Basis of Presentation and Summary of Significant Accounting Policies
|12 Months Ended|
Dec. 31, 2015
|Basis of Presentation and Summary of Significant Accounting Policies||
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation - These consolidated financial statements and related notes are presented in accordance with the accounting principles generally accepted in the United States (U.S. GAAP) and are expressed in U.S. dollars. The Companys consolidated financial statements include Dr. Pave, LLC and Dr. Pave Worldwide, LLC; both wholly-owned subsidiaries of the Company, which are represented in the Companys discontinued operations (Note 7). All intercompany balances and transactions have been eliminated in the consolidated financial statements.
Going Concern and Managements Plan - The Companys financial statements are prepared using U.S. GAAP and are subject to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company faces certain risks and uncertainties that are present in many emerging companies regarding product development, future profitability, ability to obtain future capital, protection of patents and property rights, competition, rapid technological change, government regulations, recruiting and retaining key personnel, and third party manufacturing organizations.
The Company has previously relied exclusively on private placements with a small group of investors to finance its business and operations. The Company has had little revenue since inception. For the year ended December 31, 2015, the Company incurred a net loss from continuing operations of approximately $2,982,920 and used approximately $639,500 in net cash from operating activities from continuing operations and approximately $231,356 in net cash from operating activities from discontinued operations. The Company had total cash on hand including cash from discontinued operations of approximately $14,000 as of December 31, 2015. The Company is not able to obtain additional financing adequate to fulfill its commercialization activities, nor achieve a level of revenues adequate to support the Companys cost structure. The Company does not currently have any revenue under contract nor does it have any immediate sales prospects. The Company has significantly reduced employees and overhead. The decision to cease operations of Dr. Pave, LLC and Dr. Pave Worldwide, LLC was made on December 31, 2015. These business components are captured within discontinued operations as of December 31, 2015 (Note 7). The Company has significantly scaled back operations to maintain only a minimal level of operations necessary to support our licensee, warehouse the equipment held for the licensee and look for potential merger candidates. It is the Companys intention to move forward as a public entity and to seek potential merger candidates. If the Company fails to merge or be acquired by another company, we will be required to terminate all operations.
During the year ended December 31, 2015, the Company received cash in the aggregate of $753,000 and converted a $160,000 secured note plus accrued interest and a $20,000 unsecured note into the $2,000,000 senior secured debt offering commenced in February 2015. Based upon the Companys current financial position and inability to obtain additional financing, the Company was not be able to satisfy the mandatory principal payments in 2015 under the $2,000,000 senior secured debt. The Company will continue to work with the lenders to explore extension or conversion options, but there is no guarantee the lenders will agree to modify the repayment terms of the notes under conditions that will allow the Company to continue to repay the notes, if at all. As these notes are secured by all of the assets of the Company, including intellectual property rights, the Company is in default in regards to interest payments on the notes, and the lenders may call the notes and foreclose on the Companys assets.
The issues described above raise substantial doubt about the Companys ability to continue as a going concern. The Company has been solely reliant on raising debt and capital in order to maintain its operations. Previously the Company was able to raise debt and equity financing through the assistance of a small number of investors who have been substantial participants in its debt and equity offerings since the Companys formation. These investors have chosen not to further assist the Company with its capital raising initiatives and, at this time, the Company is not able to obtain any alternative forms of financing and the Company will not be able to continue to satisfy its current or long term obligations. The Company needs to merge with or be acquired by another company. If a candidate is not identified, the Company will be forced to cease operations all together.
The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be different should the Company be unable to continue as a going concern.
Use of Estimates - The preparation of financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions by management that affect reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are continuously evaluated and are based on managements experience and knowledge of the relevant facts and circumstances. While management believes the estimates to be reasonable, actual results could differ materially from those estimates and could impact future results of operations and cash flows.
Cash and Cash Equivalents - The Company considers all highly liquid investments with a maturity at the date of purchase of three months or less to be cash equivalents. The Company had no cash equivalents at December 31, 2015. At times, the Company may have cash balances in excess of the Federal Deposit Insurance Corporation (FDIC) insured limits of up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk. As of December 31, 2015, none of the Companys accounts exceeded the FDIC insured limits.
Accounts Receivable and Bad Debt Expense - Management reviews individual accounts receivable balances that exceed 90 days from the invoice date. Based on an assessment of current creditworthiness of the customer, the Company estimates the portion, if any, of the balance that will not be collected. All accounts deemed to be uncollectible are written off to operating expense. The Company recognized bad debt expense in the amount of $5,148 during the year ended December 31, 2015; there was no bad debt expense during December 31, 2014. There was no allowance for uncollectible accounts for the years ended December 31, 2015 and 2014.
Inventories - The Companys finished goods and materials and supplies inventories are recorded at lower of cost or net realizable value. Cost is determined by using the FIFO (first-in, first-out) inventory method.
Equipment - Equipment is stated at cost and consists of office and computer equipment depreciated on a straight line basis over an estimated useful life of three years, and process demonstration equipment (demo equipment) depreciated on a straight line basis over an estimated useful life of seven years. Maintenance and repairs are charged to expense as incurred.
Assets held for sale - In efforts to streamline the operations and expenses the Company has opted to sell or return certain assets to improve cash flow or settle debt. The assets are expected to be sold within the next 12 months and meet the other relevant held-for-sale criteria are classified as long-lived assets held-for-sale and measured at their fair value based on the Companys own judgments about assumptions that market participants would use in pricing the asset and on observable market data, when available. An impairment loss is recorded in the statement of operations for long-lived assets held-for-sale when the carrying amount of the asset exceeds its fair value less cost to sell. A long-lived asset is not depreciated while it is classified as held-for-sale.
Impairment of Long-lived Assets - The Company periodically reviews its long-lived assets to determine potential impairment by comparing the carrying value of the long-lived assets with the estimated future net undiscounted cash flows expected to result from the use of the assets, including cash flows from disposition, at least annually or more frequently if events or changes in circumstances indicate a potential impairment may exist. Should the sum of the expected future net cash flows be less than the carrying value, the Company would recognize an impairment loss at that date. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value (estimated discounted future cash flows) of the long-lived assets. The Company performs its impairment analysis in October of each year. The Company recognized an impairment of $1,517,859 on intangible assets related to the asset purchase agreement. (Note 5)
Goodwill - The Company recognizes goodwill as the excess purchase price paid after allocation to the identifiable assets and liabilities based on their estimated fair value. The Company assesses the carrying amount of goodwill for impairment annually, or more frequent if an event occurs or circumstances changes that would more likely than not reduce the fair value below its carrying value. During 2014, the Company recognized an immediate impairment on the goodwill acquired in the purchase of Dr. Pave, LLC, in the amount of $390,659. No such impairment was recognized during the year ended December 31, 2015.
Intangible Assets - Intangible assets consisted of developed technology acquired as part of an acquisition, which was deemed in-process research and development upon acquisition. During development, in-process research and development is not subject to amortization and is tested for impairment. In October 2012, the in-process research and development was reclassified as developed technology. The Companys developed technology was amortized over its estimated useful life of seven years. Based on the Companys financial position and substantial doubt about the Companys ability to continue as a going concern, the Company has chosen to estimate future cash flows at zero. The Company recognized an impairment of $1,517,859 during the second quarter of 2015.
Debt Discount - The Company recognizes the fair value of detachable warrants issued in conjunction with a debt instrument as debt discount. The discount is amortized using the interest method over the life of the notes. The amortization of the discount was $58,801 and $153,617 for the years ended December 31, 2015 and 2014, respectively.
Extinguishment of Debt - The Company recognizes any difference between the reacquisition price of debt and the net carrying amount of the extinguished debt in income of the period of the extinguishment as gains or losses. The Company recognized a loss of $822,205 on the extinguishment of unsecured notes payable during the year ended December 31, 2014.
Stock-Based Compensation - The Company accounts for the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award, determined on the date of grant. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award. The Company estimates forfeitures at the time of grant and makes revisions, if necessary, at each reporting period if actual forfeitures differ from those estimates. The Company estimated future unvested forfeitures at 25% and 0% for the years ended December 31, 2015 and 2014, respectively.
Advertising Expense - The Company charges advertising costs to expense as incurred. Advertising costs were $25,431 and $114,417 from continuing operations for the year ended December 31, 2015 and 2014, respectively.
Income Taxes - The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
The provision for income taxes includes federal and state income taxes currently payable and deferred taxes resulting from temporary differences between the financial statement and tax basis of assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets when it is more-likely-than-not that a tax benefit will not be realized.
With respect to uncertain tax positions, the Company would recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The Company had no unrecognized tax benefits or uncertain tax positions at December 31, 2015 or 2014.
Compensated absences - For the years ended December 31, 2015 and 2014, the Company recorded a liability for paid time off earned by permanent employees but not taken, in accordance with human resource policies.
Research and development - Research and development costs are expensed as incurred and consist of direct and overhead-related expenses. Expenditures to acquire technologies, including licenses, which are utilized in research and development and that have no alternative future use are expensed when incurred. Technology the Company develop for use in its products is expensed as incurred until technological feasibility has been established after which it is capitalized and depreciated.
Revenue Recognition - The Company sells its equipment (HWX-30 heater, HWX-30S mobile heater and HWX-AP-40 asphalt processor), as well as certain consumables to third parties. Equipment sales revenue is recognized when all of the following criteria are satisfied: (a) persuasive evidence of a sales arrangement exists; (b) price is fixed and determinable; (c) collectability is reasonably assured; and (d) delivery has occurred. Persuasive evidence of an arrangement and a fixed or determinable price exist once the Company receives an order or contract from a customer. The Company assesses collectability at the time of the sale and if collectability is not reasonably assured, the sale is deferred and not recognized until collectability is probable or payment is received. Typically, title and risk of ownership transfer when the equipment is shipped.
Other revenue represents consumable revenue and discounts on equipment and consumables sold.
Concentration of Supplier and Customer Risk - During the year ended December 31, 2015, the Companys asphalt repair equipment, including major components, were purchased from two primary suppliers providing an aggregate of 95% of total equipment purchases. During the same period, two customers were responsible for an aggregate of 72% of total revenues.
Reclassifications - Prior year amounts have been adjusted to reflect the current year presentation. These reclassifications had no impact on the Companys consolidated balance sheet or consolidated statements of operations or consolidated statements of cash flows.
Recent Accounting Pronouncements
ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360):
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. A public business entity and a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market should apply the ASU prospectively to both of the following:
· All disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years
· All businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years
All other entities should apply the ASU prospectively to both of the following:
· All disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015
· All businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015
ASU 2014-09, Revenue from Contracts with Customers (Topic 606):
In May 2014, the Financial Accounting Standards Board issued ASU 2014-09 - Revenue from Contracts with Customers. The Update provides a robust framework for addressing revenue recognition issues and, upon its effective date, replaces almost all existing revenue recognition guidance, including industry-specific guidance, in current U.S. generally accepted accounting principles. The revenue recognition policies of almost all entities will be affected by the new guidance in the ASU. For public business entities, the ASU, as amended, is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.
ASU 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation:
ASU 2014-10 eliminates the financial reporting distinction of being a development stage entity from U.S. GAAP. For public business entities, the amendments related to the elimination of inception-to-date information and the other remaining disclosure requirements of ASC Topic 915 are effective for annual reporting periods beginning after December 15, 2014, and interim periods therein. For other entities, the amendments are effective for annual reporting periods beginning after December 15, 2014, and interim reporting periods beginning after December 15, 2015.
ASU 2014-10 also eliminates an exception provided to development stage entities in paragraph 810-10-15-16 of the Variable Interest Entities (VIE) subsections of Subtopic 810-10 for determining whether an entity is a VIE on the basis of the amount of investment equity that is at risk. For public business entities, the amendment eliminating the exception to the sufficiency-of-equity-at-risk criterion for development stage entities in paragraph 810-10-15-16 should be applied retrospectively for annual reporting periods beginning after December 15, 2015, and interim periods therein. For all other entities, the amendments to Topic 810 should be applied retrospectively for annual reporting periods beginning after December 15, 2016, and interim reporting periods beginning after December 15, 2017.
ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern:
In August 2014, the Financial Accounting Standards Board issued ASU 2014-15 - Presentation of Financial Statements - Going Concern. The Update provides U.S. GAAP guidance on managements responsibility in evaluating whether there is substantial doubt about a companys ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a companys ability to continue as a going concern within one year from the date the financial statements are issued. The amendments in the update are effective for the annual period ending after December 15, 2016.
ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory:
In July 2015, the Financial Accounting Standards Board issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in the ASU require entities to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is defined as estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. For public entities, ASU 2015-11 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. Early adoption of ASU 2015-11 is permitted.
The entire disclosure for the basis of presentation and significant accounting policies concepts. Basis of presentation describes the underlying basis used to prepare the financial statements (for example, US Generally Accepted Accounting Principles, Other Comprehensive Basis of Accounting, IFRS). Accounting policies describe all significant accounting policies of the reporting entity.
Reference 1: http://www.xbrl.org/2003/role/presentationRef