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, 2015 and 2014
(Amounts expressed in US dollars)
NOTE 1 - BUSINESS AND GOING CONCERN
Organization
Kallo Inc. ("Kallo" or the "Company") develops customized health care solutions designed to improve or enhance the delivery of care in the countries and regions we serve.
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 $32,143,044 at December 31, 2015. The Company is expected to incur additional losses as it executes its go to market strategy.
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 accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") and in accordance with the instructions to Form 10-K related to smaller reporting companies as promulgated by the Securities and Exchange Commission.
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.
F-6
KALLO INC.
Notes to Consolidated Financial Statements
December 31, 2015 and 2014
(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 reflects the potential dilution of securities that could share in earnings of an entity. In a loss year, dilutive common equivalent shares are excluded from the loss per share calculation as the effect would be anti-dilutive. For the years ended December 31, 2015 and 2014, basic and diluted losses per share are the same for both years.
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 comprise computer equipment, software, office furniture and equipment and leasehold improvement and are stated at cost less accumulated depreciation. The cost of the equipment is depreciated using the straight-line method over the estimated useful life of the related assets of between 1 - 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.
Deposit – long term
Deposit – long term represents prepayments of rent due at the end of our new office lease.
F-7
KALLO INC.
Notes to Consolidated Financial Statements
December 31, 2015 and 2014
(Amounts expressed in US dollars)
NOTE 2 – ACCOUNTING POLICIES AND OPERATIONS (continued)
Related party transactions
FASB ASC 850, "Related Party Disclosures" requires companies to include in their financial statements disclosures of material related party transactions. The Company discloses all material related party transactions. Related parties are defined to include any principal owner, director or executive officer of the Company and any immediate family members of a principal owner, director or executive officer.
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, it was determined that the copyrights were impaired as at December 31, 2014 and fully reserved with no additional impairment on December 31, 2015.
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 the copyrights were impaired as at December 31, 2014 and Clinical Command Center and Infrastructure fixed assets were impaired on December 31, 2015.
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.
F-8
KALLO INC.
Notes to Consolidated Financial Statements
December 31, 2015 and 2014
(Amounts expressed in US dollars)
NOTE 2 – ACCOUNTING POLICIES AND OPERATIONS (continued)
Foreign Currency Translation
The Company's functional and reporting currency is the United States dollar. Transaction 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.
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.
In accordance with the statute of limitations for federal tax returns, the Company's federal tax returns for the years 2011 through 2014 are subject to examination. 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).
F-9
KALLO INC.
Notes to Consolidated Financial Statements
December 31, 2015 and 2014
(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, 2015 and 2014:
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
210,834
|
|
|
$
|
210,834
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
336,390
|
|
|
$
|
336,390
|
|
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).
F-10
KALLO INC.
Notes to Consolidated Financial Statements
December 31, 2015 and 2014
(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 12.
Stock Issued in Exchange for Services
In accordance with ASC 505, 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 contractor's requisite service period (generally the vesting period of the equity grant).
Convertible promissory note
The Company accounts for conversion options embedded in convertible notes in accordance with ASC 815. ASC 815 generally requires companies to bifurcate conversion options embedded in convertible notes from their host instruments and to account for them as free standing derivative financial instruments if they do not meet the criteria for classification in stockholders' equity.
The Company has evaluated the terms and conditions of its convertible notes under the guidance of ASC 815. The conversion feature did not meet the definition of "indexed to a company's own stock" provided for in ASC 815. Therefore, the conversion features require bifurcation and liability classification. The Company recorded the conversion feature as a derivative liability and debt discount and is amortized over the life of the convertible note. The debt discount is recorded against the related convertible note outstanding. The amortization is recorded as interest expense. The derivative liabilities are re-valued at the end of each reporting period using the lattice Model, with changes in the fair value of the derivative liability recorded as charges or credits to income, in the period in which the changes occur.
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.
F-11
KALLO INC.
Notes to Consolidated Financial Statements
December 31, 2015 and 2014
(Amounts expressed in US dollars)
NOTE 2 - ACCOUNTING POLICIES AND OPERATIONS (continued)
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.
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
$56,014 and
$27,868
, during the years ended
December 31, 2015 and
2014
, respectively.
Recently Adopted Accounting Pronouncements
Management does not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.
F-12
KALLO INC.
Notes to Consolidated Financial Statements
December 31, 2015 and 2014
(Amounts expressed in US dollars)
NOTE 3 – CAPITAL STOCK
Common Stock
On September 26, 2012, the Company entered into a investment agreement with Kodiak Capital Group, LLC ("Kodiak") whereby the company could issue 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. In connection therewith, the Company filed a Form S-1 registration statement with the Securities and Exchange Commission registering for sale up to 50,000,000 common shares. The previous arrangement with Kodiak expired in April 2014, but on July 15, 2014, the Company and Kodiak amended the investment agreement to extend the agreement through December 31, 2015. During the year ended December 31, 2015, the Company put $172,183 and 6,250,000 shares were issued compared to the year ended December 31, 2014, the Company put $481,583 and 8,472,223 shares were issued pursuant to the above Agreement. The agreement expired on December 31, 2015 with no additional extension.
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, 2015, 7,233,334 shares have been issued under this 2011 Non-Qualified Stock Option Plan with no additional shares issued in 2015 under this plan.
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, 2015, no shares have been issued under this 2012 Non-Qualified Stock Option Plan.
During 2014, the holder of a promissory note converted the principal and interest outstanding of $23,776 into 680,000 shares. The fair value of the stock issued was $27,200 and therefore the Company experienced a loss on extinguishment of $3,424. The Company also issued 7,560,000 shares valued at $434,150 to various employees and directors as compensation for services rendered and 700,000 shares valued at $116,364 to consultants for services rendered. During the year ended December 31, 2014, the Company issued 45,637,917 shares for cash of $2,281,895.
During 2015, the holders of promissory notes converted the principal and the related interest outstanding of $677,742 into 2,196,251,125 shares. The fair value of the derivative liability associated with the notes that were converted, $635,176 was reclassified to equity upon conversion. Therefore the Company recorded $1,312,918 in conjunction with the conversions. The Company also issued 2,989,800,000 shares valued at $3,701,600 to various employees and directors as compensation for services rendered. During the year ended December 31, 2015, the Company issued 68,867,121 shares for cash of $2,491,089.
F-13
KALLO INC.
Notes to Consolidated Financial Statements
December 31, 2015 and 2014
(Amounts expressed in US dollars)
NOTE 3 – CAPITAL STOCK (continued)
During 2015, the Company issued 3,508,500 shares in consideration of $230,427 of consulting services related to fund raising activities. Also, the Company issued 1,557,840 shares in consideration of $171,362 as repayment for open Accounts Payables related to design development of mobile trailers and recorded a loss on extinguishment as the value of the stock exceeded the balance due on invoice at the time of issuance.
Preferred Stock
During 2014, the Company has designated 95,000,000 of its preferred stock as Series A Preferred Stock, each of which has 100 votes. The Company, will not, without the affirmative vote or written consent of the holders of at least a majority of the outstanding Series A Preferred Stock (i) authorize or create any additional series of stock ranking prior to or on a parity with the Series A Preferred Stock as to dividends, voting rights, or the distribution of assets upon liquidation; or (ii) change any of the rights, privileges or preferences of the Series A Preferred Stock.
The Company issued 95,000,000 Series A Preferred shares to several directors as compensation for services rendered during 2014. The shares of Series A Preferred stock are not convertible, carry voting rights of 100 votes per Preferred share and the fair value of the Preferred shares were deemed to be $288,780 based on the voting rights of the Preferred shares relative to the fair value of the Company at the date of the issuance.
During 2015, the Company did not issue any Preferred Class shares.
NOTE 4 – WARRANTS
Warrant activity during 2015 and 2014 is as follows:
|
|
|
|
|
Weighted Average
|
|
|
|
Number of Warrants
|
|
|
Exercise Price
|
|
Balance, December 31, 2013
|
|
|
1,580,000
|
|
|
$
|
0.50
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(1,580,000
|
)
|
|
|
-
|
|
Balance, December 31, 2014
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
|
|
Balance, December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
Each warrant was 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 and the warrants expired unexercised in 2014.
F-14
KALLO INC.
Notes to Consolidated Financial Statements
December 31, 2015 and 2014
(Amounts expressed in US dollars)
NOTE 5 – RELATED PARTY TRANSACTIONS
During 2015, 2,662,500,000 shares were issued to directors of the Company as stock-based compensation and were valued, using the market closing price on the date of the grant, at $3,630,000. In addition, 6,470,914 shares were issued to a director of the Company for cash of $323,546 and 55,104,172 shares were issued to an affiliate for cash of $1,938,282.
During 2014, 6,000,000 common shares were issued to directors of the Company as stock-based compensation and were valued, using the market closing price on the date of the grant, at $350,000. Also during 2014, 95,000,000 Series A Preferred Stock were issued to directors of the Company as stock-based compensation and were valued at $288,780 based on the voting rights of the Preferred shares relative to the fair value of the Company at the date of the issuance. In addition, 6,304,633 shares were issued to a director of the Company for cash of $315,232.
Included in convertible note payable is an amount due to a director of the Company for the amount of $138,069 (2014 - NIL) and an amount due to an affiliate of the company for the amount of $134,643 (2014 – NIL).
Included in accounts payable and accrued liabilities is an amount of $7,873 (2014 - $15,714) due to directors and officers of the Company as at December 31, 2015.
NOTE 6 – EQUIPMENT
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Computer equipment under capital lease
|
|
$
|
223,683
|
|
|
$
|
223,683
|
|
Nexus computer equipment under capital lease
|
|
|
42,023
|
|
|
|
42,023
|
|
Computer equipment
|
|
|
50,724
|
|
|
|
39,338
|
|
Computer software
|
|
|
37,210
|
|
|
|
9,577
|
|
Hardware & Installation
|
|
|
10,128
|
|
|
|
-
|
|
Office furniture and equipment
|
|
|
27,739
|
|
|
|
24,796
|
|
Leasehold improvement
|
|
|
55,072
|
|
|
|
30,370
|
|
Medical Equipment
|
|
|
13,274
|
|
|
|
-
|
|
Clinical Command Center
|
|
|
15,790
|
|
|
|
-
|
|
Infrastructure
|
|
|
7,911
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Equipment
|
|
|
483,554
|
|
|
|
369,787
|
|
Less accumulated depreciation
|
|
|
(348,003
|
)
|
|
|
(271,546
|
)
|
|
|
|
|
|
|
|
|
|
Equipment – net
|
|
$
|
135,551
|
|
|
$
|
98,241
|
|
Depreciation expense during 2015 and 2014 were $76,457 and $53,813 respectively.
Impairment on fixed assets during 2015 and 2014 were $355,508 and $865,000 respectively as described in detail under Impairment of Long-lived Assets in Note 2.
F-15
KALLO INC.
Notes to Consolidated Financial Statements
December 31, 2015 and 2014
(Amounts expressed in US dollars)
NOTE 7 – COPYRIGHTS
On December 11, 2009, the Company acquired 100% 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.
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. All three projects are included in the integrated solution in the MobileCare and RuralCare projects being proposed under the Ghana Project and Guinea Project mentioned in Note 12 and hence the total amount of $700,000 will be due and payable upon closing of either the Ghana Project or Guinea Project. 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 future Projects. The Company reviews the value of the copyrights on an annual basis to determine if the value has been impaired. Based on Management's estimation of future profits and as the Company has not generated any revenues from the copyrights yet, it was determined that the copyrights were impaired as at December 31, 2014 and fully reserved at that point.
NOTE 8 – LOAN PAYABLE
As at December 31, 2014, a loan payable of $56,112 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 $7,233.
As at December 31, 2015, loan payable is NIL.
F-16
KALLO INC.
Notes to Consolidated Financial Statements
December 31, 2015 and 2014
(Amounts expressed in US dollars)
NOTE 9 – CONVERTIBLE PROMISSORY NOTES AND DERIVATIVE LIABILITIES
The convertible promissory notes are unsecured and bear interest at between 8% and 12% per annum with all principal and accrued interest due and payable between one and two years from the dates of execution of the Notes. The Notes are due and were issued as disclosed in the following table. The Holders of the Notes can, 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 disclosed. The following table represents the remaining notes outstanding as of December 31, 2015.
Original Face amount
|
|
Interest rate
|
Due date
|
Conversion price per share
|
|
|
|
|
|
Promissory note of $125,000
|
|
|
8%
|
December 1, 2015
|
75% of average of the previous two lowest trading
days over the last 15 trading days
|
Promissory note of $100,000
|
|
|
10%
|
December 21, 2015
|
65% of lowest trading day over
the last 15 trading days
|
Promissory note of $50,000
|
|
|
8%
|
October 5, 2015
|
60% of the lowest trading price over
the last 15 trading days
|
Promissory note of $87,500
|
|
|
8%
|
January 15, 2016
|
70% of average of two lowest closing bid price over
the last 15 trading days
|
Promissory note of $60,000
|
|
|
12%
|
February 3, 2017
|
60% of the lowest trading price over
the last 25 trading days
|
Promissory note of $50,000
|
|
|
12%
|
February 3, 2017
|
65% of the lowest trading price over
the last 25 trading days
|
Promissory note of $55,000
|
|
|
8%
|
July 9, 2017
|
65% of the lowest trading price over
the last 20 trading days
|
Promissory note of $55,000
|
|
|
8%
|
February 5, 2016
|
60% of the lowest trading price over
the last 15 trading days
|
Promissory note of $40,000
|
|
|
8%
|
July 13, 2016
|
60% of the lowest trading price over
the last 15 trading days
|
A summary of the promissory notes is as follows:
|
|
2015
|
|
|
2014
|
|
Balance as at Beginning of Period
|
|
$
|
16,175
|
|
|
$
|
-
|
|
New convertible promissory notes
|
|
|
633,611
|
|
|
|
265,000
|
|
Original issue discount
|
|
|
(53,536
|
)
|
|
|
(23,904
|
)
|
Penalties
|
|
|
114,914
|
|
|
|
-
|
|
Derivative liabilities
|
|
|
(607,510
|
)
|
|
|
(241,096
|
)
|
Converted into shares
|
|
|
(654,641
|
)
|
|
|
-
|
|
Amortization of debt discount
|
|
|
780,364
|
|
|
|
16,175
|
|
Balance as at end of period
|
|
|
229,377
|
|
|
|
16,175
|
|
Convertible notes – short term
|
|
|
(204,826
|
)
|
|
|
(16,175
|
)
|
Convertible notes – long term
|
|
$
|
24,551
|
|
|
$
|
-
|
|
The future principal maturities are due $266,104 in 2016 and $93,100 in 2017.
F-17
KALLO INC.
Notes to Consolidated Financial Statements
December 31, 2015 and 2014
(Amounts expressed in US dollars)
NOTE 9 – CONVERTIBLE PROMISSORY NOTES AND DERIVATIVE LIABILITIES (continued)
The company analyzed the conversion option for derivative accounting consideration under ASC Topic 815-40, Derivatives and Hedging – Contract in Entity's Own Stock and concluded that the conversion option does not meet the criteria for classification in stockholders' equity. Therefore, derivative accounting is applicable for the conversion option.
During the year ended December 31, 2015, at the commitment dates, the initial fair values of the embedded conversion feature for the new convertible promissory notes were estimated at $1,034,346 and recorded as derivative liabilities, resulting in a Day 1 loss of $426,836. During the year, there were conversions and mark to market adjustments as summarized in the table below. The original issue discount for the new convertible promissory notes was $53,536 and $607,510 was allocated to the embedded derivative liabilities. The debt discounts are amortized over the terms of the respective Notes. The fair value of the embedded conversion feature is estimated at the end of each quarterly reporting period using the Multinomial lattice model, which uses a probability weighted discounted cash flow model. The Model requires assumptions related to the interest rate, stock price and conversion price that would be in effect in different scenarios, for which cash flow projections and probabilities are made. A discounted weighted average cash flow over the various scenarios was completed, and compared to the discounted cash flow of the note without the embedded features, to arrive at the derivative liability.
The key assumptions for the valuation of the derivative liability are as follows:
•
|
The notes convert with an initial conversion price of 55%-75% of the average or low of the close or bid prices over the 15-15 previous days.
|
•
|
The projected annual volatility curve for each valuation period was based on the historical annual volatility of the company in the range 238% - 278%.
|
•
|
The holder would automatically convert the note at the maximum of 2 times the conversion price.
|
•
|
Full Reset events are projected to occur quarterly generating a projected conversion prices at 125% of market.
|
The following table illustrates the fair value adjustments that were recorded related to the derivative liabilities associated with the convertible promissory notes:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Fair value as at beginning of period
|
|
$
|
336,390
|
|
|
$
|
-
|
|
New promissory notes
|
|
|
607,510
|
|
|
|
386,187
|
|
Elimination associated with conversion of promissory notes
|
|
|
(635,176
|
)
|
|
|
-
|
|
Change in fair value (gain)
|
|
|
(97,890
|
)
|
|
|
(49,797
|
)
|
Fair value as at end of period
|
|
$
|
210,834
|
|
|
$
|
336,390
|
|
F-18
KALLO INC.
Notes to Consolidated Financial Statements
December 31, 2015 and 2014
(Amounts expressed in US dollars)
NOTE 10 – SHORT TERM LOANS PAYABLE AND CONVERTIBLE LOANS PAYABLE
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Promissory note bearing interest at 10% per annum, due Nov. 15, 2015
|
|
$
|
-
|
|
|
$
|
25,020
|
|
Convertible promissory note bearing interest at 15% per annum –third party
|
|
|
105,395
|
|
|
|
-
|
|
Convertible promissory note bearing interest at 15% per annum – Related Party
|
|
|
272,712
|
|
|
|
-
|
|
Non-interest bearing short term funding from third parties
|
|
|
15,730
|
|
|
|
13,535
|
|
|
|
$
|
393,837
|
|
|
$
|
38,555
|
|
During the fourth quarter of 2015, the Company provided a debt offering as opposed to equity financing. The offering includes 15% interest per annum and is convertible at a fixed price at any time during the 1 year term. The company has the option to pay the note at any time. The company analyzed the conversion option for derivative accounting consideration under ASC Topic 815-40, Derivatives and Hedging – Contract in Entity's Own Stock and concluded that the embedded conversion feature was zero. The total outstanding notes from this debt offering is $378,107 of which accrued interest of $8,439 was added to the balance as of December 31, 2015.
On October 15, 2013, the Company issued a promissory note agreeing to pay the principal amount of Canadian $25,000 plus interest at the rate of 10% per annum on January 15, 2014. The amount outstanding at December 31, 2014 was $25,020 US. Kallo did not pay on the due date and the holder agreed to extend the due date by seven additional periods of three months up to November 15, 2015. On November 10, 2015, the holder agreed to convert the principal amount and accrued interest of $5,041 into a new debt offering of 15% interest for a 12 month term maturing on November 10, 2016.
On December 18, 2015, the Company issued a promissory note for $18,610 for settlement of a vendor accounts payable.
As at December 31, 2015, the balance of $15,730 (2014 - $13,535) represented short term funding provided by third parties which are non-interest bearing, unsecured and have no fixed repayment date.
F-19
KALLO INC.
Notes to Consolidated Financial Statements
December 31, 2015 and 2014
(Amounts expressed in US dollars)
NOTE 11 – INCOME TAXES
The Company had no income taxes payable at December 31, 2015 and 2014.
The reconciliation of income tax provision computed at statutory rates to the reported income tax provision is as follows:
|
|
2015
|
|
|
2014
|
|
Net loss for the year
|
|
$
|
(8,964,960
|
)
|
|
$
|
(4,209,038
|
)
|
Effective statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
Expected tax recovery
|
|
$
|
(3,048,086
|
)
|
|
$
|
(1,431,073
|
)
|
Net effects of non deductible and allowable items
|
|
|
1,742,542
|
|
|
|
29,697
|
|
Change in valuation allowance
|
|
|
1,305,544
|
|
|
|
1,401,376
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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:
|
|
2015
|
|
|
2014
|
|
Net operating loss carry forward
|
|
$
|
4,779,729
|
|
|
$
|
3,710,244
|
|
Equipment
|
|
|
118,771
|
|
|
|
9,335
|
|
Valuation allowance
|
|
|
(4,898,500
|
)
|
|
|
(3,719,579
|
)
|
Deferred tax assets, net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
Net operating loss carry forwards totaled approximately $14,058,027 at December 31, 2015. The net operating loss carry forwards will begin to expire in the year 2021 if not utilized. After consideration of all the evidence, management has recorded a valuation allowance at December 31, 2015 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.
F-20
KALLO INC.
Notes to Consolidated Financial Statements
December 31, 2015 and 2014
(Amounts expressed in US dollars)
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Commitments
Operating lease
The Company has a sublease agreement to lease office facilities under an operating lease for a term of two and a half years. The Company's future base and additional rental payment obligations under the lease commitments are as follows:
Total rent expense for the above lease was as follows:
2014
|
|
$
|
122,432
|
|
2015
|
|
|
209,965
|
|
|
|
$
|
332,397
|
|
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 had 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. As of June 19, 2015, both contracts have been cancelled.
On January 23, 2014, Kallo Inc. announced the signing of a US$200,000,925 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.
F-21
KALLO INC.
Notes to Consolidated Financial Statements
December 31, 2015 and 2014
(Amounts expressed in US dollars)
NOTE 12 – COMMITMENTS AND CONTINGENCIES (continued)
Sales commission agreement (continued)
In respect of the Guinea Project mentioned, 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.
|
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.
Agreements with suppliers
The Company has entered into agreements with a number of service providers for licensing of software and other professional services to be rendered. The total remaining amount committed is $2,773,737.
F-22
KALLO INC.
Notes to Consolidated Financial Statements
December 31, 2015 and 2014
(Amounts expressed in US dollars)
NOTE 13 – SUBSEQUENT EVENTS
Convertible promissory notes
After December 31, 2015, promissory notes for a total of $53,805 were converted into 1,197,396,993 common shares.
Short term loans payable
After December 31, 2015, a total of $204,704 was received as advances against loans with will have the same terms as described in note 10.
Related party transactions
After December 31, 2015, of the total short term loans payable amount received, a major shareholder and a director invested an aggregate of $174,704 to the Company.
Directors, Executive Officers and Corporate Governance
On February 29, 2016, Vince Leitao resigned as President and Chief Operating Officer
On February 29, 2016, John Cecil was appointed to the position of President and Lloyd Chiotti was appointed to the position of Chief Operating Officer