16. Restatement of Prior Period Financials

3 Months Ended

Mar. 31, 2014

Accounting Changes and Error Corrections [Abstract]

Restatement of Prior Period Financials

Conventional Convertible Debt

In connection with the Company’s second quarter 2014 review procedures and internal control analysis, management conducted an analysis of the Company’s various financial instruments and agreements involving its convertible debt and related warrants, and in particular, the $530,000 in unsecured convertible notes issued in December 2013 (the “12% December 2013 Notes”), and the $170,000 convertible debt mortgage relating to the Company’s property in Pueblo (the “Pueblo Mortgage”) (collectively, the “Convertible Debt”).  Management’s analysis was particularly focused on the accounting treatment of derivative financial instruments and debt under Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 815, “Derivatives and Hedging” (“ASC 815”) and ASC Topic 470, “Debt” (“ASC 470”), respectively.

Management’s analyses included  reviewing its previous analysis and accounting of the Convertible Debt noted above to see if any events may have occurred subsequent to the original issuance which would cause the Company’s original accounting and classification to change. Through the Company’s reevaluation process which included the Company obtaining a thorough understanding of the transactions, including gaining a thorough understanding of the terms of each instrument issued, and any potential derivative features. The Company reevaluated the debt instruments pursuant to ASC 815, to identify whether any equity-linked features in the Convertible Debt are freestanding or embedded. The Convertible Debt was issued availing the option for note holders to convert debt to common stock at fixed conversion price of $5.00 per share.  The Company determined that conversion feature was embedded in the debt instrument and was therefore not a free standing features.  The Convertible Debt were then analyzed in accordance with ASC 815 to determine if the embedded conversion feature should be bifurcated and accounted for at fair value and remeasured at fair value in income. The Company determined that the embedded conversion feature did not meet the definition of a derivative pursuant to ASC Topic 815 and therefore should not be bifurcated pursuant to ASC 815 and therefore should be evaluated and accounted for as conventional convertible debt. The Company then reviewed ASC 470-20, and determined that the Convertible Debt met the criteria of conventional convertible notes and that none of the Convertible Debt instruments had a beneficial conversion feature as the conversion price was greater than the market price of the Company’s common stock on the date of issuance(s). As a result, pursuant to ASC 470-20, the Company concluded that the Convertible Debt should have been recorded as a conventional convertible debt instrument in its entirety.

The Company had originally accounted for embedded conversion feature associated with the Convertible Debt as beneficial conversion features in the previously issued consolidated financial statements.  In addition, the Company originally valued the conversion features using the Black-Scholes pricing model as the Company originally identified that the conversion price of the debt was greater than then value of the Company’s common stock on the date of issuance. Based on our reevaluation analyses performed during the second quarter 2014, we concluded that our original accounting for the embedded conversion feature as a debt discount on the Convertible Debt was incorrect, as the embedded conversion features did not meet the definition of a derivative and therefore should not have been bifurcated and the embedded conversion feature did not have a beneficial conversion, therefore the Company should not have accounted for the embedded conversion feature as a debt discount.

On August 15, 2014, as a result of this analysis, management, along with Company’s board of directors, concluded that it was necessary to restate its previously filed consolidated financial statements for the period from June 5, 2013 (Inception) to December 31, 2013 filed on Form 10-K and Form 10-Q for March 31, 2014.

Derivative Warrant Liability

In connection with the Company’s second quarter 2014 review procedures, management conducted an analysis of the Company’s warrants, specifically, the 1,000,000 Series C warrants issued in conjunction with the Company’s financing arrangement with Full Circle.  Management’s analysis was particularly focused on the accounting treatment of derivative financial instruments under Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 815, “Derivatives and Hedging” (“ASC 815”).

Management’s analyses included reviewing its previous analysis and accounting for the Series C warrants to see if any events may have occurred subsequent to the original issuance which would cause the Company’s original accounting and classification to change. Through the Company’s reevaluation process which included the Company obtaining a thorough understanding of the transactions, including gaining a thorough understanding of the terms of the warrants issued, and any potential derivative features. The Company reevaluated the warrants instruments pursuant to ASC 815, to assess whether the share settlement feature of the Series C warrants included in the agreement with Full Circle was within the Company’s control.  Management’s analysis of the agreement noted that without a conversion price floor or maximum number of shares, the Company cannot conclude that a sufficient number of shares are available. In order to share settle all outstanding contracts for common stock, the Company would be required to increase the authorized number of shares. Per ASC 815-40-25-19, if the Company is required to increase the number of authorized shares, share settlement is not within the control of the Company. Per ASC 815-40-25-22, if share settlement is not within the control of the Company, asset or liability classification is required. ASC 815-10-35-1 requires all derivatives be measured at fair value at each reporting period, and ASC 815-10-35-2 requires the gain or loss to be recognized in the Company's consolidated statement of operations.

On August 15, 2014, as a result of this analysis, management, along with Company’s board of directors, concluded that it was necessary to restate its previously filed consolidated financial statements for the three months ended March 31, 2014 filed on Form 10-Q and for the period from June 5, 2013 (Inception) to December 31, 2013 filed on Form 10-K (collectively, the “Restated Periods”).

Restatement Impact

As a result of the restatement, the table below sets forth the changes to be made in the consolidated financial statements for the Restated Periods:

Effect of Corrections	As Previously						As
	Reported		Adjustments				Restated
Balance Sheet as of December 31, 2013
Convertible notes payable (net of debt discount) – current portion	$	2,930	$	2,426		(1)	$	5,356
Total current liabilities		46,142		2,426		(1)		48,568
Convertible notes payable (net of debt discount), less current portion		341,907		268,043		(1)		609,950
Total long-term liabilities		343,157		268,043		(1)		611,200
Common stock		1,204,096		(270,469	)	(2)		933,627
Total stockholders’ equity		493,134		(270,469	)	(2)		222,665
Statement of Changes in Stockholders’ Equity for the Period from June 5, 2013 (Inception) to December 31, 2013
Discount on convertible notes December 27, 2013		289,811		(270,469	)	(2)		19,342
Common stock		1,204,096		(270,469	)	(2)		933,627
Total stockholders’ equity		493,134		(270,469	)	(2)		222,665

Effect of Corrections	As Previously
	Reported				Adjustments				As Restated
Balance Sheet as of March 31, 2014:
Deferred financing costs, net		$	115,000		$	(6,000	)	(3)	$	109,000
Total Assets			2,532,925			(6,000	)	(8)		2,526,925
Derivative liability			-			1,147,640		(5)		1,147,640
Accounts payable and accrued expenses			32,813			(6,000	)	(3)		26,813
Total current liabilities			38,740			1,141,640		(8)		1,180,380
Convertible notes payable, net			402,595			254,888		(1)		657,483
Total long-term liabilities			403,845			254,888		(8)		658,733
Total liabilities			442,585			1,396,528		(8)		1,839,113
Common stock			3,375,165			(770,469	)	(11)		2,604,696
Deficit accumulated during the development stage			(1,284,825	)		(632,059	)	(10)		(1,916,884	)
Total Stockholders' Equity			2,090,340			(1,402,528	)	(8)		687,812
Total Liabilities & Stockholders' Equity			2,532,925			(6,000	)	(8)		2,526,925
Statement of Operations for the three months ended March 31, 2014:
Amortization of debt discount			(320,422	)		15,581		(4)		(304,841	)
Gain (loss) on derivative liability, net			-			(647,640	)	(8)		(647,640	)
Total other expense			(369,696	)		(632,059	)	(8)		(1,001,755	)
Net loss			(573,863	)		(632,059	)	(8)		(1,205,922	)
Net loss per share - basic and diluted			(0.04	)		(0.05	)	(9)		(0.09	)
Statement of Operations for the period from Inception (June 5, 2013) to March 31, 2014
Amortization of debt discount			(321,216	)		15,581		(4)		(305,635	)
Gain (loss) on derivative liability, net			-			(647,640	)	(6)		(647,640	)
Total other expense			(371,361	)		(632,059	)	(8)		(1,003,420	)
Loss from continuing operations			(1,286,782	)		(632,059	)	(8)		(1,918,841	)
Net loss			(1,284,825	)		(632,059	)	(8)		(1,916,884	)
Statement of Cash Flows for the three months ended March 31, 2014:
Net loss			(573,863	)		(632,059	)	(8)		(1,205,922	)
Amortization of debt discount			320,422			(15,581	)	(4)		304,841
Amortization of deferred financing costs			-			6,000		(3)		6,000
(Gain) loss on derivative liability, net			-			647,640		(6)		647,640
Increase/ (decrease) in accounts payable and accrued expenses			(11,193	)		(5,206	)	(3)		(16,399	)
Net cash provided by (used in) operating activities – continuing operations			(330,777	)		794		(8)		(329,983	)
Net cash provided by (used in) operating activities			(330,777	)		794		(8)		(329,983	)
Principal repayment on convertible notes payable			(943	)		(794	)	(4)		(1,737	)
Statement of Cash Flows for the period from Inception (June 5, 2013) to March 31, 2014:
Net loss			(1,284,825	)		(632,059	)	(8)		(1,916,884	)
Amortization of debt discount			321,216			(15,581	)	(4)		305,635
Amortization of deferred financing costs			-			6,000		(3)		6,000
(Gain) loss on derivative liability, net			-			647,640		(6)		647,640
Increase/ (decrease) in accounts payable and accrued expenses			32,019			(5,206	)	(3)		26,813
Net cash provided by (used in) operating activities – continuing operations			(809,977	)		794		(8)		(809,183	)
Net cash provided by (used in) operating activities			(819,848	)		794		(8)		(819,054	)
Principal repayment on convertible notes payable			(943	)		(794	)	(4)		(1,737	)
Statement of Changes in Stockholders' Equity for the period from Inception (June 5, 2013) to March 31, 2014:
Discount on convertible notes issued December 27, 2013			289,811			(270,469	)	(2)		19,342
Common stock at December 31 , 2013			1,204,096			(270,469	)	(8)		933,627
Warrants sold to Full Circle January, 2014 in financing transaction			500,000			(500,000	)	(7)		-
Common stock at March 31, 2014			3,375,165			(770,469	)	(8)		2,604,696
Net loss for three months ended March 31, 2014			(573,863	)		(632,059	)	(8)		(1,205,922	)
Total Stockholders' Equity			2,090,340			(1,402,528	)	(8)		687,812

(1)   To reclassify debt discount, net of amortization, previously recognized as a beneficial conversion feature to current and noncurrent convertible notes payable from discount on convertible notes and common stock.

(2)   To reclassify debt discount, net of amortization, previously recognized as a beneficial conversion feature from discount on convertible notes and common stock to current and noncurrent convertible notes payable.

(3)   To present amortization expense recognized on deferred financing costs as its own line item in the statement of cash flows and reclassify it from Increase/ (decrease) in accounts payable and accrued expenses.

(4)   To recognize amortization of debt discount and reclassify amounts repaid on the principal of the convertible notes.

(5)   To record derivative liability at March 31, 2014.

(6)   To present the loss on the warrant derivative liability.

(7)   To derecognize the warrants sold to Full Circle which were erroneously recorded as adjustments to common stock.

(8)   To present the cumulative impact of adjustments discussed above.  This is a line item is a subtotal or total balance on the financial statements.

(9)   To present the cumulative impact of adjustments on the net loss per share.

(10)   To present the cumulative impact of adjustments on the Company’s deficit accumulated during the development stage.

(11)   To present the cumulative impact of adjustments relating to items (7) and (2).