CodeSmart Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 Nature of Operations
CodeSmart Holdings, Inc. (formerly known as First Independence Corp.) (“Holdings”), a Florida corporation, was formed to private label pourable food products for start-ups, local and national supermarket chains and specialty stores. Holdings was incorporated on February 10, 2012 (Date of Inception) with its corporate headquarters located in Osprey, Florida and its year-end as February 28th, which was subsequently changed to December 31st.
On May 3, 2013, Holdings and the stockholders of The CodeSmart Group, Inc. (the “Company” or “CodeSmart”) who collectively own 68.06% of the outstanding shares of the Company (the “CodeSmart Stockholders”) completed a reverse acquisition transaction through a Share Exchange Agreement (the “Share Exchange Agreement,” such transaction referred to as the “Share Exchange Transaction”), whereby (i) Holdings issued to the CodeSmart Stockholders an aggregate of 3,062,500 shares of its common stock, par value $.0001 (“Common Stock”), in exchange for 68.06% of equity interests of CodeSmart held by the CodeSmart Stockholders. After the Share Exchange Transaction, Holdings implemented a 2-for-1 forward stock split of its Common Stock. All equity disclosures have been retrospectively restated to present both the transaction and the 2-1 forward split. As a result of the Share Exchange Transaction, CodeSmart became a subsidiary of Holdings.
The share exchange transaction was treated as a reverse acquisition for accounting purposes, with CodeSmart as the acquirer and Holdings as the acquired party. Unless the context suggests otherwise, references in this report to business and financial information for periods prior to the consummation of the reverse acquisition, refer to the business and financial information of CodeSmart and its predecessors. For accounting purposes, the acquisition of CodeSmart has been treated as a recapitalization with no adjustment to the historical book and tax basis of the Company’s assets and liabilities.
Upon completion of the Share Exchange Transaction, the Company changed its name from First Independence Corp. to CodeSmart Holdings, Inc. and commenced trading under the symbol “ITEN” on the OTC QB. The OTC QB market tier of the OTC market helps investors identify companies that are current in their reporting obligations with the SEC. OTC QB securities are quoted on OTC Markets Group's quotation and trading system.
On August 20, 2013, the Company and Marc Kovens (“Kovens”), who owned the 31.94% shares of the Common Stock of the Company that did not participate in the reverse acquisition, entered into and consummated transactions pursuant to a Share Exchange Agreement whereby (i) the Company issued to Kovens an aggregate of 2,808,000 shares of the Company’s common stock, par value $.0001 and (ii) the Company paid Kovens in cash $1,350,000, in exchange for the 31.94% of equity interests. As a result of the Share Exchange Transaction, the subsidiary is now 100% fully owned and a non-controlling interest is no longer presented.
The Company provides on-line education for medical coding and billing to healthcare professionals and also educates new healthcare professionals coming into the field. The Company will also support provider organizations by offering outsourced medical coding services and transitional consulting.
CodeSmart Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note 2 Summary of Significant Accounting Policies
Basis of presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. In the opinion of the Company’s management, the accompanying condensed consolidation financial statements reflect all adjustments, consisting of normal, recurring adjustments, considered necessary for a fair presentation of the results for the three and nine months ended September 30, 2013. Although management believes that the disclosures in these unaudited condensed consolidated financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. The results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013.
The financial statements have been prepared on the going concern basis, which assumes the realization of assets and the liquidation of liabilities in the normal course of operations. If the Company were not to continue as a going concern, it would likely not be able to realize its assets at values comparable to the carrying value or the fair value estimates reflected in the financial statements. There can be no assurances that the Company will be successful in generating additional cash from equity or other sources to be used for operations. The financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
Principles of Consolidation
The Company applies the guidance of Topic 810 “Consolidation” of the FASB Accounting Standards Codification to determine whether and how to consolidate another entity. Pursuant to ASC Paragraph 810-10-15-10 all majority-owned subsidiaries—all entities in which a parent has a controlling financial interest—shall be consolidated except (1) when control does not rest with the parent, the majority owner; (2) if the parent is a broker-dealer within the scope of Topic 940 and control is likely to be temporary; (3) consolidation by an investment company within the scope of Topic 946 of a non-investment-company investee. Pursuant to ASC Paragraph 810-10-15-8, the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree. The Company consolidates all less-than-majority-owned subsidiaries, if any, in which the parent’s power to control exists.
The consolidated financial statements include all accounts of the entities at September 30, 2013 as follows:
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Name of consolidated subsidiary or entity
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State or other jurisdiction of incorporation or organization
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Date of incorporation or formation
(date of acquisition, if applicable)
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Attributable interest at September 30, 2013
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The CodeSmart Group, Inc.
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The State of Nevada, U.S.A.
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October 3, 2012
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100% |
All inter-company balances and transactions have been eliminated.
Going Concern Matters
The financial statements have been prepared on the going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of operations. The ability of the Company to continue its operations is dependent on Management’s plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. The Company may need to incur additional liabilities with certain related parties to sustain the Company’s existence. If the Company were not to continue as a going concern, it would likely not be able to realize its assets at values comparable to the carrying value or the fair value estimates reflected in the financial statements. There can be no assurances that the Company will be successful in generating additional cash from equity or other sources to be used for operations. The financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
CodeSmart Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
As reflected in the accompanying financial statements, the Company has a net loss and net cash used in operations of $(7,618,927) and $(1,617,878), respectively, for the nine months ended September 30, 2013. In addition, the Company has an accumulated deficit of $13,850,153 as of September 30, 2013.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
The Company’s significant estimates and assumptions include the fair value of financial instruments; allowance for doubtful accounts; the carrying value, recoverability and impairment, if any, of long-lived assets, including the values assigned to property and equipment; expected term of share options and similar instruments, expected volatility of the entity’s common shares and the method used to estimate it, expected annual rate of quarterly dividends, and risk free rate(s); revenue recognized or recognizable, sales returns and allowances; income tax rate, income tax provision, deferred tax assets and valuation allowance of deferred tax assets and the assumption that the Company will continue as a going concern. Those significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to those estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly.
Actual results could differ from those estimates.
Risks and Uncertainties
The Company’s operations are subject to significant risk and uncertainties including financial, operational, technological, and regulatory risks including the potential risk of business failure.
Cash
The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. The Company held no cash equivalents at September 30, 2013 and December 31, 2012.
CodeSmart Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits.
Fair Value of Financial Instruments
The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
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Level 1
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Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
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Level 2
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Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
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Level 3
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Pricing inputs that are generally observable inputs and not corroborated by market data.
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Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The carrying amount of the Company’s financial assets and liabilities, such as cash, accounts receivable, prepaid expenses, accounts payable and accrued expenses, approximate their fair value because of the short maturity of those instruments. The Company’s secured convertible notes approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at September 30, 2013 and December 31, 2012. The Company did not have any secured convertible notes issued as of December 31, 2012.
The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative liability at every reporting period and recognizes gains or losses in the consolidated statements of operations that are attributable to the change in the fair value of the derivative liability.
Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
It is not, however, practical to determine the fair value of advances from significant stockholder, if any, due to their related party nature.
Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis
Level 3 Financial Liabilities – Derivative conversion features
Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheets as of September 30, 2013:
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Fair Value Measurement
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Carrying Value
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Level 1 |
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Level 2 |
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Level 3
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Total
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Derivative conversion features
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$ |
211,685 |
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$ |
- |
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$ |
- |
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|
$ |
211,685 |
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|
$ |
211,685 |
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CodeSmart Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
There were no financial assets and liabilities measured at fair value on the consolidated balance sheets as of December 31, 2012.
The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2013:
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Derivative Liabilities |
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Total |
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Balance, December 31, 2012
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$
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-
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$
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-
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Total (gains) or losses (realized/unrealized) included in consolidated statements of operations
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1,310,197
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1,310,197
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Purchases, issuances and settlements
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476,488
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476,488
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Transfers in and/or out of Level 3
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(1,575,000
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)
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(1,575,000
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)
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Balance, September 30, 2013
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$
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211,685
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$
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211,685
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Carrying Value, Recoverability and Impairment of Long-Lived Assets
The Company has adopted paragraph 360-10-35-17 of the FASB Accounting Standards Codification for its long-lived assets. The Company’s long-lived assets, which include property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
The Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives.
The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; and (v) regulatory changes. The Company evaluates acquired assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.
The key assumptions used in management’s estimates of projected cash flow deal largely with forecasts of revenue levels, gross margins, and operating costs of the manufacturing facilities. These forecasts are typically based on historical trends and take into account recent developments as well as management’s plans and intentions. Other factors, such as increased competition or a decrease in the desirability of the Company’s services, could lead to lower projected revenue levels, which would adversely impact cash flows. A significant change in cash flows in the future could result in an impairment of long lived assets.
The impairment charges, if any, are included in operating expenses in the accompanying statements of operations.
CodeSmart Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Property and Equipment
Property and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation is computed by the straight-line method (after taking into account their respective estimated residual values) over the assets estimated useful life of three (3) years. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in statements of operations.
Derivative Instruments
The Company evaluates its convertible debt to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with Paragraph 810-10-05-4 of the Codification and Paragraph 815-40-25 of the Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statements of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the consolidated balance sheet as current or non-current based on whether or not the net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.
The Company utilizes the Lattice model that values the liability of the derivative features based on a probability weighted discounted cash flow model with the assistance of a third party valuation firm. The reason the Company picks the Lattice model is that in many cases there may be multiple embedded features or the features of the bifurcated derivatives may be so complex that a Black-Scholes valuation does not consider all of the terms of the instrument. Therefore, the fair value may not be appropriately captured by simple models. In other words, simple models such as Black-Scholes may not be appropriate in many situations given complex features and terms of conversion option (e.g., combined embedded derivatives). The Lattice model is based on future projections of the various potential outcomes. The features that were analyzed and incorporated into the model included the exercise and full reset features. Based on these features, there are two primary events that can occur; the holder converts the secured convertible notes or the notes are held to expiration. The Lattice model analyzed the underlying economic factors that influenced which of these events would occur, when they were likely to occur, and the specific terms that would be in effect at the time (i.e. stock price, exercise price, volatility, etc.). Projections were then made on the underlying factors which led to potential scenarios. Probabilities were assigned to each scenario based on management projections. This led to a cash flow projection and a probability associated with that cash flow. A discounted weighted average cash flow over the various scenarios was completed to determine the value of the derivative liability.
Research and Development
Research and development is expensed as incurred. Research and development expenses for the three and nine months ended September 30, 2013 was $71,646 and $96,482, respectively.
CodeSmart Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Revenue Recognition and Deferred Revenue
Revenues consist primarily of tuition and fees derived from courses taught by the University online as well as from related educational resources that the University provides to its students, such as access to our online materials and learning management system. Tuition revenue and most fees from related educational resources are recognized pro-rata over the applicable period of instruction. The University maintains an institutional tuition refund policy, which provides for all or a portion of tuition to be refunded if a student withdraws during stated refund periods. Certain states in which students reside impose separate, mandatory refund policies, which overrides the University’s policy to the extent in conflict. If a student withdraws at a time when a portion or none of the tuition is refundable, then in accordance with its revenue recognition policy, the University will immediately recognize as revenue the tuition that was not refunded. Since the University will recognize revenue pro-rata over the term of the course and because, under its institutional refund policy, the amount subject to refund is never greater than the amount of the revenue that has been deferred, under the University’s accounting policies revenue is not recognized with respect to amounts that could potentially be refunded. The University also charges students annual fees for library, technology and other services, which are deferred and recognized over the related service period. Deferred revenue and student deposits in any period represent the excess of tuition, fees, and other student payments received as compared to amounts recognized as revenue and are reflected as current liabilities in the accompanying balance sheets. The University’s educational programs have starting and ending dates that differ from its fiscal quarters. Therefore, at the end of each fiscal quarter, a portion of revenue from these programs is not yet earned. Other revenues may be recognized as sales occur or services are performed. The Company recognized $62,859 and $0 of deferred revenue, respectively, at September 30, 2013 and December 31, 2012.
Instructional Costs and Services
Instructional costs and services consist primarily of costs related to the administration and delivery of the Company’s educational programs. This expense category includes compensation for faculty and administrative personnel, costs associated with online faculty, curriculum and new program development costs, bad debt expense related to accounts receivable, financial aid processing costs, technology license costs and costs associated with other support groups that provide services directly to the students.
The Company recognized $113,852 and $133,550, respectively in instructional/service income related costs for the three and nine months ended September 30, 2013.
Advertising and Promotions
Advertising and promotional costs include compensation of personnel engaged in marketing and recruitment, as well as costs associated with purchasing leads, producing marketing materials, and advertising. Such costs are generally affected by the cost of advertising media and leads, the efficiency of the Company’s marketing and recruiting efforts, compensation for the Company’s enrollment personnel and expenditures on advertising initiatives for new and existing academic programs. Advertising costs consist primarily of marketing leads and other branding and promotional activities. Non-direct response advertising activities are expensed as incurred, or the first time the advertising takes place, depending on the type of advertising activity.
The Company incurred $101,618 and $221,303 in advertising and promotional costs for the three and nine months ended September 30, 2013, respectively.
General and Administrative
General and administrative expenses include compensation of employees engaged in corporate management, finance, human resources, information technology, compliance and other corporate functions. General and administrative expenses also include professional services fees, travel and entertainment expenses and facility costs.
CodeSmart Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Stock-Based Compensation for Obtaining Employee Services
The Company accounts for its stock based compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur. If shares of the Company are thinly traded the use of share prices established in the Company’s most recent private placement memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
The fair value of share options and similar instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions for inputs are as follows:
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Expected term of share options and similar instruments: The expected life of options and similar instruments represents the period of time the option and/or warrant are expected to be outstanding. Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification, the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration the contractual term of the instruments and employees’ expected exercise and post-vesting employment termination behavior into the fair value (or calculated value) of the instruments. Pursuant to paragraph 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected term = ((vesting term + original contractual term) / 2), if (i) A company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded; (ii) A company significantly changes the terms of its share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term; or (iii) A company has or expects to have significant structural changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses the simplified method to calculate expected term of share options and similar instruments as the company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
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Expected volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii), a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
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Expected annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.
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Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments.
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The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.
Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of Sub-topic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).
CodeSmart Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Pursuant to ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur. If shares of the Company are thinly traded the use of share prices established in the Company’s most recent PPM, or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
The fair value of share options and similar instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions for inputs are as follows:
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Expected term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification, the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s expected exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data to estimate holder’s expected exercise behavior. If the Company is a newly formed corporation or shares of the Company are thinly traded the contractual term of the share options and similar instruments is used as the expected term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
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Expected volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii), a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
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Expected annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.
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Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments.
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Pursuant to ASC paragraph 505-50-25-7, if fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee enter into an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments), then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement is entered into). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized as contra-equity under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances. Pursuant to ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return for fully vested, non-forfeitable equity instruments that are issued at the date the grantor and grantee enter into an agreement for goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra-equity by the grantor of the equity instruments. The transferability (or lack thereof) of the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited to transactions in which equity instruments are transferred to other than employees in exchange for goods or services. Section 505-50-30 provides guidance on the determination of the measurement date for transactions that are within the scope of this Subtopic.
CodeSmart Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Pursuant to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a stock option that the counterparty has the right to exercise expires unexercised.
Pursuant to ASC paragraph 505-50-30-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should be recorded.
The Company accounts for stock-based compensation in accordance with ASC Topic 718, “Accounting for Stock-Based Compensation” established financial accounting and reporting standards for stock-based employee compensation. It defines a fair value based method of accounting for an employee stock option or similar equity instrument. The Company accounts for compensation cost for stock option plans in accordance with ASC 718. The Company accounts for share based payments to non-employees in accordance with ASC 505-50 “Accounting for Equity Instruments Issued to Non-Employees for Acquiring, or in Conjunction with Selling, Goods or Services”.
The Company recognizes all forms of share-based payments, including stock option grants, warrants and restricted stock grants, at their fair value on the grant date, which are based on the estimated number of awards that are ultimately expected to vest.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss), adjusted for changes in income or loss that resulted from the assumed conversion of convertible shares, by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.
The Company had 106,509 shares of common stock equivalents at September 30, 2013 (a $150,000 convertible note at a conversion price that is the lesser of (i) 65% of the average of the three lowest closing bid prices of the Common Stock during a period of 15 trading days prior to the conversion or (ii) $5.00 – at September 30, 2013, the rate was calculated to be $1.4083).
Income Taxes
The Company accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. 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.
CodeSmart Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
The Company adopted section 740-10-25 of the FASB Accounting Standards Codification (“Section 740-10-25”). Section 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under Section 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Section 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying consolidated balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its consolidated balance sheets and provides valuation allowances as management deems necessary.
Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
The Company did not take any uncertain tax positions and had no adjustments to its income tax liabilities or benefits pursuant to the provisions of Section 740-10-25 for the interim period ended September 30, 2013.
Cash Flows Reporting
The Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, which classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (the “Indirect Method”) as defined by paragraph 230-10-45-25 of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments.
Recently Issued Accounting Pronouncements
In March 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-05, Foreign Currency Matters (Topic 830), Parent’s Accounting for the Cumulative Translation Adjustment Upon Derecognition of Certain Subsidiaries or Groups of Assets Within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”). ASU 2013-05 resolves diversity in practice related to financial reporting involving a parent entity’s accounting for the cumulative translation adjustment of foreign currency into net income upon derecognition of a foreign subsidiary or group of assets. ASU 2013-05 clarifies that the sale of an investment in a foreign entity includes, (i) events that result in the loss of a controlling financial interest in a foreign entity and (ii) events that result in an acquirer’s obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date, otherwise known as a step acquisition. Upon the occurrence of these events, the cumulative translation adjustment should be released into net income. ASU 2013-05 is effective for fiscal years and interim periods beginning after December 15, 2014. The Partnership does not expect the adoption of ASU 2013-05 to impact its financial position or its results of operations.
CodeSmart Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
In March 2013, the FASB issued ASU 2013-07, “Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting.” The amendments require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation is imminent when the likelihood is remote that the entity will return from liquidation and either (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties or (b) a plan for liquidation is being imposed by other forces (for example, involuntary bankruptcy). If a plan for liquidation was specified in the entity’s governing documents from the entity’s inception (for example, limited-life entities), the entity should apply the liquidation basis of accounting only if the approved plan for liquidation differs from the plan for liquidation that was specified at the entity’s inception. The amendments require financial statements prepared using the liquidation basis of accounting to present relevant information about an entity’s expected resources in liquidation by measuring and presenting assets at the amount of the expected cash proceeds from liquidation. The entity should include in its presentation of assets any items it had not previously recognized under U.S.GAAP but that it expects to either sell in liquidation or use in settling liabilities (for example, trademarks). The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. Entities should apply the requirements prospectively from the day that liquidation becomes imminent. Early adoption is permitted.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
Note 3 Property and Equipment
Property and equipment stated at cost, less accumulated depreciation and amortization, consisted of the following:
| |
|
September 30, 2013
|
|
Estimated
Useful Life
|
|
Computer equipment
|
|
$
|
5,000
|
|
3 years
|
| |
|
|
5,000
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(694
|
)
|
|
| |
|
$
|
4,306
|
|
|
Depreciation expense for the three and nine months ended September 30, 2013 was $416 and $694, respectively.
Note 4 Secured Convertible Promissory Notes
On April 15, 2013, CodeSmart sold and issued a secured convertible promissory note (the “Note”) in the amount of $140,000. The note bore interest of 10% and was due 90 days from the issuance date. The note and accrued interest were convertible at the option of the holder into shares of the common stock of the Company or the entity with which the Company consummates a merger or business combination at the conversion price of 100% of the per share price of the first private placement of the securities of the Acquirer, subject to potential ratchet adjustments. The Company evaluated the ratchet provision and concluded that derivative accounting applied.
On July 10, 2013, the holder of this note elected to convert all of the outstanding principal and accrued interest of this note into 179,180 shares of Common Stock of the Company.
On April 24, 2013, CodeSmart sold and issued a secured convertible promissory note in the amount of $110,000. The note bore interest of 10% and was due 90 days from the issuance date. The note and accrued interest were convertible at the option of the holder into shares of the common stock of the Acquirer at the conversion price of 100% of the per share price of the first private placement of the securities of the Company, subject to potential ratchet adjustments. The Company evaluated the ratchet provision and concluded that derivative accounting applied.
CodeSmart Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
On June 14, 2013, the holder of this note elected to convert all of the outstanding principal and accrued interest of this note into 139,448 shares of Common Stock of the Company.
On August 29, 2013, the Company consummated a private placement of a convertible debenture (the “Debenture”) in the principal amount of $150,000. The Debenture is for a term of one year and accrues interest at an annual rate of 8%. The Debenture may be converted, at the option of the holder, into shares of the Company’s common stock, par value $.0001 (“Common Stock”) at a conversion price that is the lesser of (i) 65% of the average of the three lowest closing bid prices of the Common Stock during a period of 15 trading days prior to the conversion or (ii) $5.00. The Company paid $12,000 or 8% of the raise as an issuance cost. The issuance cost is being amortized over the life of debenture. For the three and nine months ended September 30, 2013, the Company expensed $1,052 as interest expense, respectively.
Note 5 Stockholders’ Equity
(A) Common Stock Transactions
The following were Common Stock issuances during the period January 1, 2013 through September 30, 2013:
On May 3, 2013, the Company issued two founders of the Company 2,887,500 shares of the Company’s Common Stock. The Company valued these shares at $0.80 per share or $2,310,000. The Company concluded that $0.80 per share was the best indicator of fair value because the Company sold shares at $0.80 per share through a private placement of public equity (“PIPE”) on May 3, 2013.
On May 3, 2013, the Company issued employees and key consultants 864,168 shares of the Company’s Common Stock. The Company recorded a charge of $691,334 or $0.80 per share. The Company concluded that $0.80 per share was the best indicator of fair value because the Company sold shares at $0.80 per share through a private placement of public equity (“PIPE”) on May 3, 2013.
As part of the reverse merger, the legal acquirer maintained 6,000,000 shares of the Company’s Common Stock. For the purchase price of $231,000, the outstanding restricted block of the Company’s Common Stock acquired from the previous controlling shareholder was cancelled.
During the nine months ended September 30, 2013, the Company sold a total 2,469,121 shares of Common Stock to various investors for prices ranging from $0.80 per share to $1.50 per share.
On June 14, 2013, a secured convertible note issued by CodeSmart NV with principal and interest of $111,537 was converted into 139,448 shares of the Company’s Common Stock.
On July 10, 2013, the holder of a secured promissory note issued by CodeSmart elected to convert all of the outstanding principal and accrued interest of such note into 179,180 shares of Common Stock of the Company.
During the nine months ended September 30, 2013, the Company issued 434,467 shares of the Company’s Common Stock for issuance fees in association with the Company’s capital raises. The Company recorded $1,357,260 in stock issuance costs. The shares were valued using the Company’s closing share price on the Over the Counter Bulletin Board. The values per share ranged from $2.53 to $3.17.
During the nine months ended September 30, 2013, the Company issued 44,964 shares of the Company’s Common Stock to a consultant of the Company for services rendered. The Company recorded a charge of $297,212. The shares were valued using the Company’s closing share price on the Over the Counter Bulletin Board. The value per share was $6.61.
During the three months ended September 30, 2013, the Company issued 375,000 shares of the Company’s Common Stock to a consultant of the Company for services rendered. The Company recorded a charge of $1,087,500. The shares were valued using the Company’s closing share price on the Over the Counter Bulletin Board. The value per share was $2.90.
CodeSmart Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note 6 Non-controlling Interest and Dividend Paid
In connection with the reverse acquisition disclosed in Note 1, one shareholder who owned 31.94% of the CodeSmart common shareholders did not participate in the exchange of their shares of CodeSmart Common Stock for shares of Common Stock of the Company as disclosed in Note 1. That shareholder was recognized as a non-controlling interest in the Company’s condensed consolidated financial statements in accordance with FASB ACS 805-40-25-2.
On August 20, 2013, the Company entered into and consummated a transaction pursuant to a Share Exchange Agreement whereby (i) the Company issued to Kovens an aggregate of 2,808,000 shares of the Company’s Common Stock, par value $.0001 and (ii) the Company paid Kovens a cash dividend of $1,350,000 in exchange for the 31.94% of equity interests in the Company. As a result of the Share Exchange Transaction, the subsidiary is now 100% fully owned and a non-controlling interest is no longer presented.
The assets, liabilities and operations underlying the shares of CodeSmart and the Company were identical. However, the shares representing ownership of the Company reflected the combination of current Company shares and former non-controlling interest shares of CodeSmart.
In accordance with ASC 810-10, the Company recorded a dividend in the amount of $6,207,840 which comprised of $4,857,840, (representing the change in fair value for the 2,808,000 shares of the Company Common Stock from May 3, 2013, date of reverse merger, to August 20, 2013, date of the issuance), and a cash payment of $1,350,000.
Below is a detailed calculation of the total value of the dividend:
|
Cash paid for non-controlling interest
|
|
|
|
|
$ |
1,350,000 |
|
|
Fair value of the 2,808,000 common shares issued for non-controlling interest on August 20, 2013 at a value of $2.53 per share, the closing share price on the Over the Counter Bulletin Board
|
|
$ |
7,104,240 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Fair value of the 2,808,000 common shares issued for non-controlling interest on May 3, 2013 at a value of $0.80 per share, the per share value on the date of the reverse merger
|
|
$ |
2,246,400 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Excess fair market value of common stock issued on August 20, 2013 as compared to the non-controlling interest value on May 3, 2013
|
|
|
|
|
|
|
4,857,840 |
|
|
Total dividend
|
|
|
|
|
|
$ |
6,207,840 |
|
CodeSmart Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note 7 Commitments and Contingencies
Litigations, Claims and Assessments
From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business. The Company is currently not aware of any such legal proceedings or claims that they believe will have, individually or in the aggregate, a material adverse effect on its business, financial condition or operating results.
Note 8 Subsequent Event
On October 31, 2013, the Company consummated and closed a share exchange transaction with Jasper Group Holdings, Inc. (“Jasper”) pursuant to a Share Exchange Agreement dated October 7, 2013 and amended as of October 31, 2013 (the “Jasper Share Exchange Agreement,” such transaction referred to as the “Jasper Share Exchange Transaction”), whereby (i) the Company received 1,106,678 shares of Jasper’s common stock, par value $0.001 (“Jasper Common Stock”), which will constitute 10% of the outstanding shares of Jasper on a fully-diluted basis; and (ii) in consideration of the Jasper Common Stock, the Company issued to Jasper a total of 400,000 shares of the Company’s Common Stock subject to potential adjustments. The Company intends to account for its investment under the equity method and will record its proportionate share of net income as gain or loss. The Company valued the investment at approximately $940,000 (400,000 shares at $2.35 per share on October 31, 2013). On October 18, 2013, BC Eagle LLC (“BC Eagle”) received a total of 25,000 shares of Common Stock in consideration for its digital brand management services to the Company pursuant to a letter proposal dated October 11, 2013.
On October 18, 2013, BC Eagle LLC (“BC Eagle”) received a total of 25,000 shares of Common Stock in consideration for its digital brand management services to the Company pursuant to a letter proposal dated October 11, 2013.
On October 18, 2013, Sonoma Med Leasing, LP (“Sonoma”) received a total of 750,000 shares of Common Stock in consideration for Sonoma’s investor relations consulting and advisory services to the Company pursuant to an IR Consulting Agreement entered between the Company and Sonoma, dated October 17, 2013.
On October 18, 2013, Max Kahn received a total of 67,500 shares of Common Stock in consideration for Mr. Kahn’s business development consulting and advisory services to the Company pursuant to a Business Development Consulting Agreement entered between the Company and Max Kahn, dated October 18, 2013.
On October 29, 2013, the Company issued to a total of 30,000 shares of Common Stock to Lucosky Brookman, LLP and its designees as compensation for its past legal services to the Company pursuant to an engagement agreement between CodeSmart NV and Lucosky Brookman, LLP dated March 12, 2013.
On November 18, 2013, the Company entered into a Common Stock Financing Term Sheet with AGA III Capital LLC (“AGA”). The Company agreed to issue and sell up to 1,200,000 shares of the Company’s Common Stock at $1.25 per share for proceeds of up to $1,500,000 in tranches with first tranche of $300,000 expected to close on or before November 22, 2013, a second tranche of $300,000 on or before December 1, 2013, and an additional $900,000 on or before December 30, 2013. On November 25, 2013, both parties agreed to terminate the term sheet.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements that involve known and unknown risks, significant uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, or implied, by those forward-looking statements. You can identify forward-looking statements by the use of the words may, will, should, could, expects, plans, anticipates, believes, estimates, predicts, intends, potential, proposed, or continue or the negative of those terms. These statements are only predictions. In evaluating these statements, you should consider various factors which may cause our actual results to differ materially from any forward-looking statements. Although we believe that the exceptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Plan of Operations
The Company plans to implement operations and reaching their goals and objectives by hiring talented people to play key roles throughout the organization. The Company utilizes a hiring process with a long term successful track record. It has a philosophy in hiring the best talent along with a strong branding and marketing campaign. The marketing campaign will be multifaceted and include a very aggressive direct marketing campaign along with building strong distribution partnerships as it has already begun to do. The majority of the funds received in offerings of the Company's securities will be put into marketing, branding, and sales activities along with operational support activities. The success of the Company is directly related to the money to be spent on marketing and sales campaigns and support. Building a national brand and creating market awareness will be critical. Supporting sales and customers will also be important from an operational perspective.
Results of Operations for the three months ended September 30, 2013
Revenue and Gross Profit
During the three months ended September 30, 2013, the Company earned $137,804 in "instructional" revenue. The Company incurred $113,852 in costs associated with earning the revenue. In addition, the Company earned $81,814 in consulting revenue for ICD-10 implementation and analysis.
Operating Expenses
Operating expenses for the three months ended September 30, 2013 consisted primarily of compensation and benefits in the amount of $429,582, professional fees totaling $1,676,216 (which included share-based compensation of $1,384,712), as well as advertising and promotion of $101,618.
Loss from Operations
Loss from operations for the three months ended September 30, 2013 was $2,317,215. The loss was primarily attributable to the general and administrative expenses as detailed above.
Net Loss
Net loss from operations for the three months ended September 30, 2013 was $2,402,244. The net loss was primarily attributable to the operating expenses as detailed above offset by gross profits earned from tuition and consulting revenue.
During the three months ended September 30, 2013, the Company issued to a non-controlling interest holder of CodeSmart NV a dividend of $6,207,840, including a cash portion of $1,350,000, to convert his non-controlling interest in CodeSmart NV into shares of the Company’s common stock, enabling the Company to own 100% of the operating subsidiary, CodeSmart NV. In addition, the Company sold a convertible debenture for $150,000 during the three months ended September 30, 2013. The convertible debenture contained embedded features that the Company had to bifurcate and account for at fair value. On the date of issuance, the Company recorded a derivative expense of $242,425. As of September 30, 2013, the Company re-valued all derivative instruments and recorded a gain of $178,990.
Inflation did not have a material impact on the Company’s operations for the period. Other than the foregoing, management knows of no trends, demands, or uncertainties that are reasonably likely to have a material impact on the Company’s results of operations.
Results of Operations for the nine months ended September 30, 2013
Revenue and Gross Profit
During the nine months ended September 30, 2013, the Company earned $169,561 in "instructional" revenue. The Company incurred $133,550 in costs associated with earning the revenue. In addition, the Company earned $81,814 in consulting revenue for ICD-10 implementation and analysis.
Operating Expenses
Operating expenses for the nine months ended September 30, 2013 consisted primarily of compensation and benefits in the amount of $3,024,858, professional fees totaling $2,547,766 (which includes share-based compensation of $4,386,046), as well as advertising and promotion of $221,303.
Loss from Operations
Loss from operations for the nine months ended September 30, 2013 was $5,962,280. The loss was primarily attributable to the general and administrative expenses as detailed above offset by gross profits earned from tuition and consulting revenue.
Net Loss
Net loss from operations for the nine months ended September 30, 2013 was $7,618,927. The net loss was primarily attributable to the operating expenses as detailed above offset by minimal tuition revenue.
During the nine months ended September 30, 2013, the Company issued the non-controlling interest holder of CodeSmart NV a dividend of $6,207,840, including a cash portion of $1,350,000, to convert his non-controlling interest in CodeSmart NV into shares of the Company’s Common Stock, enabling the Company to own 100% of the operating subsidiary, CodeSmart NV. In addition, the Company sold a convertible debenture for $150,000 during the nine months ended September 30, 2013 and CodeSmart NV sold two convertible notes for $250,000 during the nine months ended September 30, 2013, all of which were converted into a total of 318,628 shares of the Company’s Common Stock in July 2013. The outstanding convertible debenture of the Company contained embedded features that the Company had to bifurcate and account for at fair value. On the date of issuance, the Company recorded a derivative expense of $242,425. During the nine months ended September 30, 2013, the Company re-valued all derivative instruments and recorded a loss of $1,310,197.
Inflation did not have a material impact on the Company’s operations for the period. Other than the foregoing, management knows of no trends, demands, or uncertainties that are reasonably likely to have a material impact on the Company’s results of operations.
Capital Resources and Liquidity
The following table summarizes total current assets, liabilities and working capital at September 30, 2013.
| |
|
September 30, 2013
|
|
|
Current Assets
|
|
$
|
877,261
|
|
|
Current Liabilities
|
|
$
|
397,598
|
|
|
Working Capital Deficit Surplus
|
|
$
|
479,663
|
|
At September 30, 2013, we had a working capital surplus of $479,663. The Company has recently commenced commercialization of its products, and recorded $251,375 and $219,618, respectively of earned revenue for the three and nine months ended September 30, 2013.
Net cash used for operating activities for the nine months ended September 30, 2013 was $1,617,878. The net loss for the nine months ended September 30, 2013 was $7,618,927. Cash used in operating activities was primarily for compensation, professional fees and marketing and advertising.
Net cash obtained through all financing activities for the nine months ended September 30, 2013 was $2,271,302. This consisted of $3,464,302 in proceeds from the sale and issuance of common stock, $400,000 in sale and issuance of secured convertible notes and offset by a $231,000 payment to cancel the outstanding shares of the predecessor’s restricted block of common stock outstanding. An additional offset to the above, the Company issued the non-controlling interest holder a dividend of $6,207,840, including a cash portion of $1,350,000, to convert his non-controlling interest in the Company’s Subsidiary into shares of the Company’s common stock, enabling the Company to own 100% of the operating subsidiary.
Financings
On April 15, 2013, CodeSmart NV sold and issued a secured convertible promissory note with principal in the amount of $140,000. The note bears interest of 10% and is due 90 days from the issuance date. On July 10, 2013, the note and accrued interest was converted at the option of the holder into 179,180 shares of the Common Stock of the Company at the conversion price of $0.80 per share price. The Company evaluated the ratchet provision and concluded that derivative accounting applies.
On April 24, 2013, CodeSmart NV sold and issued a secured convertible promissory note with principal in the amount of $110,000. The note bears interest of 10% and is due 90 days from the issuance date. On June 14, 2013, the note and accrued interest was converted at the option of the holder into 139,448 shares of Common Stock of the Company at the conversion price of $0.80 per share. The Company evaluated the ratchet provision and concluded that derivative accounting applies.
On August 29, 2013, the Company consummated a private placement of its convertible debenture (the “Debenture”) in the principal amount of $150,000. The Debenture is of a term of one year and will accrue at an annual interest rate of 8%. The Debenture may be converted, at the option of the holder, into shares of the Company’s common stock, par value $.0001 (“Common Stock”) at a conversion price that is the lesser of (i) 65% of the average of the three lowest closing bid prices of the Common Stock during a period of 15 trading days prior to the conversion or (ii) $5.00. The Company paid $12,000 or 8% of the raise to a finder as an issuance cost. The issuance cost is being amortized over the life of debenture. For the three and nine months ended September 30, 2013, the Company expensed $1,052 to interest expense, respectively.
On January 13, 2013, CodeSmart NV sold 18,750 shares of CodeSmart NV common stock for proceeds of $25,000, at $1.33/share.
During the nine months ended September 30, 2013, the Company sold a total 2,469,121 shares of Common Stock to various investors for prices ranging from $0.80 per share to $1.50 per share.
Going Concern
The financial statements have been prepared on the going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of operations. The ability of the Company to continue its operations is dependent on Management’s plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. The Company may need to incur additional liabilities with certain related parties to sustain the Company’s existence. If the Company were not to continue as a going concern, it would likely not be able to realize on its assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of the financial statements. There can be no assurances that the Company will be successful in generating additional cash from equity or other sources to be used for operations. The financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
As reflected in the accompanying financial statements, the Company has a net loss and net cash used in operations of $(7,618,927) and $(1,617,878), respectively, for the nine months ended September 30, 2013. In addition, the Company has an accumulated deficit of $13,850,153 as of September 30, 2013.
The ability of the Company to continue its operations is dependent on Management's plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. The Company may need to incur additional liabilities with certain related parties to sustain the Company’s existence.
The Company may require additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives. The Company believes its current available cash along with anticipated revenues may be insufficient to meet its cash needs for the near future if it does not receive the anticipated additional funding. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. In that event, the Company would be required to change its growth strategy and seek funding on that basis, if at all.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
In response to the above, management will:
| |
●
|
seek additional third party debt and/or equity financing;
|
| |
●
|
continue with the implementation of the business plan;
|
| |
●
|
increase revenue commercialization of the technology.
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To date all of our funding has been generated from private investments. During the next twelve months we anticipate raising funding to continue expansion; however as of the date of this Report we only have sufficient funds to proceed with basic company operations only. We do not have sufficient funds to fully implement our business plan until such time that we are able to raise additional funds, to which there is no guarantee. If we do not obtain the funds necessary for us to continue our business activities we may need to curtail or cease our operations until such time as we have sufficient funds.
Material Recent Events
On October 31, 2013, the Company consummated and closed a share exchange transaction with Jasper Group Holdings, Inc. (“Jasper”) pursuant to a Share Exchange Agreement dated October 7, 2013 and amended as of October 31, 2013 (the “Jasper Share Exchange Agreement,” such transaction referred to as the “ Jasper Share Exchange Transaction”), whereby (i) the Company received 1,106,678 shares of Jasper’s common stock, par value $0.001 (“Jasper Common Stock”), which will constitute 10% of the outstanding shares of Jasper on a fully-diluted basis; and (ii) in consideration of the Jasper Common Stock, the Company issued to Jasper a total of 400,000 shares of the Company’s Common Stock subject to potential adjustments. The Company intends to account for its investment under the equity method and will record its proportionate share of net income as gain or loss. The Company valued the investment at approximately $940,000 (400,000 shares at $2.35 per share on October 31, 2013),
Recent Accounting Pronouncements
There are no recent accounting pronouncements that are expected to have an effect on the Company’s financial statements.
Critical Accounting Policies
Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Our significant accounting policies are summarized in Note 2 of our financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
We believe the following critical accounting policies and procedures, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
Revenue Recognition and Deferred Revenue
Revenues will consist primarily of tuition and fees derived from courses taught by the University online as well as from related educational resources that the University provides to its students, such as access to our online materials and learning management system. Tuition revenue and most fees from related educational resources will be recognized pro-rata over the applicable period of instruction. The University will maintain an institutional tuition refund policy, which provides for all or a portion of tuition to be refunded if a student withdraws during stated refund periods. Certain States in which students reside impose separate, mandatory refund policies, which override the University’s policy to the extent in conflict. If a student withdraws at a time when a portion or none of the tuition is refundable, then in accordance with its revenue recognition policy, the University will immediately recognize as revenue the tuition that was not refunded. Since the University will recognize revenue pro-rata over the term of the course and because, under its institutional refund policy, the amount subject to refund is never greater than the amount of the revenue that has been deferred, under the University’s accounting policies revenue will not be recognized with respect to amounts that could potentially be refunded. The University will also charge students annual fees for library, technology and other services, which will be deferred and recognized over the related service period. Deferred revenue and student deposits in any period will represent the excess of tuition, fees, and other student payments received as compared to amounts recognized as revenue and will be reflected as current liabilities in the accompanying consolidated balance sheets. The University’s educational programs have starting and ending dates that differ from its fiscal quarters. Therefore, at the end of each fiscal quarter, a portion of deferred revenue from these programs is not yet earned. Other revenues may be recognized as sales occur or services are performed. The Company recognized no deferred revenue for the three and nine months ended September 30, 2013.
Instructional Costs and Services
Instructional costs and services will consist primarily of costs related to the administration and delivery of the Company’s educational programs. This expense category will include compensation for faculty and administrative personnel, costs associated with online faculty, curriculum and new program development costs, bad debt expense related to accounts receivable, financial aid processing costs, technology license costs and costs associated with other support groups that provide services directly to the students.
The Company recognized $113,852 and $133,550 in instructional costs for the three and nine months ended September 30, 2013.
Advertising and Promotional Costs
Advertising and promotional costs will include compensation of personnel engaged in marketing and recruitment, as well as costs associated with purchasing leads, producing marketing materials, and advertising. Such costs are generally affected by the cost of advertising media and leads, the efficiency of the Company’s marketing and recruiting efforts, compensation for the Company’s enrollment personnel and expenditures on advertising initiatives for new and existing academic programs. Advertising costs will consist primarily of marketing leads and other branding and promotional activities. Non-direct response advertising activities are expensed as incurred, or the first time the advertising takes place, depending on the type of advertising activity.
The Company incurred $101,618 and $221,303 in advertising and promotional costs for the three and nine months ended September 30, 2013, respectively.
Stock-based Compensation
The Company accounts for its stock based compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur. If shares of the Company are thinly traded the use of share prices established in the Company’s most recent private placement memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
The fair value of share options and similar instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions for inputs are as follows:
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Expected term of share options and similar instruments: The expected life of options and similar instruments represents the period of time the option and/or warrant are expected to be outstanding. Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification, the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and employees’ expected exercise and post-vesting employment termination behavior into the fair value (or calculated value) of the instruments. Pursuant to paragraph 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected term = ((vesting term + original contractual term) / 2), if (i) A company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded; (ii) A company significantly changes the terms of its share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term; or (iii) A company has or expects to have significant structural changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses the simplified method to calculate expected term of share options and similar instruments as the company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
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Expected volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii), a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
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Expected annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.
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Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments.
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The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.
Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of Sub-topic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).
Pursuant to ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur. If shares of the Company are thinly traded the use of share prices established in the Company’s most recent PPM, or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
The fair value of share options and similar instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions for inputs are as follows:
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Expected term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification, the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s expected exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data to estimate holder’s expected exercise behavior. If the Company is a newly formed corporation or shares of the Company are thinly traded the contractual term of the share options and similar instruments is used as the expected term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
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Expected volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii), a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
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Expected annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.
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Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments.
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Pursuant to ASC paragraph 505-50-25-7, if fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee enter into an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments), then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement is entered into). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized as contra-equity under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances. Pursuant to ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return for fully vested, non-forfeitable equity instruments that are issued at the date the grantor and grantee enter into an agreement for goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra-equity by the grantor of the equity instruments. The transferability (or lack thereof) of the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited to transactions in which equity instruments are transferred to other than employees in exchange for goods or services. Section 505-50-30 provides guidance on the determination of the measurement date for transactions that are within the scope of this Subtopic.
Pursuant to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a stock option that the counterparty has the right to exercise expires unexercised.
Pursuant to ASC paragraph 505-50-30-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should be recorded.
The Company accounts for stock-based compensation in accordance with ASC Topic 718, “Accounting for Stock-Based Compensation” established financial accounting and reporting standards for stock-based employee compensation. It defines a fair value based method of accounting for an employee stock option or similar equity instrument. The Company accounts for compensation cost for stock option plans in accordance with ASC 718. The Company accounts for share based payments to non-employees in accordance with ASC 505-50 “Accounting for Equity Instruments Issued to Non-Employees for Acquiring, or in Conjunction with Selling, Goods or Services”.
The Company recognizes all forms of share-based payments, including stock option grants, warrants and restricted stock grants, at their fair value on the grant date, which are based on the estimated number of awards that are ultimately expected to vest.
Off Balance Sheet Arrangements:
We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).