Company applies ASC 845, "Accounting for Non-Monetary Transactions", to account for services received through non-cash transactions based on the fair values of the services involved, where such values can be determined. If fair value of the services received cannot be determined, then the fair value of the shares given as consideration is used.
Revenue recognition
Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery or performance has occurred; the sales price is fixed or determinable; and collection is reasonably assured.
Professional service revenue primarily consists of the fees the Company earns related to installation and consulting services. The Company recognizes revenue from professional services upon delivery or completion of performance.
Training services are recognized upon delivery of the training.
KALLO INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
(Amounts expressed in US dollars)
NOTE 2 - ACCOUNTING POLICIES AND OPERATIONS (continued)
Deferred revenue
Deferred revenue represents amounts invoiced to customers for which the related revenue has not been recognized because one or more of the revenue recognition criteria have not been met. The current portion of the deferred revenue represents the amount that is expected to be recognized as revenue within one year of the consolidated balance sheet date.
Lease accounting
The Company evaluates each lease for classification as either a capital lease or an operating lease. If substantially all of the benefits and risks of ownership have been transferred to the Company as lessee, the Company records the lease as a capital lease at its inception. The Company performs this evaluation at the inception of the lease and when a modification is made to a lease. If the lease agreement calls for a scheduled rent increase during the lease term, the Company recognizes the lease expense on a straight-line basis over the lease term.
The Company determines the straight-line rent expense impact of an operating lease upon inception of the lease.
Advertising costs
The Company expenses advertising costs as incurred. The total costs the Company recognized related to advertising were approximately
$65,484 and
$251,844
, during the years ended
December 31, 2013 and
2012
, respectively.
Recently Adopted Accounting Pronouncements
We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.
KALLO INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
(Amounts expressed in US dollars)
NOTE 3 – COMMON STOCK
2006 and 2007
On December 12, 2006, the Company issued 15,000,000 shares to its initial stockholders in exchange for $50 in cash. In 2007, the Company issued 1,471,502 shares at $0.083333 per share for total proceeds of $122,625 and 250,000 shares at $0.20 per share for total proceeds of $50,000.
2008
On February 8, 2008 the Board of Directors approved a 200% stock dividend effective on February 25, 2008. For accounting purposes this is treated as a three for one stock split. All references in the financial statements and related notes related to the number of shares and per share amounts of the common stock have been retroactively restated to reflect the impact of the February 25, 2008 transaction.
2009
In December 2009, the Company issued 6,000,000 of the Company's common shares valued at $765,300 as part of the consideration paid to acquire the outstanding shares of Rophe Medical Technologies Inc. (See Note 8).
On December 30, 2009, the Company issued 150,000 shares of its common stock at $0.10 per share to its president for proceeds of $15,000. Because the sale price was below the quoted stock price of $0.15 per share at the time, the Company considered $7,500 as compensation and recorded the amount as stock based compensation with a corresponding credit to additional paid-in-capital.
2010
During the year ended December 31, 2010, the Company issued 1,133,664 shares of its common stock at $0.15 per share for cash proceeds of $170,050.
On October 25, 2010, the Company issued 1,580,000 units at a price of $0.25 each for total proceeds of $395,000. Each unit consisted of one share and one stock purchase warrant exercisable for a period of one year from the effective date of the registration statement on October 9, 2013 at the option of the holder, into one share of common stock at an exercise price of $0.50 per share.
During the year ended December 31, 2010, 13,500,000 shares were issued to directors and officers of the Company for a total amount of $3,375,000, of which $1,350 was contributed as cash by the directors and officers and $3,373,650 was granted to them as stock based compensation.
2011
On January 14, 2011, the Company issued 4,000,000 shares of its common stock at $0.0001 per share to its CEO for proceeds of $400. Because the sale price was below the quoted stock price of $0.10 per share at the time, the Company considered $399,600 as compensation and recorded the amount as stock based compensation with a corresponding credit to additional paid-in-capital.
On September 22, 2011, the Company issued 54,500,000 shares at $0.0001 per share for proceeds of $5,450, including 38,500,000 shares to its officers. Because the sale price was below the quoted stock price of $0.05 per share at the time, the Company considered $2,719,550 as compensation and recorded the amount as stock based compensation with a corresponding credit to additional paid-in- capital.
During 2011, the Company issued 883,334 shares to creditors in consideration of satisfaction of $49,434 in outstanding payables.
KALLO INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
(Amounts expressed in US dollars)
NOTE 3 – COMMON STOCK (continued)
On October 24, 2011, the Company issued 1,000,000 shares valued at $70,000 to a consultant for the provision of services relating to the marketing of the Company's business and products to the public.
During 2011, the Company issued 13,604,132 shares for cash proceeds of $718,694, which included the conversion of loans payable of $25,000.
2012
During 2012, the Company's issued 52,589,910 shares in consideration of $2,629,497, of which $394,474 was received as at December 31, 2011.
During 2012, the Company issued 5,000,000 shares valued at $350,000 to consultants for the provision of various services to the Company.
On June 1, 2012, the Company issued 500,000 shares to a past officer as compensation of $60,000 for past services rendered.
On July 20, 2012, the Company issued 350,000 shares to a creditor in consideration of satisfaction for services rendered for a fair value of $35,427.
During 2012, the Company issued 117,834,494 shares at $0.0001 to various officers, employees and parties related to them in consideration of satisfaction of $11,564 in outstanding payables and as compensation for future services in the amount of $4,734,814. Because the sale price was below the quoted stock price per share of between $0.04 and $0.05 per share at the time, the Company considered $4,729,633 as compensation expense and $5,181 as non-cash expense and recorded the amount as stock based compensation and miscellaneous expense respectively with a corresponding credit to additional paid-in- capital.
On September 26, 2012, the Company entered into a investment agreement with Kodiak Capital Group, LLC ("Kodiak") whereby the company could issue 2,000,000 shares in exchange for an option to sell up to $2,000,000 worth of shares of the Company at a price equal to eighty percent (80%) of the lowest daily preceding five days Volume Weighted Average Price at the time of exercise and expires six months from inception. The Company recorded a stock subscription receivable (included in equity) in the amount of $100,000 which was determined to be the fair value of the option on September 26, 2012. On October 24, 2012, Kallo filed an S-1 registration statement relating to the resale of up to 50,000,000 shares of common stock issuable to Kodiak for investment banking services pursuant to an Investment Agreement dated September 26th, 2012. Such registration statement was declared effective on October 9, 2013 and the agreement expired six months later. We are currently in discussions with Kodiak Capital Group, LLC to extend the investment agreement. Subsequent to December 31, 2013, the Company put $250,000 and 3,472,223 shares have been issued to date pursuant to the above Agreement. The fair value of the option was valued using the following assumptions and estimates in the binomial lattice valuation model: Expected life of 6 months, volatility of 230%, dividend yield of 0% and risk-free interest rate of 0.13%.
KALLO INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
(Amounts expressed in US dollars)
NOTE 3 – COMMON STOCK (continued)
The Investment Agreement will terminate when any of the following events occur:
·
|
Kodiak has purchased an aggregate of $2,000,000 of Kallo common stock or six (6) months after the effective date;
|
·
|
Kallo files or otherwise enters an order for relief in bankruptcy; or
|
·
|
Kallo common stock ceases to be registered under the Securities Exchange Act of 1934 (the "Exchange Act").
|
On June 27, 2011, Kallo registered 10,000,000 shares under a 2011 Non-Qualified Stock Option Plan to be offered and sold to accounts of eligible persons of the Company under the Plan at a proposed maximum offering price per share of $0.15. This 2011 Plan is for persons employed or associated with the Company, including without limitation any employee, director, general partner, officer, attorney, accountant, consultant or advisor, is intended to advance the best interests of the Company by providing additional incentive to those persons who have a substantial responsibility for its management, affairs, and growth by increasing their proprietary interest in the success of the Company, thereby encouraging them to maintain their relationships with the Company. As at December 31, 2013, 7,233,334 shares have been issued under this 2011 Non-Qualified Stock Option Plan, which is included in the 117,834,494 shares issued to employees and others for services mentioned above.
On September 6, 2012, Kallo registered 50,000,000 shares under a 2012 Non-Qualified Stock Option Plan to be offered and sold to accounts of eligible persons of the Company under the Plan at a proposed maximum offering price per share of $0.04. This 2012 Plan is for persons employed or associated with the Company, including without limitation any employee, director, general partner, officer, attorney, accountant, consultant or advisor, is intended to advance the best interests of the Company by providing additional incentive to those persons who have a substantial responsibility for its management, affairs, and growth by increasing their proprietary interest in the success of the Company, thereby encouraging them to maintain their relationships with the Company. As at December 31, 2013, no shares have been issued under this 2012 Non-Qualified Stock Option Plan.
2013
During 2013, the Company issued 26,402,460 shares in consideration of $1,320,124 ($30,000 of proceeds were paid by investors directly to lenders of the Company), 200,000 shares valued at $5,000 to a consultant as compensation and 1,156,524 shares as repayment for short term loans to a related party valued at $57,826. The fair value of the stock issued is $46,261. Therefore the company experienced a gain on extinguishment. Since this involved a related party, the gain is treated a capital contribution.
During 2013, the Company received cash of $9,560 for shares to be issued. The related shares were not yet issued as at December 31, 2013.
KALLO INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
(Amounts expressed in US dollars)
NOTE 4 – WARRANTS
Warrant activity during 2013 and 2012 is as follows:
|
|
|
|
|
Weighted Average
|
|
|
|
Number of Warrants
|
|
|
Exercise Price
|
|
Balance, December 31, 2011
|
|
|
1,580,000
|
|
|
$
|
0.50
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Balance, December 31, 2012
|
|
|
1,580,000
|
|
|
$
|
0.50
|
|
Granted
|
|
|
-
|
|
|
|
|
|
Balance, December 31, 2013
|
|
|
1,580,000
|
|
|
$
|
0.50
|
|
Each warrant is exercisable for a period of one year from the effective date of a registration statement filed with the SEC. Such registration statement was declared effective on October 9, 2013.
The value of the stock purchase warrants granted in 2010 was valued at $117,620 using the following assumptions and estimates in the Black-Scholes model: Expected life of 1.2 years, volatility of 100%, dividend yield of 0% and risk-free interest rate of 1.40%.
NOTE 5 – RELATED PARTY TRANSACTIONS
During 2013, 1,156,524 shares (2012 - 107,076,003 shares) were issued to directors and officers of the Company and their family for a total amount of $46,261 (2012 - $4,313,040), of which $NIL (2012 - $150,000) was contributed as cash by them, $46,261 (2012 - $NIL) was for repayment of short term loans payable, and $NIL (2012 - $4,163,040) was granted to them as stock-based compensation (See Note 11). The debt outstanding was $57,826, therefore the company experienced a gain on debt extinguishment of $11,565. Since the gain involved a related party, it is treated as capital contribution.
Included in short term loans payable is an amount due to a shareholder and director of the Company for the amount of $1,450 (2012 - $36,450) (See Note 11) and $NIL (2012 - $9,856) due to another director and officer of the Company (See Note 11).
Included in accounts payable and accrued liabilities – other is an amount of $68,574 (2012 - $28,118) due to directors and officers of the Company as at December 31, 2013. Other receivables include an amount of $NIL (2012 - $3,576) due from a director and officer of the Company as at December 31, 2013.
KALLO INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
(Amounts expressed in US dollars)
NOTE 6 – EQUIPMENT
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Computer equipment under capital lease
|
|
$
|
223,683
|
|
|
$
|
223,683
|
|
Nexus computer equipment under capital lease
|
|
|
42,023
|
|
|
|
42,023
|
|
|
|
|
|
|
|
|
|
|
Total Equipment
|
|
|
265,706
|
|
|
|
265,706
|
|
Less accumulated depreciation
|
|
|
(217,733
|
)
|
|
|
(188,165
|
)
|
|
|
|
|
|
|
|
|
|
Equipment – net
|
|
$
|
47,973
|
|
|
$
|
77,541
|
|
Depreciation expense during 2013, 2012 and the period from December 12, 2006 (date of inception) to December 31, 2013 were $29,568, $88,569 and $225,448 respectively.
During 2013, the Company increased its estimate of the useful lives of certain computer equipment to better reflect the period it plans to use the equipment before replacing them. This change had the effect of decreasing the net loss for 2013 by $47,973.
NOTE 7 – OBLIGATIONS UNDER CAPITAL LEASES
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Obligation under capital lease to acquire specific equipment in monthly
payments of $1,326 including interest at 10% per annum, expiring in
November 2013
|
|
$
|
-
|
|
|
$
|
21,688
|
|
Obligation under capital lease to acquire specific equipment in monthly
payments of $7,212 including interest at 10% per annum, expiring in
October 2013
|
|
|
-
|
|
|
|
86,580
|
|
|
|
|
-
|
|
|
|
108,268
|
|
Less: current portion
|
|
|
-
|
|
|
|
(108,268
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
KALLO INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
(Amounts expressed in US dollars)
NOTE 8 – COPYRIGHTS
On December 11, 2009, an agreement was entered into by the Company to acquire 100% of the issued and outstanding shares of Rophe Medical Technologies Inc. ("Rophe") for cash consideration of $1,200,000 and 3,000,000 of the Company's common shares valued at $0.122 per share for total purchase price of $1,565,000 (the "Rophe Acquisition"). The $1,200,000 was initially payable as follows: $50,000 within 30 days of the date of the agreement; $200,000 on March 31, 2010; $250,000 on April 30, 2010; $233,333 on launch of Project 1; $233,333 on launch of Project 2; and, $233,334 on launch of Project 3. This transaction was closed on December 31, 2009.
Subsequently, the Rophe Acquisition payment terms were amended and 3,000,000 additional shares of restricted common stock were issued in 2009 as payment for $400,000 with the remaining cash consideration as follows: $35,000 by March 5, 2010, $65,000 by March 31, 2010, $233,333 on launch of Project 1; $233,333 on launch of Project 2; and, $233,334 on launch of Project 3. As at December 31, 2013, there is a payable in the amount of $525 (2012 - $525) which is included in accounts payable and accrued liabilities. The 3,000,000 shares were considered issued as at the closing date of the acquisition and valued based on discounted market price per share at the date of acquisition and the total of 6,000,000 shares issued for the Rophe acquisition are restricted.
The total recorded acquisition price of $865,000 was allocated to the copyrights obtained in the acquisition as they were the only significant assets of Rophe, which did not have any operations. The copyrights relate to the following technologies: "
EMR Integration Engine" to provide integrated solutions for interoperability within the continuum of care
, "
C&ID-IMS", an Internet-based solution for monitoring and managing Communicable and Infectious Disease information,
"CCG", a clinical-care globalization technology and "MC-Telehealth", a mobile clinic long distance with Telehealth technology. The Company has not recorded the remaining contingent payment of $700,000 due to the uncertainty of the launch of Projects 1, 2 and 3. According to the Canadian Intellectual Property laws, the life of a copyright is the author's life plus fifty years. As a result, the useful life of the copyrights are determined to be indefinite are not amortized but subject to testing for impairment. The Company continues to develop these technologies for use in a diverse range of potential products and expect to make use of them in the Project mentioned in Note 16. The Company reviews the value of the copyrights on an annual basis to determine if the value has been impaired. Based on the remaining life of the copyrights and Management's estimation of future profits, there was no impairment of copyrights as at December 31, 2013 and 2012.
NOTE 9 – LOAN PAYABLE
As at December 31, 2013, a loan payable of $61,203 (2012 - $109,044) to an unrelated party bears interest at 6% per annum, is unsecured and is payable in monthly installments of principal and interest in the amount of Canadian $7,232.50. Future scheduled repayments of principal are as follows:
Within one year
|
|
$
|
61,203
|
|
|
|
$
|
61,203
|
|
NOTE 10 – CONVERTIBLE PROMISSORY NOTES
The convertible promissory notes were unsecured and bore interest at 3.25% per annum with all principal and accrued interest due and payable one year from the dates of execution of the Notes. The Notes were due as follows: $20,000 on April 23, 2013, $10,000 on July 5, 2013, $20,000 on August 22, 2013. The Holders could, in lieu of payment of the principal and interest, elect to convert such amount into common shares of the Company at the conversion price per share equal to 30% discount to the average of the previous three lowest trading days over the last 10 trading days prior to the Conversion Date. All shares converted on or after six months from the dates of execution of the notes would have been issued as free-trading, unrestricted shares. The Company could prepay these Notes at anytime without penalty and without the prior consent of the Holders.
KALLO INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
(Amounts expressed in US dollars)
NOTE 10 – CONVERTIBLE PROMISSORY NOTES (continued)
At the commitment date, the Company elected to initially and subsequently measure in its entirety the convertible promissory notes at fair value by comparing the effective conversion price to the fair value of the Company's stock. The Company recognized an initial fair value loss of $203,868 related to the debts on inception dates and recognized a gain of $87,200 related to change in fair values on the debts since their inception dates to the times of repayment of the notes. The number of common shares indexed to the financial instruments used in the above calculation were 2,472,089 as at inception date.
During the year ended December 31, 2013, the Company repaid $50,000 of the above promissory notes resulting in a gain on extinguishment of convertible promissory note of $116,668. As noted in Note 3, $30,000 was paid by an investor directly to the lender and is accordingly reflected in the Supplemental Schedule Of Non-Cash Investing And Financing Activities on the Consolidated Statement of Cash Flows.
Cash received from convertible promissory notes
|
|
$
|
50,000
|
|
Fair value loss on inception date
|
|
|
203,868
|
|
Fair value of convertible promissory notes on inception date
|
|
|
253,868
|
|
Change in fair value (gain)
|
|
|
(53,101
|
)
|
Fair value as at December 31, 2012
|
|
|
200,767
|
|
Repayment of convertible promissory note
|
|
|
(50,000
|
)
|
Gain on extinguishment of convertible promissory note
|
|
|
(116,668
|
)
|
Change in fair value (gain)
|
|
|
(34,099
|
)
|
Fair value as at December 31, 2013
|
|
$
|
-
|
|
NOTE 11 – SHORT TERM LOANS PAYABLE
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Promissory note bearing interest at 10% per annum, due January 10, 2014
|
|
$
|
25,664
|
|
|
$
|
-
|
|
Promissory note bearing interest at 10% per annum, due January 15, 2014
|
|
|
25,528
|
|
|
|
-
|
|
Promissory note to director bearing interest at 6% per annum, due July 31,
2012
|
|
|
-
|
|
|
|
31,450
|
|
Non-interest bearing advances from director
|
|
|
1,450
|
|
|
|
5,000
|
|
Non-interest bearing advances from officer
|
|
|
-
|
|
|
|
9,856
|
|
Non-interest bearing short term funding from third parties
|
|
|
23,599
|
|
|
|
18,977
|
|
|
|
$
|
76,241
|
|
|
$
|
65,283
|
|
On October 10, 2013, the Company issued a promissory note agreeing to pay the principal amount of Canadian $25,000 (US$24,139) plus interest at the rate of 10% per annum on January 10, 2014. Kallo did not pay on the due date and on January 16, 2014, the holder agreed to convert the principal and interest outstanding into 680,000 common stock of the Company. The amount outstanding as at December 31, 2013 was $25,664, including interest.
On October 15, 2013, the Company issued a promissory note agreeing to pay the principal amount of Canadian $25,000 (US$24,139) plus interest at the rate of 10% per annum on January 15, 2014. Kallo did not pay on the due date and the holder agreed to extend the due date by an additional three months. The amount outstanding as at December 31, 2013 was $25,528, including interest.
KALLO INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
(Amounts expressed in US dollars)
NOTE 11 – SHORT TERM LOANS PAYABLE (continued)
On July 9, 2012, the Company issued a promissory note to a director agreeing to pay the principal amount of Canadian $30,000 plus interest at the rate of 6% per annum on July 31, 2012. Kallo did not pay on the due date and the director advanced an additional $24,839 (2012 - $5,000) which was non-interest bearing, unsecured and has no fixed repayment date. During the fourth quarter of 2013, the director has agreed to convert the amount of $57,826, representing principal and interest, into 1,156,524 common stock of the Company, leaving $1,450 outstanding as at December 31, 2013 (2012 - $36,450). The fair value of the common stock issued was $46,261, resulting in a gain on extinguishment of the loans payable of $11,565, which was included in additional paid-in capital (See Note 5).
An officer and a stockholder have agreed to provide short term funding to the Company by paying some of its expenses. The advances are non-interest bearing, unsecured and have no fixed repayment dates. As at December 31, 2013, $NIL (2012 - $9,856) was owing to the officer and the stockholder (See Note 5).
As at December 31, 2013, the balance of $23,599 (2012 - $18,977) represented short term funding provided by third parties which are non-interest bearing, unsecured and have no fixed repayment date.
NOTE 12 – INCOME TAXES
The Company had no income taxes payable at December 31, 2013 and 2012.
The reconciliation of income tax provision computed at statutory rates to the reported income tax provision is as follows:
|
|
2013
|
|
|
2012
|
|
Net loss for the year
|
|
$
|
(1,603,283
|
)
|
|
$
|
(7,003,791
|
)
|
Effective statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
Expected tax recovery
|
|
$
|
(545,116
|
)
|
|
$
|
(2,381,289
|
)
|
Net effects of non deductible and allowable items
|
|
|
(51,197
|
)
|
|
|
1,608,041
|
|
Change in valuation allowance
|
|
|
596,313
|
|
|
|
773,248
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred income taxes reflect the net income tax effect of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and amounts used for income taxes. The Company's deferred income tax assets and liabilities consist of the following:
|
|
2013
|
|
|
2012
|
|
Net operating loss carry forward
|
|
$
|
2,538.950
|
|
|
$
|
1,875,506
|
|
Equipment
|
|
|
(220,747
|
)
|
|
|
(153,616
|
)
|
Valuation allowance
|
|
|
(2,318.203
|
)
|
|
|
(1,721,889
|
)
|
Deferred tax assets, net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
Net operating loss carry forwards totaled approximately $7,500,000 at December 31, 2013. The net operating loss carry forwards will begin to expire in the year 2028 if not utilized. After consideration of all the evidence, management has recorded a valuation allowance at December 31, 2013 due to uncertainty of realizing the deferred tax assets. Utilization of the Company's net operating loss carry forwards may be limited based on changes in ownership as defined in Internal Revenue Code Section 382.
KALLO INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
(Amounts expressed in US dollars)
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Commitments
Operating lease
The Company leases office facilities under non-cancelable operating leases. The Company's obligations under non-cancelable lease commitments are as follows:
Software development
On December 10, 2010, the Company entered into a North American Authorized Agency Agreement (the "Agreement") with Advanced Software Technologies, Inc., located in the Grand Cayman Islands ("AST"). Under the Agreement, the Company was appointed sales agent for AST and will be paid fees by AST for selling AST products. The Company has agreed to pay AST a total of $213,000 for modification of the AST products to comply with the requirements of the Canadian Electronic Health Record market, of which $NIL (2012 - $24,000) was paid in 2013. The remaining balance of $63,543, included in accounts payable and accrued liabilities, is due in 2014.
Sales commission agreement
On November 20, 2012, Kallo signed a memorandum of understanding with the Ministry of Health of the Republic of Ghana for the supply and implementation of a National Mobile Care program with Mobile Clinics and Clinical Command Centers integrated with the existing healthcare system and improve the healthcare delivery services to the rural and remote population of Ghana at large for a total project cost for National implementation and Maintenance support for five years of US$158,500,000 (the "Ghana Project"). The Ministry of Health of the Republic of Ghana and Kallo Inc. have agreed that a contract for the implementation of the Mobile Care projects will be signed when a number of financing and other conditions have been satisfied.
In respect of the Ghana Project, the Company has agreed with two third parties to pay sales commissions equal to $8,717,625 and 4.5% (subject to a maximum of $7,162,375) of the contract price respectively for facilitating and securing the Contract with the Ministry of Health of the Republic of Ghana, payable within 7 to 14 business days of receipt of payment for the Project by Kallo in proportion to the payments received by Kallo. In addition, an incentive payment of $3,000,000 will be payable to the first party mentioned above if the Government of Ghana approve the Project on or before December 20, 2013 in accordance to the same terms of payment described above. This did not happen and the $3,000,000 incentive payment will not be paid.
In respect of the Guinea Project mentioned in Note 16, the Company has agreed with two third parties in Guinea to pay sales commissions for facilitating and securing the Contract with the Ministry of Health of the Republic of Guinea as follows:
-
|
equal to $20,000,000, payable as to an advance of $300,000 immediately after the loan agreement for the Kallo MobileCare and RuralCare program is signed by the Minister of Finance of the Republic of Guinea and the remainder within 7 to 14 business days of receipt of payment for the Project by Kallo in proportion to the payments received by Kallo.
|
-
|
equal to $4,000,000, payable within 7 to 14 business days of receipt of payment for the Project by Kallo in proportion to the payments received by Kallo. In addition, a performance incentive payment of $1,000,000 will be payable to three persons related to the third party in accordance to the same terms of payment described herein.
|
KALLO INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
(Amounts expressed in US dollars)
NOTE 13 – COMMITMENTS AND CONTINGENCIES (continued)
Contingencies
On July 29, 2011, Watt International Inc. ("Watt") commenced a third party claim against Kallo concerning monies that Kallo allegedly owed to Watt for branding and internet services provided by Watt to Kallo. Watt is seeking damages in the amount of Canadian $161,673.67 plus unspecified "special" damage. Management is of the opinion that Watt has charged Kallo for services that Watt did not perform, and that Watt has duplicated charges for work that it performed and intends to defend itself vigorously in the suit. Management has recognized an accrual for the amount of the claim. An estimate could not be made of the unspecified "special" damage and hence no accrual was made thereof. Management is therefore unable to estimate the possible loss or range of loss in excess of the amounts accrued, if any.
Contingent liability
The Company has calculated the estimated amount of withholding taxes on stock-based compensation based on valuation obtained from a third party. Should the amount payable be different from the estimated amount, the difference will be recorded in the period of payment. At this point, the Company cannot make an estimate of the potential loss that may arise from any liability for withholding taxes.
NOTE 14 – COMPARATIVES
The consolidated financial statements have been reclassified, where applicable, to conform to the presentation used in the current year.
NOTE 15 – CORRECTION OF PRIOR PERIOD ERROR
During the year ended December 31, 2010, stock-based compensation expense related to shares issued to directors and officers of $3,373,650 was reduced by an amount of $604,774 owed to directors and officers, which was forgiven, resulting in net stock-based compensation of $2,768,878 recognized in stockholders' equity (deficiency).
In accordance with ASC 470-50-40-2, which states that extinguishment transactions between related parties may in essence be capital transactions, the forgiveness of obligations due to directors and officers should have been presented as a contribution to capital in the statements of changes in stockholders' equity and in the statements of cash flows as a non-cash financing transaction.
As this error was made in a reporting period prior to the comparative period, the Balance Sheet balances as at December 31, 2010 were restated as follows:
·
|
Additional Paid-In Capital was increased by $604,774 to record the forgiveness of obligations due to directors and officers which should have been treated as a capital transaction
|
·
|
Deficit accumulated during the development stage was increased by $604,774 to reverse the wrong entry made to stock-based compensation expense during 2010.
|
KALLO INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
(Amounts expressed in US dollars)
NOTE 15 – CORRECTION OF PRIOR PERIOD ERROR (continued)
In addition, the Balance Sheet balances were still understated as at December 31, 2011, so this error resulted in the restatement of the following line items for the year ended December 31, 2011:
·
|
Additional Paid-In Capital was increased by $604,774
|
·
|
Deficit accumulated during the development stage was increased by $604,774
|
The section below shows the restatement of each line item affected by the error:
Restatement of financial statements as a result of correction of an error
December 31, 2010 comparative year
Financial statement line item (Balances affected)
|
|
Actual 2010
|
|
|
Correction of Error
|
|
|
Restated Actual 2010
|
|
Balance sheet (extract)
|
|
|
|
|
|
|
|
|
|
Shareholders' Deficiency
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
392
|
|
|
|
|
|
|
392
|
|
Additional paid-in capital
|
|
|
4,900,133
|
|
|
|
604,774
|
|
|
|
5,504,907
|
|
Deficit accumulated during the development stage
|
|
|
(4,419,498
|
)
|
|
|
(604,774
|
)
|
|
|
(5,024,272
|
)
|
Total Stockholders' Equity (Deficiency)
|
|
|
481,027
|
|
|
|
-
|
|
|
|
481,027
|
|
December 31, 2011 comparative year
Financial statement line item (Balances affected)
|
|
Actual 2011
|
|
|
Correction of Error
|
|
|
Restated Actual 2011
|
|
Balance sheet (extract)
|
|
|
|
|
|
|
|
|
|
Shareholders' Deficiency
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
1,131
|
|
|
|
|
|
|
1,131
|
|
Additional paid-in capital
|
|
|
8,862,522
|
|
|
|
604,774
|
|
|
|
9,467,296
|
|
Deficit accumulated during the development stage
|
|
|
(9,757,198
|
)
|
|
|
(604,774
|
)
|
|
|
(10,361,972
|
)
|
Total Stockholders' Deficiency
|
|
|
(893,545
|
)
|
|
|
-
|
|
|
|
(893,545
|
)
|
NOTE 16 – SUBSEQUENT EVENTS
Conversion of short term loan payable
On January 16, 2014, the holder of a promissory note, in the amount of Canadian $25,000 due on January 10, 2014, agreed to convert the principal and interest outstanding into 680,000 common stock of the Company. The amount outstanding as at December 31, 2013 was $25,664, including interest (See Note 11).
Investment agreement with Kodiak
On February 17, 2014, Kallo elected to exercise its right pursuant to the investment agreement with Kodiak Capital Group, LLC to require Kodiak to purchase its shares. The Company put $250,000 for the issuance of 3,472,223 newly issued shares. The agreement with Kodiak, as discussed in Note 3, expired in April 2014, six months after the related S-1 registration statement was declared effective. The Company is currently in discussions with Kodiak to extend the investment agreement.
KALLO INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
(Amounts expressed in US dollars)
NOTE 16 – SUBSEQUENT EVENTS (continued)
Share issuance
On January 6, 2014, the Company issued 760,000 shares valued at $30,400 to various employees as compensation for services rendered. On June 10, 2014, the Company issued 5,000,000 shares valued at $200,000 to its CEO as compensation for services rendered. Through July 4, 2014, the Company has signed subscription agreements for the issuance of 13,365,540 shares in consideration of $668,277 cash.
New contract
On January 23, 2014, Kallo Inc. announced the signing of a US$200,000,925 (Two Hundred million nine hundred and twenty-five US dollars) Supply Contract with the Ministry of Health and Public Hygiene of the Republic Of Guinea (the "Guinea Project").
Under the Supply Contract, Kallo will implement customized healthcare delivery solutions for the Republic of Guinea. The components of the solutions include, MobileCare, RuralCare, Hospital Information Systems, Telehealth Systems, Pharmacy Information, disaster management, air and surface patient transportation systems and clinical training.
In respect of the Guinea Project mentioned above, the Company has agreed with two third parties in Guinea to pay sales commissions for facilitating and securing the Contract with the Ministry of Health of the Republic of Guinea as follows:
-
|
equal to $20,000,000, payable as to an advance of $300,000 immediately after the loan agreement for the Kallo MobileCare and RuralCare program is signed by the Minister of Finance of the Republic of Guinea and the remained within 7 to 14 business days of receipt of payment for the Project by Kallo in proportion to the payments received by Kallo per agreement signed on December 6, 2013.
|
-
|
equal to $4,000,000, payable within 7 to 14 business days of receipt of payment for the Project by Kallo in proportion to the payments received by Kallo. In addition, a performance incentive payment of $1,000,000 will be payable to three persons related to the third party in accordance to the same terms of payment described herein per agreement signed on February 18, 2014.
|
The Guinea Project will not begin until after the finalization of a formal loan agreement by the Government of the Republic of Guinea.
Sales commission agreement
On March 8, 2014, the Company has agreed with a third party to pay sales commissions equal to $25,000,000 for facilitating and securing the Contract with the Government of the Republic of Sierra Leone, payable within 7 to 14 business days of receipt of payment for the Project by Kallo in proportion to the payments received by Kallo. In addition, an incentive payment of $7,000,000 will also be payable if the Government of Sierra Leone approve the Project on or before August 15, 2014 in accordance to the same terms of payment described above.
New lease
Effective July 1, 2014, we entered into a new lease for office space. The lease expires on January 30, 2017 and the monthly rental is approximately $25,000 per month.