NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
PRINCIPAL BUSINESS ACTIVITIES:
Organization and Business
- Heatwurx, Inc. (Heatwurx, the Company) is an asphalt repair equipment and technology company. Heatwurx was incorporated on March 29, 2011 as Heatwurxaq, Inc. and subsequently changed its name to Heatwurx, Inc. on April 15, 2011. On January 1, 2014, Heatwurx acquired Dr. Pave, LLC, a service company offering asphalt repair and restoration. On July 22, 2014 Dr. Pave Worldwide, LLC was organized to offer franchises for the operation of businesses that use the Heatwurx branded equipment and Heatwurx repair process to repair, maintain and preserve roadways. (Note 6)
2.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
- These consolidated financial statements and related notes are presented in accordance with the accounting principles generally accepted in the United States (U.S. GAAP) and are expressed in U.S. dollars. The Companys consolidated financial statements include Dr. Pave, LLC and Dr. Pave Worldwide, LLC; both wholly-owned subsidiaries of the Company, which are represented in the Companys discontinued operations (Note 7). All intercompany balances and transactions have been eliminated in the consolidated financial statements.
Going Concern and Managements Plan
- The Companys financial statements are prepared using U.S. GAAP and are subject to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company faces certain risks and uncertainties that are present in many emerging companies regarding product development, future profitability, ability to obtain future capital, protection of patents and property rights, competition, rapid technological change, government regulations, recruiting and retaining key personnel, and third party manufacturing organizations.
The Company has previously relied exclusively on private placements with a small group of investors to finance its business and operations. The Company has had little revenue since inception. For the year ended December 31, 2015, the Company incurred a net loss from continuing operations of approximately $2,983,000 and used approximately $640,000 in net cash from operating activities from continuing operations and approximately $232,000 in net cash from operating activities from discontinued operations. The Company had total cash on hand including cash from discontinued operations of approximately $14,000 as of December 31, 2015. The Company is not able to obtain additional financing adequate to fulfill its commercialization activities, nor achieve a level of revenues adequate to support the Companys cost structure. The Company does not currently have any revenue under contract nor does it have any immediate sales prospects. The Company has significantly reduced employees and overhead. The decision to cease operations of Dr. Pave, LLC and Dr. Pave Worldwide, LLC was made on December 31, 2015. These business components are captured within discontinued operations as of December 31, 2015 (Note 7). The Company has significantly scaled back operations to maintain only a minimal level of operations necessary to support our licensee, warehouse the equipment held for the licensee and look for potential merger candidates. It is the Companys intention to move forward as a public entity and to seek potential merger candidates. If the Company fails to merge or be acquired by another company, we will be required to terminate all operations.
During the year ended December 31, 2015, the Company received cash in the aggregate of $753,000 and converted a $160,000 secured note plus accrued interest and a $20,000 unsecured note into the $2,000,000 senior secured debt offering commenced in February 2015. Based upon the Companys current financial position and inability to obtain additional financing, the Company was not be able to satisfy the mandatory principal payments in 2015 under the $2,000,000 senior secured debt. The Company will continue to work with the lenders to explore extension or conversion options, but there is no guarantee the lenders will agree to modify the repayment terms of the notes under conditions that will allow the Company to continue to repay the notes, if at all. As these notes are secured by all of the assets of the Company, including intellectual property rights, the Company is in default in regards to interest payments on the notes, and the lenders may call the notes and foreclose on the Companys assets.
31
The issues described above raise substantial doubt about the Companys ability to continue as a going concern. The Company has been solely reliant on raising debt and capital in order to maintain its operations. Previously the Company was able to raise debt and equity financing through the assistance of a small number of investors who have been substantial participants in its debt and equity offerings since the Companys formation. These investors have chosen not to further assist the Company with its capital raising initiatives and, at this time, the Company is not able to obtain any alternative forms of financing and the Company will not be able to continue to satisfy its current or long term obligations. The Company needs to merge with or be acquired by another company. If a candidate is not identified, the Company will be forced to cease operations all together.
The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be different should the Company be unable to continue as a going concern.
Use of Estimates
- The preparation of financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions by management that affect reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are continuously evaluated and are based on managements experience and knowledge of the relevant facts and circumstances. While management believes the estimates to be reasonable, actual results could differ materially from those estimates and could impact future results of operations and cash flows.
Cash and Cash Equivalents
- The Company considers all highly liquid investments with a maturity at the date of purchase of three months or less to be cash equivalents. The Company had no cash equivalents at December 31, 2015. At times, the Company may have cash balances in excess of the Federal Deposit Insurance Corporation (FDIC) insured limits of up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk. As of December 31, 2015, none of the Companys accounts exceeded the FDIC insured limits.
Accounts Receivable and Bad Debt Expense
- Management reviews individual accounts receivable balances that exceed 90 days from the invoice date. Based on an assessment of current creditworthiness of the customer, the Company estimates the portion, if any, of the balance that will not be collected. All accounts deemed to be uncollectible are written off to operating expense. The Company recognized bad debt expense in the amount of $5,148 during the year ended December 31, 2015; there was no bad debt expense during December 31, 2014. There was no allowance for uncollectible accounts for the years ended December 31, 2015 and 2014.
Inventories
- The Companys finished goods and materials and supplies inventories are recorded at lower of cost or net realizable value. Cost is determined by using the FIFO (first-in, first-out) inventory method.
Equipment
- Equipment is stated at cost and consists of office and computer equipment depreciated on a straight line basis over an estimated useful life of three years, and process demonstration equipment (demo equipment) depreciated on a straight line basis over an estimated useful life of seven years. Maintenance and repairs are charged to expense as incurred.
Assets held for sale
- In efforts to streamline the operations and expenses the Company has opted to sell or return certain assets to improve cash flow or settle debt. The assets are expected to be sold within the next 12 months and meet the other relevant held-for-sale criteria are classified as long-lived assets held-for-sale and measured at their fair value based on the Companys own judgments about assumptions that market participants would use in pricing the asset and on observable market data, when available. An impairment loss is recorded in the statement of operations for long-lived assets held-for-sale when the carrying amount of the asset exceeds its fair value less cost to sell. A long-lived asset is not depreciated while it is classified as held-for-sale.
32
Impairment of Long-lived Assets
- The Company periodically reviews its long-lived assets to determine potential impairment by comparing the carrying value of the long-lived assets with the estimated future net undiscounted cash flows expected to result from the use of the assets, including cash flows from disposition, at least annually or more frequently if events or changes in circumstances indicate a potential impairment may exist. Should the sum of the expected future net cash flows be less than the carrying value, the Company would recognize an impairment loss at that date. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value (estimated discounted future cash flows) of the long-lived assets. The Company performs its impairment analysis in October of each year. The Company recognized an impairment of $1,517,859 on intangible assets related to the asset purchase agreement. (Note 5)
Goodwill
- The Company recognizes goodwill as the excess purchase price paid after allocation to the identifiable assets and liabilities based on their estimated fair value. The Company assesses the carrying amount of goodwill for impairment annually, or more frequent if an event occurs or circumstances changes that would more likely than not reduce the fair value below its carrying value. During 2014, the Company recognized an immediate impairment on the goodwill acquired in the purchase of Dr. Pave, LLC, in the amount of $390,659. No such impairment was recognized during the year ended December 31, 2015.
Intangible Assets
- Intangible assets consisted of developed technology acquired as part of an acquisition, which was deemed in-process research and development upon acquisition. During development, in-process research and development is not subject to amortization and is tested for impairment. In October 2012, the in-process research and development was reclassified as developed technology. The Companys developed technology was amortized over its estimated useful life of seven years. Based on the Companys financial position and substantial doubt about the Companys ability to continue as a going concern, the Company has chosen to estimate future cash flows at zero. The Company recognized an impairment of $1,517,859 during the second quarter of 2015.
Debt Discount
- The Company recognizes the fair value of detachable warrants issued in conjunction with a debt instrument as debt discount. The discount is amortized using the interest method over the life of the notes. The amortization of the discount was $58,801 and $153,617 for the years ended December 31, 2015 and 2014, respectively.
Extinguishment of Debt
- The Company recognizes any difference between the reacquisition price of debt and the net carrying amount of the extinguished debt in income of the period of the extinguishment as gains or losses. The Company recognized a loss of $822,205 on the extinguishment of unsecured notes payable during the year ended December 31, 2014.
Stock-Based Compensation
- The Company accounts for the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award, determined on the date of grant. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award. The Company estimates forfeitures at the time of grant and makes revisions, if necessary, at each reporting period if actual forfeitures differ from those estimates. The Company estimated future unvested forfeitures at 25% and 0% for the years ended December 31, 2015 and 2014, respectively.
Advertising Expense
- The Company charges advertising costs to expense as incurred. Advertising costs were $25,431 and $114,417 from continuing operations for the year ended December 31, 2015 and 2014, respectively.
Income Taxes
- The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
The provision for income taxes includes federal and state income taxes currently payable and deferred taxes resulting from temporary differences between the financial statement and tax basis of assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets when it is more-likely-than-not that a tax benefit will not be realized.
With respect to uncertain tax positions, the Company would recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The Company had no unrecognized tax benefits or uncertain tax positions at December 31, 2015 or 2014.
33
Compensated absences
- For the years ended December 31, 2015 and 2014, the Company recorded a liability for paid time off earned by permanent employees but not taken, in accordance with human resource policies.
Research and development
- Research and development costs are expensed as incurred and consist of direct and overhead-related expenses. Expenditures to acquire technologies, including licenses, which are utilized in research and development and that have no alternative future use are expensed when incurred. Technology the Company develop for use in its products is expensed as incurred until technological feasibility has been established after which it is capitalized and depreciated.
Revenue Recognition
- The Company sells its equipment (HWX-30 heater, HWX-30S mobile heater and HWX-AP-40 asphalt processor), as well as certain consumables to third parties. Equipment sales revenue is recognized when all of the following criteria are satisfied: (a) persuasive evidence of a sales arrangement exists; (b) price is fixed and determinable; (c) collectability is reasonably assured; and (d) delivery has occurred. Persuasive evidence of an arrangement and a fixed or determinable price exist once the Company receives an order or contract from a customer. The Company assesses collectability at the time of the sale and if collectability is not reasonably assured, the sale is deferred and not recognized until collectability is probable or payment is received. Typically, title and risk of ownership transfer when the equipment is shipped.
Other revenue represents consumable revenue and discounts on equipment and consumables sold.
Concentration of Supplier and Customer Risk
- During the year ended December 31, 2015, the Companys asphalt repair equipment, including major components, were purchased from two primary suppliers providing an aggregate of 95% of total equipment purchases. During the same period, two customers were responsible for an aggregate of 72% of total revenues.
Reclassifications
- Prior year amounts have been adjusted to reflect the current year presentation. These reclassifications had no impact on the Companys consolidated balance sheet or consolidated statements of operations or consolidated statements of cash flows.
Recent Accounting Pronouncements
ASU 2014-08
, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360):
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. A public business entity and a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market should apply the ASU prospectively to both of the following:
·
All disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years
·
All businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years
All other entities should apply the ASU prospectively to both of the following:
·
All disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015
·
All businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015
ASU 2014-09
,
Revenue from Contracts with Customers (Topic 606):
In May 2014, the Financial Accounting Standards Board issued ASU 2014-09 - Revenue from Contracts with Customers. The Update provides a robust framework for addressing revenue recognition issues and, upon its effective date, replaces almost all existing revenue recognition guidance, including industry-specific guidance, in current U.S. generally accepted accounting principles. The revenue recognition policies of almost all entities will be affected by the new guidance in the ASU. For public business entities, the ASU, as amended, is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.
34
ASU 2014-10
,
Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation:
ASU 2014-10 eliminates the financial reporting distinction of being a development stage entity from U.S. GAAP. For public business entities, the amendments related to the elimination of inception-to-date information and the other remaining disclosure requirements of ASC Topic 915 are effective for annual reporting periods beginning after December 15, 2014, and interim periods therein. For other entities, the amendments are effective for annual reporting periods beginning after December 15, 2014, and interim reporting periods beginning after December 15, 2015.
ASU 2014-10 also eliminates an exception provided to development stage entities in paragraph 810-10-15-16 of the Variable Interest Entities (VIE) subsections of Subtopic 810-10 for determining whether an entity is a VIE on the basis of the amount of investment equity that is at risk. For public business entities, the amendment eliminating the exception to the sufficiency-of-equity-at-risk criterion for development stage entities in paragraph 810-10-15-16 should be applied retrospectively for annual reporting periods beginning after December 15, 2015, and interim periods therein. For all other entities, the amendments to Topic 810 should be applied retrospectively for annual reporting periods beginning after December 15, 2016, and interim reporting periods beginning after December 15, 2017.
ASU 2014-15
,
Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern
:
In August 2014, the Financial Accounting Standards Board issued ASU 2014-15 - Presentation of Financial Statements - Going Concern. The Update provides U.S. GAAP guidance on managements responsibility in evaluating whether there is substantial doubt about a companys ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a companys ability to continue as a going concern within one year from the date the financial statements are issued. The amendments in the update are effective for the annual period ending after December 15, 2016.
ASU 2015-11
, Inventory (Topic 330): Simplifying the Measurement of Inventory:
In July 2015, the Financial Accounting Standards Board issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in the ASU require entities to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is defined as estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. For public entities, ASU 2015-11 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. Early adoption of ASU 2015-11 is permitted.
3. ASSETS HELD FOR SALE:
The Company measures its financial assets and liabilities at fair value. Fair value is defined 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. The authoritative guidance for fair value measurements establishes a three-level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of the hierarchy are defined as follows:
·
Level 1 - inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities
·
Level 2 - inputs to the valuation techniques that are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly
·
Level 3 - inputs to the valuation techniques that are unobservable for the assets or liabilities
The Company reviews the carrying amounts of long-lived assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recognized when the carrying amount of the long-lived asset is not recoverable and exceeds its fair value. The Company estimated the fair values of long-lived assets based on the Companys own judgments about the assumptions that market participants would use in pricing the asset and on observable market data, when available. The Company classified these fair value measurements as Level 3.
35
|
|
|
|
|
|
| |
Assets held for sale
|
|
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
|
|
|
Equipment
|
Inventory
|
Total
|
Beginning balance
|
|
$
|
-
|
$
|
-
|
$
|
-
|
Transfers in
|
|
|
124,424
|
|
62,125
|
|
186,549
|
Disposals
|
|
|
(98,549)
|
|
(46,000)
|
|
(144,549)
|
Ending balance
|
|
$
|
25,875
|
$
|
16,125
|
$
|
42,000
|
Impairment losses recognized
|
|
$
|
62,554
|
$
|
123,514
|
$
|
186,068
|
The Company entered into a Letter of Intent with the licensee stating that assets consisting of equipment and inventory were sold in the first quarter of 2016 in the amount of $25,000.
4.
PROPERTY AND EQUIPMENT:
A summary of the cost of property and equipment, by component, and the related accumulated depreciation is as follows:
|
|
|
|
|
| |
|
|
December 31, 2015
|
|
December 31, 2014
|
Computer equipment & software
|
|
$
|
19,150
|
|
$
|
22,569
|
Demo equipment
|
|
|
-
|
|
|
484,540
|
|
|
|
19,150
|
|
|
507,109
|
Accumulated depreciation
|
|
|
(18,991)
|
|
|
(148,153)
|
|
|
$
|
159
|
|
$
|
358,956
|
Depreciation expense was $60,251 and $71,029 for the years ended December 31, 2015 and 2014, respectively. The Company recognized a loss on disposal of fixed assets of $60,743 during the year ended December 31, 2015. The Company reclassified fixed assets with a net book value of $186,549 to assets held for sale, at fair market value and recognized a loss on impairment of assets held for sale during the year ended December 31, 2015 of $62,554.
5.
ASSET PURCHASE AGREEMENT:
On April 15, 2011, the Company entered into an Asset Purchase Agreement with an individual who is a founder and a current stockholder. Pursuant to the agreement, the Company purchased the related business and activities of the design, manufacture and distribution of asphalt repair machinery under the Heatwurx brand. The total purchase price was $2,500,000.
The business essentially consisted of the investment in research and development of the technology, the patents applied for as a result of the research and development activities and certain distribution relationships that were in process, but not finalized as of the acquisition date. Collectively, these investments constitute the in-process research and development the Company refers to as the asphalt preservation and repair solution. The Company capitalized $2,500,000 of in-process research and development related to this asphalt preservation and repair solution. As of October 1, 2012, in-process research and development was classified as developed technology and amortized over its estimated useful life of seven years. The initial estimated fair value of the in-process research and development was determined using the income approach. Under the income approach, the expected future cash flows from the asset are estimated and discounted to its net present value at an appropriate risk-adjusted rate of return. Based on the Companys financial position and substantial doubt about the Companys ability to continue as a going concern, the Company has chosen to estimate future cash flows at zero. The Company recognized an impairment of $1,517,859 during the second quarter of 2015. As of December 31, 2015, the Companys developed technology intangible asset had no value. Amortization expense prior to the impairment for 2015 was $178,571. The amortization expense for the year ended December 31, 2014 was $357,142.
In conjunction with the Asset Purchase Agreement, the Company granted 200,000 performance stock options to a founder of the Company with an exercise price of $0.40 per share and a term of seven years. Following the effectiveness of the seven for one stock split that was completed in October 2011, the 200,000 performance stock options were exchanged for 1,400,000 performance stock options with an exercise price of $0.057 per share. On February 10, 2015, the founder of the Company elected to cancel the 1,400,000 performance stock options.
36
6. ACQUISITION
On January 7, 2014, the Company entered into an Agreement and Plan of Reorganization (the Acquisition Agreement) dated January 8, 2014 with Dr. Pave, LLC, a California limited liability company (Dr. Pave). Dr. Pave was controlled by David Dworsky, the Chief Executive Officer of the Company. The acquisition of Dr. Pave gave the Company the immediate ability to provide service work to municipalities and other end purchasers of Heatwurx equipment. The Company acquired all of the outstanding membership interests in Dr. Pave for 58,333 shares of common stock of the Company at a value of $3.00 per share for consideration in the amount of $175,000. The consideration included the issuance of 41,668 shares to Dworsky Partners, LLC, an entity in which David Dworsky owned 80% of the ownership interest, and 3,333 shares to Reginald Greenslade, one of the Companys directors. As a result of the acquisition, which closed on January 8, 2014, Dr. Pave became a wholly owned subsidiary of the Company. The parties to the Acquisition Agreement established the effective date of the closing of the transaction for tax and accounting purposes as of January 1, 2014.
As of January 1, 2014, Dr. Pave had net liabilities of $215,659 assumed by the Company; in addition to the consideration of 58,333 shares of common stock valued at $175,000. The total consideration paid in the acquisition of Dr. Pave resulted in goodwill in the amount of $390,659. The Company determined that the goodwill was immediately impaired as of the acquisition date based on the lack of service revenue for the prior year. An impairment of goodwill from the acquisition in the amount of $390,659, was recorded as an operating expense in the income statement for the year ended December 31, 2014.
Dr. Pave, LLC and Dr. Pave Worldwide, LLC ceased operations during 2015 and are included in Discontinued operations. See Note 7 below.
7.
DISCONTINUED OPERATIONS
In efforts to streamline operations and expenses the Company elected to discontinue the Dr. Pave and Dr. Pave Worldwide entities during 2015. The financial results of these events are represented in the discontinued operations included in the December 31, 2015 and 2014 financial statements.
The operating results of the discontinued operations of Dr. Pave and Dr. Pave Worldwide for the years ended December 31, 2015 and 2014 are summarized below:
|
|
|
|
| |
|
2015
|
|
2014
|
Revenue
|
$
|
28,870
|
|
$
|
92,962
|
Expense
|
|
400,177
|
|
|
933,611
|
Net Loss, before taxes
|
|
(371,307)
|
|
|
(840,649)
|
Income tax benefit
|
|
-
|
|
|
-
|
Net Loss, net of tax
|
$
|
(371,307)
|
|
$
|
(840,649)
|
The balance sheet items for discontinued operations as of December 31, 2015 and 2014 are summarized below:
|
|
|
|
| |
|
2015
|
|
2014
|
Cash and cash equivalents
|
$
|
12,350
|
|
$
|
25,044
|
Accounts receivable, net
|
|
-
|
|
|
2,785
|
Inventories
|
|
-
|
|
|
2,815
|
Other current assets
|
|
-
|
|
|
24,004
|
Total current assets
|
|
12,350
|
|
|
54,648
|
Fixed assets, net
|
|
-
|
|
|
107,457
|
Total assets
|
$
|
12,350
|
|
$
|
162,105
|
|
|
|
|
|
|
Payables and accrued liabilities
|
|
70,358
|
|
|
63,213
|
Short-term debt
|
|
229,980
|
|
|
389,980
|
Total liabilities
|
$
|
300,338
|
|
$
|
453,193
|
37
The Companys borrowings included in discontinued operations as of December 31, 2015 and 2014 are as follows:
Revolving line of credit
-
The Company assumed a revolving line of credit through the acquisition of Dr. Pave in the amount of $229,980, and is secured by the assets of Dr. Pave, LLC a wholly owned subsidiary of the Company. The total line of credit available is $250,000 with $20,020 unused as of December 31, 2015. The balance on the line of credit bears interest at a rate of 12% per annum. Interest is payable monthly on the first day of each month. The outstanding principal balance as of July 1, 2015 shall become due and payable in sixty (60) equally amortized monthly installments of principal and interest due on the fifteenth day of each calendar month until paid in full. As of December 31, 2015 no principal payments have been made, the Company is in default on the revolving line of credit. The Company will work with the lenders to explore extension or conversion options. There is no guarantee the lenders will accommodate our requests.
Interest on the revolving line of credit totaling $25,330 was outstanding at December 31, 2015.
Secured Notes Payable
- The Company assumed secured notes payable through the acquisition of Dr. Pave in the amount of $160,000. The principal amount and accrued interest in the amount of $14,361 was converted into the senior secured loan agreement as described below on June 30, 2015.
8.
NOTES PAYABLE:
Unsecured Notes Payable
- The Company commenced two non-public offerings of notes and warrants in 2014. The notes bear interest at 12% per annum payable monthly, with principal and unpaid interest due and payable on January 6, 2016. As additional consideration for a lender to enter into the Loan Agreement, the Company agreed to issue to each lender one common stock purchase warrant for each $3.00 loaned to the Company. The Company allocated the fair value of the warrants as a discount on notes payable which is amortized over the term of the notes to interest expense in the income statement. The Warrants expire three years following the date of issuance and may not be offered for sale, sold, transferred or assigned without the consent of the Company. The three-year warrants were exercisable immediately at $3.00 per share. The Company recognized amortization of discount on notes payable in interest expense of $58,801 and $153,617 during the year ended December 31, 2015 and 2014, respectively. As of the date of this filing; these notes have not been paid in full and interest continues to accrue.
Secured Notes Payable
- On February 16, 2015, the Company entered into a Senior secured loan agreement with JMW Fund, Richland Fund, and San Gabriel Fund (collectively, the lenders) whereby the lenders agreed to loan to the Company up to an aggregate of $2,000,000. The interest rate on the notes is 12% per annum and monthly interest payments are due the first day each month beginning March 1, 2015. If any interest payment remains unpaid in excess of 90 days, and the lender has not declared the entire principal and unpaid accrued interest due and payable, the interest rate on that amount only will be increased to 18% per annum, until the past due interest amount is paid in full. The notes and any future notes under the loan agreement are secured by all of the assets of the Company, including intellectual property rights. The Company has not paid the interest on the notes timely and interest is therefore accrued at the 18% interest rate as stated above. On August 16, 2015; all senior secured notes were extended to a maturity date of February 15, 2016. Subsequent to year-end, on March 23, 2016; all senior secured notes were extended to a maturity date of September 30, 2016. The Company is in default on the senior secured loan agreement. The lenders may call the notes or foreclose upon the assets of the Company.
|
|
|
|
|
|
|
|
|
| |
|
Principal
Balance
|
Interest
Rate
|
Accrued
Interest
|
Warrants
issued
|
Warrant
Fair Value
- Discount
|
Unamortized
Discount
|
Unsecured notes payable
|
$
|
420,000
|
12%
|
$
|
41,990
|
139,997
|
$
|
115,159
|
$
|
967
|
Secured notes payable
|
$
|
947,361
|
12% - 18%
|
$
|
119,618
|
-
|
$
|
-
|
$
|
-
|
|
$
|
1,367,361
|
|
$
|
161,608
|
139,997
|
$
|
115,159
|
$
|
967
|
Equipment Loan Payable
In September 2012, the Company financed the purchase of equipment used for transportation and service work performed. The note, in the original amount of $142,290, bears interest at a rate of 2.6% per annum and matures on September 4, 2017. The Company returned the financed equipment in October 2015 to relieve the debt. As of December 31, 2015 there is no liability outstanding.
38
In August 2013, the Company financed the purchase of a truck to transport our equipment used in service and demonstrations. The loan, in the amount of $83,507, bears interest at a rate of 6.1% per annum and matures on December 1, 2018. On September 25, 2015 the Company returned the truck in efforts to relieve the debt. As of December 31, 2015 the Company recognized an impairment on the asset in the amount of $5,215, the difference in the asset carrying value and the previous outstanding loan balance. As of December 31, 2015 there is no liability outstanding.
In September 2014, the Company financed the purchase of equipment used in connection with the Heatwurx equipment to facilitate demonstrations and repairs. The loan, in the amount of $49,204; matures on October 15, 2018. The Company reclassified the asset to Assets held for sale and recognized an impairment on the asset in the amount of $17,889. In October 2015 these assets were returned to the financing company in efforts to relieve the debt. As of December 31, 2015, there is no loan liability.
As of December 31, 2015, the loans are subject to mandatory principal payments as follows:
|
| |
Year
|
Payments
|
2016
|
$
|
1,367,361
|
2017
|
|
-
|
2018
|
|
-
|
2019
|
|
-
|
2020
|
|
-
|
Total principal payments
|
$
|
1,367,361
|
Less: unamortized debt discount
|
|
967
|
Total current portion
|
|
1,366,394
|
Based upon the Companys financial position, the Company does not believe it will be able to satisfy the mandatory principal payments in 2016. The Company will work with the lenders to explore extension or conversion options. There is no guarantee the lenders will accommodate our requests. The Company is in default in regards to interest payments on the notes, the Companys assets may be foreclosed upon.
9. INCOME TAXES:
The Company and its predecessor file income tax returns in the U.S. federal jurisdiction and in the states of Colorado, Utah, North Dakota and California. There are currently no income tax examinations underway for these jurisdictions. The Company filed its initial tax returns for the nine months ended December 31, 2011 with federal and Utah and December 31, 2012 is the initial tax filing period for Colorado, and December 31, 2013 is the initial tax filing period for North Dakota and California.
The Company provides deferred income taxes for differences between the tax reporting bases and the financial reporting bases of assets and liabilities. The Company had no unrecognized income tax benefits. Should the Company incur interest and penalties relating to tax uncertainties, such amounts would be classified as a component of interest expense and operating expense, respectively. Unrecognized tax benefits are not expected to increase or decrease within the next twelve months.
As of December 31, 2015, the Companys tax year for 2012, 2013 and 2014 are subject to examination by the tax authorities.
Deferred Income Taxes
- The Company does not recognize the deferred income tax asset at this time because the realization of the asset is less likely than not. As of December 31, 2015 and 2014, the Company has net operating losses for federal and state income tax purposes of approximately $12,761,702 and $12,074,903, respectively, which are available for application against future taxable income and which will start expiring in 2031. The benefit associated with the net operating loss carry forward will more likely than not go unrealized unless future operations are successful. Since the success of future operations is indeterminable, the potential benefits resulting from these net operating losses have not been recorded in the financial statements.
39
|
|
|
|
| |
|
December 31, 2015
|
|
December 31, 2014
|
Deferred Tax Assets:
|
|
|
|
Current
|
|
|
|
Net operating loss carry forward - Federal
|
$
|
4,338,979
|
|
$
|
2,851,493
|
Net operating loss carry forward - State
|
|
598,096
|
|
|
343,854
|
Contribution carry forward
|
|
199
|
|
|
199
|
Stock-based compensation
|
|
225,162
|
|
|
196,495
|
Accrued liabilities and deferred rent
|
|
1,519
|
|
|
15,139
|
Total current deferred tax assets
|
|
5,163,955
|
|
|
3,407,180
|
|
|
|
|
|
|
Noncurrent
|
|
|
|
|
|
Depreciation
|
|
(16,533)
|
|
|
(117,275)
|
Amortization
|
|
-
|
|
|
272,507
|
Total noncurrent deferred tax (liabilities)/assets
|
|
(16,533)
|
|
|
155,232
|
Total net deferred tax assets
|
|
5,147,422
|
|
|
3,562,412
|
Valuation allowance for deferred tax asset
|
|
(5,147,422)
|
|
|
(3,562,412)
|
Total deferred tax assets
|
$
|
-
|
|
$
|
-
|
A reconciliation between the statutory federal income tax rate of 34% and our effective tax rate for the years ended December 31, 2015 and 2014, are as follows:
|
| |
|
Year ended
December 31, 2015
|
Year ended
December 31, 2014
|
Federal statutory income tax rate
|
34.0%
|
34.0%
|
Permanent differences
|
7.5%
|
(6.8)%
|
Deferred tax asset valuation allowance
|
(48.7)%
|
(30.6)%
|
Redeterminations/Other
|
7.2%
|
3.4%
|
Effective income tax rate
|
-
|
-
|
10.
STOCKHOLDERS EQUITY:
Common Stock
- The Company has authorized 20,000,000 common shares with a $0.0001 par value. There were 11,017,388 shares issued and 11,061,414 outstanding at December 31, 2015 and 9,495,045 shares issued and 10,952,356 outstanding at December 31, 2014.
On October 1, 2014, the Company commenced a non-public equity offering of up to 3,650,807 units at $1.75 per unit (the Units). Each Unit consists of one common share and one-half warrant, with each whole warrant exercisable at $2.00 per share. The purchase price for the Units is payable in either cash, conversion of outstanding Series D preferred shares or certain outstanding promissory notes. During the first half of 2015, the Company issued 50,285 shares of common stock and warrants to purchase 25,141 shares of common stock for cash proceeds of $88,000.
On March 13, 2015 the Company issued 15,000 common shares in exchange for consulting services valued at $25,500.
Preferred Stock
- The Company has authorized 4,500,000 shares of Preferred Stock with a $0.0001 par value. As holders of any series of preferred stock convert into common shares the preferred shares are no longer outstanding and become available for reissuance. As of December 31, 2015 and December 31, 2014, there were no shares of Series B preferred outstanding. As of the date of this report there are 200 shares of Series B preferred shares that were automatically converted to common shares but have not been converted by transfer agent. As of December 31, 2015 and 2014, there were 178,924 Series D preferred shares outstanding.
Series D Preferred Stock
- As of December 31, 2015 and December 31, 2014 there were 178,924 and 178,924 shares of Series D preferred stock outstanding, respectively.
40
Holders of Series D preferred stock accrue dividends at the rate per annum of $0.24 per share, payable on a quarterly basis. As dividends are accrued and payable quarterly on the Series D preferred stock, the Company paid dividends of $31,475 and $177,846 during the years ended December 31, 2015 and 2014, respectively. As of December 31, 2015 the Company has dividends payable in accrued expenses of $42,942.
The holders of the Series D preferred stock have conversion rights equivalent to such number of fully paid and non-assessable shares of common stock as is determined by dividing the Series D original issue price of $3.00 by the then applicable conversion price. Each Series D Share will convert into one share of our common stock at any time at the option of the holder of the Series D Shares or will be converted at the option of the Company at any time the trading price of our common stock is at least $4.50 per share for ten consecutive trading days. The conversion ratio is subject to anti-dilution adjustments, including in the event that the Company issues equity securities at a price equivalent to or less than the conversion price in effect immediately prior to such issue.
The holders of Series D preferred stock have a liquidation preference over the holders of the Companys common stock equivalent to the purchase price per share of the Series D preferred stock plus any accrued and unpaid dividends, whether or not declared, on the Series D preferred stock. A liquidation would be deemed to occur upon the happening of customary events, including transfer of all or substantially all of the Companys common stock or assets or a merger, or consolidation. The Company believes that such liquidation events are within its control and therefore the Company has classified the Series D preferred stock in stockholders equity.
The holders of Series D preferred stock vote together as a single class with the holders of the Companys common stock on all action to be taken by the Companys stockholders. Each share of Series D preferred stock entitles the holder to the number of votes equal to the number of shares of common stock into which the shares of the Series D preferred stock are convertible as of the record date for determining stockholders entitled to vote on such matter.
Stock Options
|
|
| |
|
Number of Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Life (Years)
|
Balance, December 31, 2013
|
1,320,000
|
$ 2.23
|
3.44
|
Granted
|
298,000
|
$ 3.00
|
|
Exercised
|
-
|
-
|
|
Cancelled
|
(371,500)
|
$ 2.46
|
|
Balance, December 31, 2014
|
1,246,500
|
$ 2.35
|
2.83
|
Exercisable, December 31, 2014
|
882,583
|
$ 2.20
|
2.52
|
Granted
|
425,000
|
$ 1.50
|
|
Exercised
|
-
|
-
|
|
Cancelled
|
(1,080,333)
|
$ 2.33
|
|
Balance, December 31, 2015
|
591,167
|
$ 1.78
|
3.75
|
Exercisable, December 31, 2015
|
463,000
|
$ 1.76
|
3.68
|
On April 30, 2015, the Board of Directors approved the grant of 125,000 options to the former CEO of the Company, David Dworsky, in accordance with the terms of the 2011 Equity Incentive Plan, as amended. The options vested immediately and have an exercise price of $1.50 per share, with an expiration date of five years from the grant date. Mr. Dworsky forfeited his vested options of 93,750 and unvested options of 206,250 with an exercise price of $3.00 per share.
On April 30, 2015, the Board of Directors approved the grant of 100,000 options to an employee for continued consulting services, in accordance with the terms of the 2011 Equity Incentive Plan, as amended. The options vested immediately and have an exercise price of $1.50 per share, with an expiration date of five years from the grant date. The employee forfeited his vested options of 100,000 and unvested options of 100,000 with an exercise price of $2.00 per share.
41
On April 30, 2015, the Board of Directors approved the grant of 200,000 options to employees of the Company, in accordance with the terms of the 2011 Equity Incentive Plan, as amended. One-half of the options vest immediately, with the remaining vesting on the one year anniversary of the grant date. The options have an exercise price of $1.50 per share, with an expiration date of five years from the grant date.
On January 13, 2014, the Board of Directors approved the grant of 94,000 options to employees of the Company, in accordance with the terms of the 2011 Equity Incentive Plan, as amended. One-third of the options vest immediately, with the remaining vesting over a 2 year period. The options have an exercise price of $3.00 per share, with an expiration date of five years from the grant date.
On January 16, 2014, the Board of Directors approved the grant of 40,000 options to the Companys Directors for their 2013 service, in accordance with the terms of the 2011 Equity Incentive Plan, as amended. The options vest immediately and have an exercise price of $3.00 per share, with an expiration date of five years from the grant date.
On February 1, 2014, the Board of Directors approved the grant of 50,000 options to an employee of the Company, in accordance with the terms of the 2011 Equity Incentive Plan, as amended. The options vest ratably over a four year period. The options have an exercise price of $3.00 per share, with an expiration date of five years from the grant date.
On April 4, 2014, the Board of Directors approved the grant of 4,000 options to employees of the Company, in accordance with the terms of the 2011 Equity Incentive Plan, as amended. One-third of the options vest immediately, with the remaining vesting over a two year period. The options have an exercise price of $3.00 per share, with an expiration date of five years from the grant date.
On June 19, 2014, the Board of Directors approved the grant of 10,000 options to the new Secretary of the Board. The options vest immediately. The options have an exercise price of $3.00 per share, with an expiration date of five years from the grant date.
On June 19, 2014, the Board of Directors approved the grant of 100,000 options to an employee of the Company, in accordance with the terms of the 2011 Equity Incentive Plan, as amended. The options vest ratably over a three-year period. The options have an exercise price of $3.00 per share, with an expiration date of five years from the grant date.
The fair value of each stock option granted was estimated on the date of grant using the Black Scholes option pricing model with the following assumptions:
|
| |
|
December 31, 2015
|
December 31, 2014
|
Risk-free interest rate range
|
1.43%
|
1.49%-1.71%
|
Expected life
|
5.0 Years
|
5.0 Years
|
Vesting period
|
0 - 1 Year
|
0 - Years
|
Expected volatility
|
42%
|
42%
|
Expected dividend
|
-
|
-
|
Forfeiture rate
|
25%
|
-
|
Fair value range of options at grant date
|
$0.259
|
$0.671 - $1.167
|
Significant assumptions utilized in determining the fair value of our stock options included the volatility rate, estimated term of the options, risk-free interest rate and forfeiture rate. In order to estimate the volatility rate at each issuance date, given that the Company has not established a historical volatility rate as it has minimal trading volume since we began trading in October 2013, management reviewed volatility rates for a number of companies with similar manufacturing operations to arrive at an estimated volatility rate for each option grant. The term of the options was assumed to be five years, which is the contractual term of the options. The risk-free interest rate was determined utilizing the treasury rate with a maturity equal to the estimated term of the option grant. Finally, management assumed a zero forfeiture rate in 2014 as the options granted were either fully-vested upon the date of grant or had relatively short vesting periods. In 2015, with Company changes and significant reduction in operations and personnel, management estimated a forfeiture rate of 25%.
42
For the years ended December 31, 2015 and 2014, the Company recorded stock-based compensation expense of $96,929 and $231,524, respectively.
As of December 31, 2015 and 2014 there was $6,690 and $308,041, respectively, of unrecognized compensation expense related to the issuance of the stock options.
Performance Stock Options
There were no performance stock options granted during the years ended December 31, 2015 and 2014.
|
|
| |
|
Number of Options
|
|
Weighted
Average
Exercise
Price
|
Balance, December 31, 2013
|
1,440,000
|
|
$ 0.11
|
Granted
|
-
|
|
-
|
Exercised
|
-
|
|
-
|
Cancelled
|
-
|
|
-
|
Balance, December 31, 2014
|
1,440,000
|
|
$ 0.11
|
Granted
|
-
|
|
-
|
Exercised
|
-
|
|
-
|
Cancelled
|
(1,400,000)
|
|
$ 0.06
|
Balance, December 31, 2015
|
40,000
|
|
$2.00
|
Exercisable, December 31, 2014 and 2015
|
40,000
|
|
$ 2.00
|
See Note 5 for further discussion of the performance options.
Warrants
During 2015 the Company issued 25,141 warrants in connection with the private equity offering dated October 1, 2014 discussed above. Each unit consisted of one share of Common stock and one-half warrant, with each whole warrant exercisable at $2.00 per share and grants the right to purchase a share of the Companys common stock. The warrants expire three years from the date of issuance and are exercisable immediately.
During 2014 the Company issued 85,993 warrants during the year ended December 31, 2014 in connection with the Series D preferred stock unit offering. Each unit consisted of one share of Series D preferred stock and one-half warrant, with each whole warrant exercisable at $3.00 per share and grants the right to purchase a share of the Companys common stock. All warrants outstanding in connection with the Series D unit offering expired in October 2015.
In 2014, the Company issued 283,329 warrants in connection with the non-public offering of unsecured notes and warrants up to $1,000,000. The warrants expire three years from the date of issuance and are exercisable immediately at $3.00 per share.
In 2014, the Company issued 432,995 warrants in connection with the non-public offering of unsecured notes and warrants up to $3,000,000. The warrants expire three years from the date of issuance and are exercisable immediately at $3.00 per share.
In 2014, the Company issued 104,659 warrants in connection with the private equity offering dated October 1, 2014. Each unit consisted of one share of Common stock and one-half warrant, with each whole warrant exercisable at $2.00 per share and grants the right to purchase a share of the Companys common stock. The warrants expire three years from the date of issuance and are exercisable immediately.
In 2014, the Company issued 550,438 warrants in connection with the conversion of unsecured notes payable into the private equity offering dated October 1, 2014. The unsecured notes payable converted into one share of common stock plus one-half warrant for each $1.75 of the outstanding principal and accrued interest. The warrants expire three years from the date of issuance and are exercisable immediately at $2.00 per share.
43
In 2014, the Company issued 603,742 warrants in connection with the conversion of Series D preferred shares into the private equity offering dated October 1, 2014. The Series D preferred shares converted into one share of common stock plus one-half warrant for each $1.75 of the original purchase price. The warrants expire three years from the date of issuance and are exercisable immediately at $2.00 per share.
|
|
| |
|
Number of Warrants
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Life (Years)
|
Balance, December 31, 2013
|
363,824
|
$ 3.00
|
1.88
|
Granted
|
2,061,156
|
$ 2.39
|
|
Exercised
|
-
|
-
|
|
Cancelled
|
-
|
-
|
|
Balance, December 31, 2014
|
2,424,980
|
$ 2.48
|
2.28
|
Granted
|
25,141
|
$ 2.00
|
|
Exercised
|
-
|
-
|
|
Cancelled
|
(449,817)
|
$ 3.00
|
|
Balance, December 31, 2015
|
2,000,304
|
$ 2.36
|
1.64
|
11.
NET LOSS PER COMMON SHARE:
The Company computes loss per share of common stock using the two-class method required for participating securities. The Companys participating securities include all series of its convertible preferred stock. Undistributed earnings allocated to these participating securities are added to net loss in determining net loss applicable to common stockholders. Basic and Diluted loss per share are computed by dividing net loss applicable to common stockholder by the weighted-average number of shares of common stock outstanding.
Outstanding options and warrants underlying 2,591,471 shares were not included in the computation of diluted loss per share because the exercise price was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.
The calculation of the numerator and denominator for basic and diluted net loss per common share is as follows:
|
|
|
|
| |
|
For the year ended
December 31, 2015
|
|
For the year ended
December 31, 2014
|
Net loss from continuing operations
|
$
|
(2,982,920)
|
|
$
|
(3,685,601)
|
Net loss from discontinued operations
|
|
(371,307)
|
|
|
(840,649)
|
Net loss
|
|
(3,354,227)
|
|
|
(4,526,250)
|
Basic and diluted:
|
|
|
|
|
|
Preferred stock cumulative dividend - Series B
(1)
|
|
-
|
|
|
(62,227)
|
Preferred stock cumulative dividend - Series C
|
|
-
|
|
|
2,200
|
Preferred stock cumulative dividend - Series D
|
|
42,942
|
|
|
230,542
|
Deemed dividend - inducement premium
|
|
-
|
|
|
1,332,376
|
Income applicable to preferred stockholders
|
|
42,942
|
|
|
1,502,891
|
Net loss applicable to common stockholders
|
$
|
(3,397,169)
|
|
$
|
(6,029,141)
|
(1)
Upon conversion of the Series B preferred stock into common stock, the holders of the Series B preferred stock were no longer entitled to the dividends recorded in the adjustment to net loss applicable to common shareholders in prior periods. As a result, prior year reported dividends were adjusted downward to reflect this release of accumulated dividends.
12.
COMMITMENTS AND CONTINGENCIES:
Lease Commitments
- On July 18, 2012, the Company entered into a thirteen month lease for office space for its corporate headquarters located in Greenwood Village, Colorado. Under the terms of the lease agreement, the Company leased approximately 2,244 square feet of general office space. The lease term commenced on July 23, 2012 and ended June 30, 2014.
44
Upon movement of the Companys corporate headquarters to California, the Company assumed a lease of warehouse and office space for the equipment and operations located in Gardena, CA. On August 1, 2015 the Company is no longer under a rental lease agreement for the office and warehouse space in Gardena, CA. The Company is now on a month-to-month agreement and will be required to exit the premises if the landlord identifies a new tenant.
Total rent expense for the year ended December 31, 2015 and 2014 was $50,035 and $55,744, respectively.
Purchase Commitments
- During the year ended December 31, 2014, the Company had a commitment to its manufacturer to purchase equipment and parts totaling approximately $70,000. In December 2014, the Company paid the existing commitment in full. No future commitment exists at this time.
Vendors and Debt
- The Company has significant liabilities as of December 31, 2015 with limited cash flow generated by the sale of Company assets and revenue. The Company has $159,249 in accounts payable from continuing operations and $33,777 from discontinued operations. In addition, the Company has $1,528,969 in debt and accrued interest from continuing operations and $255,310 in debt and accrued interest from discontinued operations. The Company will work with their vendors and lenders to establish payment plans, explore extensions and conversion of debt.
13.
RELATED PARTY TRANSACTIONS:
Consulting arrangements
In November 2014, the Company entered into a consulting arrangement with Heather Kearns, the former Interim Chief Financial officer and incurred consulting fees of $73,000 and $18,000 during the years ended December 31, 2015 and 2014, with $19,600 in current liabilities owed to her as of December 31, 2015.
On July 15, 2014, the Company terminated the Consulting Agreement with Mr. Richard Giles, a founder, stockholder, and former director of the Company. The Company paid consulting fees of $69,800 to Mr. Giles during the year ended December 31, 2014. The Company had a Senior Subordinated note payable with Mr. Richard Giles, during the year ended December 31, 2014, the Company made the final required principal payments totaling $500,000 and paid interest of $7,500.
Share activity
Justin Yorke is the manager of the JMW Fund, LLC, the San Gabriel Fund, LLC, the Richland Fund, LLC, and the Arroyo Fund, LLC; and was a director from April 2011 until June 2012. Mr. McGrain, our Interim Chief executive officer and Interim Chief financial officer is also a member of the JMW Fund, LLC, the San Gabriel Fund, LLC, the Richland Fund, LLC, and the Arroyo Fund, LLC. During the year ended 2014 Mr. Yorke, as the manager, was issued 83,330 Series D preferred shares and warrants to purchase 41,665 common shares. Mr. Yorke, as the manager, converted 166,660 Series D preferred shares into 285,700 common shares and warrants to purchase 142,850 common shares as part of the Private equity offering dated October 1, 2014. Mr. Yorke, as the manager, accrued dividends from preferred stock in 2014 totaling $27,725. During 2014, Mr. Yorke, as the manager, was issued unsecured notes payable in the aggregate principal amount of $1,729,003, bearing interest at 12% per annum and granted warrants to purchase 576,327 common shares in connection with the Companys $1 million and $3 million note offerings. In October 2014, Mr. Yorke, as the manager, was issued a short-term unsecured loan in the amount of $75,000, bearing interest at 12% per annum. Mr. Yorke, as the manager, converted an aggregate amount or $1,926,537 unsecured notes payable and accrued interest into 1,100,876 common shares and was granted warrants to purchase 550,438 common shares in the Private equity offering dated October 1, 2014. As of December 31, 2014 the Company had an unsecured note payable with Mr. Yorke, as the manager, in the amount of $20,000; a secured note payable in the amount of $160,000, and an outstanding balance of $138,000 on the revolving line of credit. Mr. Yorke, as the manager, received or has accrued interest payments from loans payable in 2014 totaling $105,275. During the year ended December 31, 2015 Mr. Yorke, converted the $20,000 and $160,000 unsecured notes payable into senior secured notes payable. As of December 31, 2015, Mr. Yorke has secured notes outstanding totaling $947,361, and was paid or has accrued interest totaling $120,565 in 2015. In addition Mr. Yorke was issued warrants to purchase 2,857 common shares as part of the Private equity offering dated October 1, 2014, during 2015.
45
During the year ended December 31, 2014, Mr. Gus Blass III, a former member of our board of directors and a stockholder whom resigned September 15, 2015, was issued 16,666 Series D preferred shares and warrants to purchase 8,333 common shares. During the years ended December 31, 2015 and 2014 Mr. Blass III received or had accrued dividends from preferred stock totaling $24,000 and $22,355, respectively. In addition, Mr. Gus Blass II, a former member of our board of directors and father to Mr. Gus Blass III, was issued an unsecured note payable in the amount of $250,000 during 2014, paying interest at 12% per annum with a maturity date of January 6, 2016. Mr. Gus Blass II was granted warrants to purchase 83,333 common shares in connection with the unsecured note payable in 2014, and expired in October 2015 unexercised. Mr. Blass II, received or had accrued interest payments of $30,000 and $29,507 for the years ended December 31, 2015 and 2014, respectively.
During the year ended December 31, 2014, Reginald Greenslade, a former member of our board of directors and a stockholder, who resigned August 1, 2015; was issued 16,659 Series D preferred shares and warrants to purchase 8,329 common shares. Mr. Greenslade converted 16,659 Series D preferred shares into 28,487 common shares and warrants to purchase 14,279 common shares in the Private equity offering dated October 1, 2014. Mr. Greenslade received or had accrued dividends from preferred stock totaling $2,180 in 2014. On January 1, 2014 as part of the Dr. Pave, LLC acquisition, the Company assumed an outstanding balance of $45,980 on the revolving line of credit to Mr. Greenslade. Mr. Greenslade received or had accrued interest totaling $5,519 and $5,518 for the years ended December 31, 2015 and 2014, respectively
During the year ended 2014, the Company issued 1,500 Series D preferred shares and warrants to purchase 750 common shares to David Dworsky, the former Chief Executive Officer and board member of the Company, whom resigned his Officer position effective April 30, 2015 and his board position effective August 31, 2015. Mr. Dworsky received or has accrued dividends totaling $360 and $213 for the years ended December 31, 2015 and 2014, respectively.
Dr. Pave Acquisition
On January 7, 2014, the Company entered into an Agreement and Plan of Reorganization (the Acquisition Agreement) dated January 8, 2014 with Dr. Pave, LLC, a California limited liability company. Dr. Pave, LLC was controlled by David Dworsky, the former Chief Executive Officer of the Company. The Company acquired all of the outstanding membership interests in Dr. Pave for 58,333 shares of common stock of the Company at a value of $3.00 per share for total consideration in the amount of $175,000. The consideration included the issuance of 41,668 shares to Dworsky Partners, LLC, an entity in which David Dworsky owned 80% of the ownership interest, and 3,333 shares to Reginald Greenslade, a former member of our board of directors. During 2015, the company ceased operations of Dr. Pave, LLC. The related accounting results are reflected in the discontinued operations lines within the financial statements for the years ended December 31, 2015 and 2014. See Note 5 above for additional information.
14.
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
| |
|
For the year ended
December 31, 2015
|
|
For the year ended
December 31, 2014
|
Cash paid for interest
|
$
|
25,356
|
|
$
|
194,447
|
Cash paid for income taxes
|
$
|
-
|
|
$
|
132
|
Series D Dividend payable in accrued expenses
|
$
|
42,942
|
|
$
|
45,590
|
|
|
|
|
|
|
Non-Cash investing and financing transactions
|
|
|
|
|
|
Returned equipment applied to outstanding loan principal
|
$
|
98,098
|
|
$
|
-
|
Conversion of unsecured notes to senior secured notes
|
$
|
174 361
|
|
$
|
-
|
Repayment of unsecured notes payable and accrued interest with issuance of common shares
|
$
|
-
|
|
$
|
2,506,982
|
Financing the purchase of equipment under a 4 year loan agreement
|
$
|
-
|
|
$
|
49,204
|
Deemed dividend and inducement premium on conversion of Series D preferred shares to common shares
|
$
|
-
|
|
$
|
1,332,376
|
Beneficial conversion feature on warrants issued in conjunction with Series D preferred shares
|
$
|
-
|
|
$
|
51,110
|
46
15.
SUBSEQUENT EVENTS
Debt offerings
On March 23, 2016, the Company entered into a Secured note under the senior secured loan agreement in the amount of $15,000. In addition, the Company extended all Secured Notes issued under the Senior Secured Loan Agreement to September 30, 2016, in the aggregate amount of $962,361. As of the filing date, the company is in default on the senior secured loan agreement. The lenders may call the notes or foreclose upon the assets of the Company.
47