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Restatement of Previously Issued Financial Statements

6 Months Ended

Jun. 30, 2021

Restatement of Previously Issued Financial Statements

2. Restatement of Previously Issued Financial Statements

Restatement of Previously Issued Financial Statements. The financial statements for the three and six months ended June 30, 2020 have been restated to reflect the correction of misstatements. The Company also restated all amounts impacted within the notes to the financial statements. A description of the adjustments and their impact on the previously issued financial statements are included below.

Description of Restatement Adjustments. Commencing in the second quarter of 2021, the Company conducted a review of its sales tax positions, and related accounting, with the assistance of outside consultants. As a result of the review, it was determined that certain non-POPs services/products sales were subject to sales tax and that the Company had not assessed sales tax on sales of those services/products to customers. Company management then undertook a process to obtain documentation from significant customers to determine if each was exempt from sales tax assessments during the applicable periods. Based on responses received from these customers, the Company determined that it did not properly accrue sales tax and accrued the estimated sales tax. The misstatements in the previously issued financial statements are considered material and are described below.

As described in additional detail in the Explanatory Note in our Annual Report on Form 10-K/A for the year ended December 31, 2020, the Company restated its audited financial statements for the years ended December 31, 2020 and 2019, and its unaudited financial statements for the quarterly periods ended March 31, 2020 and 2019, June 30, 2020 and 2019, and September 30, 2020 and 2019. The Company also filed a Quarterly Report on Form 10-Q/A for the three months ended March 31, 2021 to restate its unaudited financial statements for the three months ended March 31, 2021 and 2020. As a result of the misstatements, the Company restated our interim financial statements for the three and six months ended June 30, 2020.

A summary of the impact of the misstatements is as follows:

	June 30, 2020
	Three months						Six months
Three Months Ended	As previously reported			Restated			As previously reported			Restated
Total Net Sales	$	3,388,000		$	3,347,000		$	8,070,000		$	7,993,000
Operating Loss		(1,777,000	)		(1,830,000	)		(2,886,000	)		(2,986,000	)
Net Loss		(1,772,000	)		(1,843,000	)		(2,635,000	)		(2,768,000	)

June 30, 2020

As of

As previously

reported

Restated

Shareholders' equity

9,287,000

8,444,000

	The categories of restatement adjustments and their impact on previously reported financial statements are described below:

	(a)	Sales Tax and Related Misstatements – Sales tax on sales to customers who were subject to sales tax that was not previously accrued by the Company is corrected by an increase to accrued liabilities on the balance sheets and a reduction of net sales on the statements of operations. The Company also determined on which past sales the Company would bill for sales tax and corrected by increasing accounts receivable, net of an allowance for doubtful collectability, on the balance sheets and increasing net sales on the statements of operations. Estimated penalties on the related sales tax are corrected by an increase to accrued liabilities on the balance sheets and an increase to general and administrative expenses on the statements of operations. Estimated interest on the related sales tax is corrected by an increase to accrued liabilities on the balance sheets and an increase to interest expense within other income on the statement of operations.

	(b)	Related Income Tax Impact - Any impact on income tax benefit from the impact on loss before taxes due to the correction in (a) above is reflected as a change in deferred tax asset or liability on the balance sheet and a change in income tax benefit on the statements of operations.

	The following is a summary of the impact of the correction of the sales tax error for the periods previously reported for the three and six months ended June 30, 2020.

	The following table sets forth the corrections in each of the individual line items affected in the statements of operations:

	June 30, 2020
	Three months		Six months
Reduction of net sales	$	41,000	$	77,000
Increase in general and administrative expense for penalties		12,000		23,000
Increase in interest expense		18,000		33,000
Total effect of restatement items	$	71,000	$	133,000

	June 30, 2020
	Three months						Six months
Six Months Ended	As previously reported			Restated			As previously reported			Restated
Services revenues	$	3,174,000		$	3,133,000		$	7,610,000		$	7,533,000
Products revenues		214,000			214,000			460,000			460,000
Total Net Sales		3,388,000			3,347,000			8,070,000			7,993,000

Cost of services		2,807,000			2,807,000			6,189,000			6,189,000
Cost of goods sold		208,000			208,000			380,000			380,000
Impairment loss		-			-			159,000			159,000
Total Cost of Sales		3,015,000			3,015,000			6,728,000			6,728,000
Gross Profit		373,000			332,000			1,342,000			1,265,000

Operating Expenses:
Selling		927,000			927,000			1,647,000			1,647,000
Marketing		243,000			243,000			608,000			608,000
General and administrative		980,000			992,000			1,973,000			1,996,000
Total Operating Expenses		2,150,000			2,162,000			4,228,000			4,251,000
Operating Loss		(1,777,000	)		(1,830,000	)		(2,886,000	)		(2,986,000	)

Other income (expense):
Interest expense		-			(18,000	)		-			(33,000	)
Miscellaneous		16,000			16,000			40,000			40,000
Loss Before Taxes		(1,761,000	)		(1,832,000	)		(2,846,000	)		(2,979,000	)

Income tax benefit		11,000			11,000			(211,000	)		(211,000	)
Net Loss	$	(1,772,000	)	$	(1,843,000	)	$	(2,635,000	)	$	(2,768,000	)

Net loss per share:
Basic	$	(1.03	)	$	(1.07	)	$	(1.53	)	$	(1.60	)
Diluted	$	(1.03	)	$	(1.07	)	$	(1.53	)	$	(1.60	)

Shares used in calculation of net loss per share:
Basic		1,725,000			1,725,000			1,725,000			1,725,000
Diluted		1,725,000			1,725,000			1,725,000			1,725,000

The following table sets forth the corrections in each of the individual line items affected in the balance sheet:

	June 30, 2020
	As previously reported		Error correction		Restated
Accounts receivable, net	$	5,319,000	$	102,000	$	5,421,000
Accrued liabilities - sales tax	$	-	$	773,000	$	773,000
Accrued liabilities - other	$	597,000	$	172,000	$	769,000
Accumulated deficit	$	6,896,000	$	844,000	$	7,740,000

The following table sets forth the corrections to retained earnings (accumulated deficit) and total shareholders’ equity in the statements of shareholders’ equity.

SHAREHOLDERS' EQUITY

	Accumulated Deficit			Total Shareholders' Equity
June 30, 2020
As reported	$	(6,896,000	)	$	9,287,000
Adjustment due to cumulative error correction		(844,000	)		(844,000	)
As restated	$	(7,740,000	)	$	8,443,000

The Company did not present tables for adjustments within the statement of cash flows, since all of the foregoing adjustments were within the operating activities section of the cash flows. These adjustments did not affect total cash flows from operating activities, financing activities or investing activities for the three and six month periods ended June 30, 2020.