Quarterly report pursuant to Section 13 or 15(d)

Summary of significant accounting policies

v3.5.0.2
Summary of significant accounting policies
9 Months Ended
Sep. 30, 2016
Accounting Policies [Abstract]  
Summary of significant accounting policies

Note 2 – Summary of significant accounting policies

 

Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2016, are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

 

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K filed on April 27, 2016 for the fiscal year ended December 31, 2015.

 

The accompanying unaudited consolidated financial statements include the accounts of 5BARz International Inc., and its subsidiary companies CelLynx Group Inc. (60%) and its wholly owned subsidiary CelLynx Inc. (100%), 5BARz International SA de CV (99%), 5BARz India Private Limited (99.9%), 5BARz Pte. Inc. (100%), and 5BARz Technology Holdings Inc. (100%). Results of operations for subsidiary Companies are reflected only from the date of acquisition of that subsidiary, for the period indicated in the respective statements. All intercompany accounts and transactions have been eliminated in consolidation.

 

 The Company started revenue-generating operations in the last quarter of 2015, however these activities are in early stages and still do not generate positive cash flows from operations, so the Company is dependent on debt and equity funding to finance its operations, and it is considered to be a development stage company. The Company’s activities are subject to significant risks and uncertainties, including failing to secure additional funding to commercialize the Company’s current technology and opportunities.

 

In June 2014, the Financial Accounting Standards Board issued new guidance that removed all incremental financial reporting requirements from generally accepted accounting principles in the United States for development stage entities. The Company early adopted this new guidance effective June 30, 2014, as a result of which all inception-to-date financial information and disclosures have been removed from this report.

 

Use of estimates

 

The preparation of these 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 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. Significant estimates include impairment analysis for long lived assets, income taxes, litigation and valuation of derivative instruments. Actual results could differ from those estimates.

  

Research and Development Costs

 

Research and development costs are charged to expense as incurred. The costs of materials and equipment that are acquired or constructed for research and development activities, and have alternative future uses (either in research and development, marketing or production), are classified as property and equipment and depreciated over their estimated useful lives.

 

Furniture & equipment

 

Furniture and equipment is recorded at historical cost and is depreciated using the straight-line method over their estimated useful lives.  The useful life and depreciation method are reviewed periodically to ensure that the depreciation method and period are consistent with the anticipated pattern of future economic benefits. Expenditures for maintenance and repairs are charged to operations as incurred while renewals and betterments are capitalized. Gains and losses on disposals are included in the results of operations. The furniture and equipment is being depreciated over their estimated useful life of three to seven years.

 

Inventory

 

Inventories are carried at the lower of cost and net realizable value. Cost is determined using the weighted-average method. As of September 30, 2016, in the US and India the Company held an inventory of $83,138 comprised of sub-assemblies and finished goods inventories of cellular network extenders. The Company’s inventory in Mexico included 967 units of Road Warrior cellular network extenders valued at $110,691 net of a reserve of $54,923. The Company’s inventory reserve of $54,923 is provided for slow moving or potentially obsolete items in Mexico, and is charged to cost of sales.

 

  

Goodwill and other intangible assets

 

The Company accounts for goodwill and intangible assets in accordance with the accounting guidance which requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. The Accounting Standards Codification (“Codification”) requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment). Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgment is required to estimate the fair value of reporting units which includes estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment. 

 

When testing goodwill for impairment, the Company may assess qualitative factors for some or all of its reporting units to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. Alternatively, the Company may bypass this qualitative assessment for some or all of our reporting units and perform a detailed quantitative test of impairment (step 1). If the Company performs the detailed quantitative impairment test and the carrying amount of the reporting unit exceeds its fair value, the Company would perform an analysis (step 2) to measure such impairment. In accordance with the Codification, the Company reviews the carrying value of its intangibles and other long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparing the carrying amount of the asset or asset group to the undiscounted cash flows that the asset or asset group is expected to generate. If the undiscounted cash flows of such assets are less than the carrying amount, the impairment to be recognized is measured by the amount by which the carrying amount of the asset or asset group, if any, exceeds its fair market value.

 

Long-Lived Assets Subject to Amortization

 

The Company amortizes intangible assets with finite lives over their estimated useful lives and reviews them for impairment annually or whenever impairment exists. The Company continually evaluates whether events or changes in circumstances might indicate that the remaining estimated useful life of long-lived assets may warrant revision, or that the remaining balance may not be recoverable. When factors indicate that long-lived assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted cash flows in measuring whether the long-lived asset should be written down to fair value. Measurement of the amount of impairment would be based on generally accepted valuation methodologies, as deemed appropriate. The intangible assets are being amortized over their estimated useful life of seven to ten years.  

 

There were no long-lived assets impairment charges recorded during the nine months ended September 30, 2016 and 2015.

 

Revenue recognition

 

The Company's revenue recognition policies are in compliance with ASC Topic 605, “Revenue Recognition.”  Revenue is recognized at the date of shipment to customers, and when the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured.

 

 

Foreign currency translation

 

Transactions in foreign currencies have been translated into US dollars using the current rate method. The functional currency of the Company’s subsidiary 5BARz International SA de CV, in Mexico is the local currency, the Mexican Peso, and the functional currency in the Company’s subsidiary 5BARz India Private Limited is the functional currency in India, the Indian Rupee. The functional currency in the Company’s subsidiary 5BARz Pte Inc. in Singapore is the Singapore Dollar. Assets and liabilities are translated based in the exchange rates at the balance sheet date, while revenue and expense accounts are translated at the average exchange rates prevailing during the year. Equity accounts are translated at historical exchange rates. The resulting translated gain and loss adjustments are accumulated as a component of stockholders’ equity and other comprehensive income.

 

Concentrations

The Company maintains cash with major financial institutions. Cash held in US bank institutions is currently insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. No similar insurance or guarantee exists for cash held in Mexico, Singapore or Indian bank accounts. There were aggregate uninsured cash balances of $57,923 and $13,634 at September 30, 2016 and December 31, 2015, respectively.

 

Comprehensive Income (Loss)

 

Comprehensive income is defined as the change in equity of a business during a period from transactions and other events and circumstances from non-owners sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The guidance requires other comprehensive income (loss) to include foreign currency translation adjustments.

 

Foreign Operations

 

The following summarizes key financial metrics associated with the Company’s foreign operations (these financial metrics are immaterial for the Company’s operations in the Switzerland):

    September 30,   December 31,
    2016   2015
Assets- U.S.   $ 3,907,508     $ 4,396,990  
Assets- Mexico.     114,479       172,170  
Assets- India.     284,190       50,645  
Assets - Singapore     253,710       —    
Assets- Total   $ 4,559,887     $ 4,619,805  
                 
Liabilities- U.S.   $ 9,893,592     $ 9,540,657  
Liabilities- Mexico     135,986       57,422  
Liabilities- India     407,473       150,842  
Liabilities - Singapore     4,255       —    
Liabilities- Total   $ 10,441,306     $ 9,748,921  

 

 

    For the 3 months ended     For the 9 months ended
    September 30, 2016     September 30, 2015     September 30, 2016   September 30, 2015
Revenues- U.S. $ —     $ —       $ —       $ —    
Revenues- Mexico.   —       —         —         —    
Revenues- India.   19,543     —         56,071       —    
Revenues – Singapore   —       —          —         —    
Revenues- Total $ 19,543   $ —       $ 56,071     $ —    
                             
Net (Income) Loss- U.S. $ 1,014,831   $ 2,568,897     $ 3,788,615     $ 7,634,322  
Net loss- Mexico   43,473     35,449       147,059       68,992  
Net loss- India   310,103     217,425       961,072       438,115  
Net loss -  Singapore   1,373     —         11,490       —    
Net Loss- Total $ 1,369,780   $ 2,821,771     $ 4,908,236     $ 8,141,429  

 

 

Fair value of financial instruments

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other current liabilities, approximate fair value due to the short-term nature of these instruments.

Fair value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:

 

  •   Level 1. Quoted prices in active markets for identical assets or liabilities.
  •   Level 2. Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly.
  •   Level 3. Significant unobservable inputs that cannot be corroborated by market data.

 

  

The assets or liability’s fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. The following table provides a summary of the assets that are measured at fair value on a recurring basis.

 

    Consolidated
Balance Sheet
  Quoted Prices in Active Markets for Identical Assets or Liabilities
(Level 1)
  Quoted Prices for Similar Assets or Liabilities in Active Markets
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
Derivative Liabilities:                
September 30, 2016   $ 3,154,068     $ —       $ —       $ 3,154,068  
December 31, 2015   $ 1,868,439     $ —       $ —       $ 1,868,439  

  

 

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis for the nine months ended September 30, 2016 and the 12 months ended December 31, 2015:

 

    September 30, 2016   December 31, 2015
Beginning balance   $ 1,868,439     $ 547,940  
Aggregate fair value of conversion feature upon issuance of common shares     -       (457,228 )
Change in fair value of derivative liabilities     (1,310,776 )     (45,356 )
Reclassification of warrants to derivative liability     2,475,702       1,823,083  
Reclassification of stock options to derivative liability     120,703       —    
Ending balance   $ 3,154,068     $ 1,868,439  

 

The derivative conversion feature liabilities are measured at fair value using the Black-Scholes pricing model and are classified within Level 3 of the valuation hierarchy. The significant assumptions and valuation methods that the Company used to determine fair value and the change in fair value of the Company’s derivative financial instruments are provided below:

  

 

 

    September 30, 2016   December 31, 2015
Stock price   $ 0.084     $ 0.10  
Volatility     106.01 %     91.3 %
Risk-free interest rate     .68 %     0.64 %
Dividend yield     0.0 %     0.0 %
Expected life     1.5 - 5 years        1.5 - 2 years  

 

  

 

Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented in the tables above may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in historical company data) inputs.  

 

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. 

   

Level 3 financial liabilities consist of the derivative liabilities for which there is no current market such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

 

As of September 30, 2016, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.

 

Derivative instruments

 

Derivative Financial Instruments The fair value of an embedded conversion option that is convertible into a variable amount of shares and warrants that include price protection reset provision features are deemed to be “down-round protection” and, therefore, do not meet the scope exception for treatment as a derivative under ASC 815 “Derivatives and Hedging”, since “down-round protection” is not an input into the calculation of the fair value of the conversion option and warrants and cannot be considered “indexed to the Company’s own stock” which is a requirement for the scope exception as outlined under ASC 815. The accounting treatment of derivative financial instruments requires that the Company record the embedded conversion option and warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. 

 

If the Company were to enter into a financial arrangement through the issuance of convertible debt and or warrants, for which such instruments would contain a variable conversion feature with an indeterminable number of shares, the Company would apply a sequencing policy in accordance with ASC 815- 40-35-12 whereby such instruments, and all future issuances of financial instruments regardless of conversion terms, would be classified as a derivative liability with the exception of instruments related to share-based compensation issued to employees or directors. The Company may also apply sequencing in any circumstance, whereby the Company has entered into financial arrangements for commitments to issue shares, for which such issuances would exceed the authorized share limit. Upon the issuance of any such instrument, the excess shares committed to be issued, would also be reclassified as a derivative liability.

       

The Black-Scholes option valuation model was used to estimate the fair value of the warrants and conversion options. The model includes subjective input assumptions that can materially affect the fair value estimates. The Company determined the fair value of the Binomial Lattice Model and the Black-Scholes Valuation Model to be materially the same. The expected volatility is estimated based on the most recent historical period of time equal to the weighted average life of the warrants or conversion options. Conversion options are recorded as debt discount and are amortized as interest expense over the life of the underlying debt instrument.

  

Amortization of Debt Discount

 

The Company issued various debt with conversion privileges for which total proceeds were allocated to individual instruments based on the relative fair value of the each instrument at the time of issuance. The value of the debt was recorded as discount on debt and amortized over the term of the respective debt.

 

Stock Based Compensation

 

The Company records stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation.” ASC 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee’s requisite service period. Under ASC 718, the Company’s volatility is based on the historical volatility of the Company’s stock or the expected volatility of similar companies. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

The Company uses the Black-Scholes option-pricing model which was developed for use in estimating the fair value of options. Option-pricing models require the input of highly complex and subjective variables including the expected life of options granted and the Company’s expected stock price volatility over a period equal to or greater than the expected life of the options. Because changes in the subjective assumptions can materially affect the estimated value of the Company’s employee stock options, it is management’s opinion that the Black-Scholes option-pricing model may not provide an accurate measure of the fair value of the Company’s employee stock options. 

 

Although the fair value of employee stock options is determined in accordance with ASC 718 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/seller market transaction.

 

For non-employees, the fair value of the award is generally re-measured on financial reporting dates and vesting dates until the service period is complete. The fair value amount is then recognized over the period the services are required to be provided in exchange for the award, usually the vesting period.

  

The Company incurred stock based compensation charges during the three and nine-month period ended September 30, 2016 and 2015 as follows;

    3 months ended
September 30
  9 months ended
September 30
    2016   2015   2016   2015
General and administrative   $ 45,772     $ 49,435     $ 938,679     $ 132,843  
Research and development     —         57,198       70,347       97,028  
Sales and marketing     —         37,455       7,007       93,637  
Total   $ 45,772     $ 144,088     $ 1,016,033     $ 323,508  

 

   

Net loss per share

 

The Company reports loss per share in accordance with the ASC Topic 260, “Earnings Per Share.”, which requires presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation.  In the accompanying financial statements, basic earnings per share of common stock is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period plus the issuance of common shares, if dilutive, that could result from the exercise of outstanding stock options and warrants and conversion of notes payable. These potentially dilutive securities outstanding at September 30, 2016 and December 31, 2015 respectively of 208,919,937 and 155,670,170 were not included in the calculation of loss per common share, because their effect would be anti-dilutive. The weighted average number of shares outstanding does not include reciprocal shareholdings, held by the Company’s subsidiary, CelLynx Group, Inc. which is reflected as a reduction in capital in excess of par value on the Company’s balance sheet.  

 

The Company will not have sufficient Common shares available to issue should all of the above conversions and exercises occur.

 

The Company applies sequencing with respect to such commitments and other circumstances as disclosed in its accounting policies for derivatives.

 

Recent Accounting Pronouncements

 

In July 2015, the FASB issued ASU No. 2015-11, “ Inventory: Simplifying the Measurement of Inventory ”, that requires inventory not measured using either the last in, first out (LIFO) or the retail inventory method to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable cost of completion, disposal and transportation. The new standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and will be applied prospectively. Early adoption is permitted. The Company currently uses lower of cost or net realizable value.

 

The FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The new standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities. The Company has not yet determined the effect of the adoption of this standard on the Company’s consolidated financial position and results of operations.

   

The FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). ASU 2016-09 provides improvement to employee share-based payment accounting. ASU 2016-09 involve the simplification of several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities the amendments in this update are effective for annual periods beginning after December 15, 2016. Early adoption is permitted for any entity in any interim or annual period. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.

 

The FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606). ASU 2016-10 provides guidance on identifying performance obligations and licensing. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and or services. This update does not change the core principles, but rather clarify the following two aspects, identifying performance obligations and licensing implementation guidance. The new standard will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application is not permitted for all public business entities. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.

 

FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of March 31, 2016 that will become effective in subsequent periods; however, management does not believe that any of those updates would have significantly affected our financial accounting measures or disclosures had they been in effect during 2016 or 2015, and it does not believe that any of those pronouncements will have a significant impact on our consolidated financial statements at the time they become effective.

 

Subsequent Events

 

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements, except as disclosed in Note 16.