| 3. RESTATEMENT |
During
the audit for the year ended December 31, 2013, it was determined that the previously issued financial statements for the three
months ended March 31, 2013 required corrections for errors described below:
|
a) |
The
financial statements for the three months ended March 31, 2013 recognized revenue and
accounts receivable of $192,625 and cost of goods sold of $296,050 that should not have
been recognized. Revenues and accounts receivable in the amount of $192,625 related to
the sales value of inventory that was transferred to a manufacturer for inclusion in
finished goods and an error in calculating the price of the ending inventory as of the
end of the period. Cost of goods sold in the amount of $296,050 related to the cost of
inventory sent for manufacturing in the amount of $39,865 being included in cost of goods
sold and $256,185 relating to errors related to calculating ending inventory. |
|
b) |
Not
all of the prepaid inventory purchased as part of the PhytoSPHERE Transaction in the
amount of $1,260,510 was included in the financial statements as of March 31, 2013. This
resulted in an overstatement of intangible assets and an understatement of prepaid inventory
for the period. Prepaid inventory represents the amount of inventory purchased but not
yet received prior to closing the Transaction, the rights to receive the inventory and
subsequent receipt of inventory transferred to the Company upon closing of the Transaction. |
|
c) |
Amortization
expense as reported in the financial statements for the three months ended March 31,
2013, in the amount of $378,167, was in error. Based on the restated value of assets
purchased from PhytoSPHERE, intangible assets totaled $4,110,000. Restated amortization
on those assets for the three months ended March 31, 2013, is $137,000, representing
a decrease of $241,167 for the period. This resulted in an overstatement of amortization
expense and operating expenses of $241,167. |
|
d) |
Intangible
assets as presented in the financial statements as of March 31, 2013 were in error. The
financial statements previously included $34,045,000 of intangible assets acquired in
connection with the PhytoSPHERE Transaction, which were labeled as goodwill on the statement
of cash flows and classified as intangible assets on the balance sheet. As determined
by the valuation of the assets purchased under the PhytoSPHERE Agreement, intangible
assets totaled $4,110,000 and goodwill totaled $1,855,512. The effect of this error resulted
in overstatement of intangible assets of $28,079,488. |
|
e) |
The
amount previously reported as due to PhytoSPHERE pursuant to the Agreement as of March
31, 2013 was reported as $30,500,000. This was calculated based on a Transaction amount
of $35,000,000 and a set per share price between $4.50 and $6.00 under the Agreement.
In reviewing the price that the Company’s common stock was trading at during the
year, subsequent to March 31, 2013, management determined that using a per share price
to value the Transaction may not represent a true measure of the fair market value of
the Transaction and that obtaining a valuation of the assets purchased from PhytoSPHERE
would be required in order to determine the fair market value of the business acquired.
Accordingly, management determined that the valuation of $8,020,000 represented a more
reliable measure of the fair value of the Transaction. As a result of that valuation,
the per share price for shares of common stock issued to PhytoSPHERE was adjusted to
$1.21 to reflect the revised value of the Transaction. Accordingly, the amount recorded
upon issuance of the shares of common stock to PhytoSPHERE and the total amount due to
PhytoSPHERE was adjusted to reflect the value of the Transaction. As a result, the amount
shown as due to PhytoSPHERE was overstated by $23,572,360. Further, the value of the
shares of common stock issued through March 31, 2013 to PhytoSPHERE was overstated by
$3,407,640. |
|
f) |
Inventory
as originally reported in the financial statements as of March 31, 2013, was understated
by $125,027. This was a result of an overstatement of cost of goods sold in the amount
of $296,050, offset by an adjustment for the value of inventory acquired from PhytoSPHERE
in the amount of $171,023. |
The
effect of these adjustments on the condensed balance sheet as of March 31, 2013 is summarized below (the letters included in brackets
below refer to the lettered paragraphs above):
| |
|
As
previously reported |
|
|
Adjustment |
|
|
As
restated |
|
| Accounts receivable (a) |
|
$ |
1,671,438 |
|
|
$ |
(192,625 |
) |
|
$ |
1,478,813 |
|
| Prepaid inventory (b) |
|
|
194,206 |
|
|
|
1,260,510 |
|
|
|
1,454,716 |
|
| Inventory (a) (f) |
|
|
725,000 |
|
|
|
125,027 |
|
|
|
850,027 |
|
| Intangible assets (net) (c) (d) |
|
|
33,656,833 |
|
|
|
(29,683,833 |
) |
|
|
3,973,000 |
|
| Goodwill (d) |
|
|
– |
|
|
|
1,855,512 |
|
|
|
1,855,512 |
|
| Amount due under the PhytoSPHERE Agreement (e) |
|
|
30,500,000 |
|
|
|
(23,572,360 |
) |
|
|
6,927,640 |
|
| Additional paid in capital (e) |
|
|
4,643,357 |
|
|
|
(3,407,640 |
) |
|
|
1,235,717 |
|
| Retained earnings (a) (c) |
|
|
193,725 |
|
|
|
344,592 |
|
|
|
538,317 |
|
The effect of theses adjustments on the condensed statement of operations for the three months ended March 31, 2013 is as follows:
| |
|
As
previously reported |
|
|
Adjustment |
|
|
As
restated |
|
| Revenue (a) |
|
$ |
1,275,000 |
|
|
$ |
(192,625 |
) |
|
$ |
1,082,375 |
|
| Cost of goods sold (a) |
|
|
501,500 |
|
|
|
(296,050 |
) |
|
|
205,450 |
|
| General and administrative expenses (c) |
|
|
435,559 |
|
|
|
(241,167 |
) |
|
|
194,392 |
|
| Net income (a) (c) |
|
|
337,941 |
|
|
|
344,592 |
|
|
|
682,533 |
|
| Earnings per share (a) (c) |
|
|
0.04 |
|
|
|
0.05 |
|
|
|
0.09 |
|
The effect of theses
adjustments on the condensed statement of cash flows for the three months ended March 31, 2013 is as follows:
| |
|
As
previously reported |
|
|
Adjustment |
|
|
As
restated |
|
| Net income (a) (c) |
|
$ |
337,941 |
|
|
$ |
344,592 |
|
|
$ |
682,533 |
|
| Amortization expense (c) |
|
|
378,167 |
|
|
|
(241,167 |
) |
|
|
137,000 |
|
| Prepaid inventory (b) |
|
|
– |
|
|
|
(194,206 |
) |
|
|
(194,206 |
) |
| Inventory (a) (f) |
|
|
(402,707 |
) |
|
|
(101,843 |
) |
|
|
(504,550 |
) |
| Accounts receivable (a) |
|
|
(1,275,000 |
) |
|
|
192,625 |
|
|
|
(1,082,375 |
) |
|