The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial
Statements
Note 1 Organization and Nature of Operations
SQL Technologies Corp. (f/k/a Safety Quick
Lighting & Fans Corp.), a Florida corporation (the “Company”), was originally organized in May 2004 as a limited
liability company under the name of Safety Quick Light, LLC. The Company was converted to corporation on November 6, 2012. Effective
August 12, 2016, the Company changed its name from “Safety Quick Lighting & Fans Corp.” to “SQL Technologies
Corp.” The Company holds a number of worldwide patents, and has received a variety of final electrical code approvals, including
UL Listing and CSA approval (for the United States and Canadian Markets), and CE (for the European market). The Company maintains
offices in Georgia, Florida and in Foshan, Peoples Republic of China.
The Company is engaged in the business of developing
proprietary technology that enables a quick and safe installation of electrical fixtures, such as light fixtures and ceiling fans,
by the use of a power plug installed in ceiling and wall electrical junction boxes. The Company’s main technology consists
of a weight bearing, fixable socket and a revolving plug for conducting electric power and supporting an electrical appliance attached
to a wall or ceiling. The socket is comprised of a nonconductive body that houses conductive rings connectable to an electric power
supply through terminals in its side exterior.
The plug is also comprised of a nonconductive
body that houses corresponding conductive rings, attaches to the socket via a male post and is capable of feeding electric power
to an appliance. The plug includes a second structural element allowing it to revolve and a releasable latching which, when engaged,
provides a retention force between the socket and the plug to prevent disengagement. The socket and plug can be detached by releasing
the latch, thereby disengaging the electric power from the plug. The socket is designed to replace the support bar incorporated
in electric junction boxes, and the plug can be installed in light fixtures, ceiling fans and wall sconce fixtures.
The Company markets consumer friendly, energy
saving “plugin” ceiling fans and light fixtures under the General Electric Company (“GE” or “General
Electric”) brand as well as “conventional” ceiling lights and fans carrying the GE brand. The Company also owns
98.8% of SQL Lighting& Fans LLC (the “Subsidiary”). The Subsidiary was formed in Florida on April 27, 2011, and
is in the business of manufacturing the patented device that the Company owns. The Subsidiary had no activity during the periods
presented.
The Company’s fiscal year end is December
31.
Note 2 Summary of Significant Accounting
Policies
Basis of Presentation
The accompanying consolidated financial statements
of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.
GAAP) under the accrual basis of accounting.
Use of Estimates
The preparation of financial statements in
conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes.
Such estimates and assumptions impact both
assets and liabilities, including but not limited to: net realizable value of accounts receivable and inventory, estimated useful
lives and potential impairment of property and equipment, the valuation of intangible assets, estimate of fair value of share based
payments and derivative liabilities, estimates of fair value of warrants issued and recorded as debt discount, estimates of tax
liabilities and estimates of the probability and potential magnitude of contingent liabilities.
Making estimates requires management to exercise
significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances
that existed at the date of the financial statements, which management considered in formulating its estimate could change in the
near term due to one or more future nonconforming events. Accordingly, actual results could differ significantly from estimates.
Risks and Uncertainties
The Company’s operations are subject
to risk and uncertainties including financial, operational, regulatory and other risks including the potential risk of business
failure.
The Company has experienced, and in the future
expects to continue to experience, variability in its sales and earnings. The factors expected to contribute to this variability
include, among others, (i) the uncertainty associated with the commercialization and ultimate success of the product, (ii) competition
inherent at large national retail chains where product is expected to be sold (iii) general economic conditions and (iv) the related
volatility of prices pertaining to the cost of sales.
Principles of Consolidation
The consolidated financial statements include
the accounts of SQL Technologies Corp. (f/k/a Safety Quick Lighting and Fans Corp.) and the Subsidiary, SQL Lighting & Fans
LLC. All intercompany accounts and transactions have been eliminated in consolidation.
Non-controlling Interest
In May 2012, in connection with the sale of
the Company’s membership units in the Subsidiary, the Company’s ownership percentage in the Subsidiary decreased from
98.8% to 94.35%. The Company then reacquired these membership units in September 2013, increasing the ownership percentage from
94.35% back to 98.8%. During the three-months ended March 31, 2017 and the twelve-months ended December 31, 2016, there was no
activity in the Subsidiary.
Cash and Cash Equivalents
Cash and cash equivalents are carried at cost
and represent cash on hand, demand deposits placed with banks or other financial institutions, and all highly liquid investments
with an original maturity of three months or less. The Company had $7,742,209 and $4,125,888 in money market as of March 31, 2017,
and December 31, 2016, respectively. The Company has deposits in financial institutions which exceeds the amount insured by the
FDIC. The amount of uninsured deposits was $6,980,079 at March 31, 2017.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable are recorded at the invoiced
amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates
the associated risks by performing credit checks and actively pursuing past due accounts.
The Company recognizes an allowance for losses
on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis
of historical bad debt experience, current receivables aging, and expected future bad debts, as well as an assessment of specific
identifiable customer accounts considered at risk or uncollectible.
The Company’s net balance of accounts
receivable for the three-months ended March 31, 2017 and December 31, 2016:
|
|
March
31, 2017
Unaudited
|
|
December
31, 2016
Audited
|
|
|
|
|
|
Accounts
Receivable
|
|
$
|
1,723,293
|
|
|
$
|
796,824
|
|
Allowance
for Doubtful Accounts
|
|
|
—
|
|
|
|
—
|
|
Net
Accounts Receivable
|
|
$
|
1,723,293
|
|
|
$
|
796,82
4
|
|
All amounts are deemed collectible at March
31, 2017 and December 31, 2016 and accordingly, the Company has not incurred any bad debt expense for the three-months ended March
31, 2017 and twelve-months ended December 31, 2016.
Inventory
Inventory consists of finished goods purchased,
which are valued at the lower of cost or market value, with cost being determined on the first-in, first-out (FIFO) method. The
Company periodically reviews historical sales activity to determine potentially obsolete items and also evaluates the impact of
any anticipated changes in future demand.
At March 31, 2017 and December 31, 2016, the
Company had $2,310,093 and $2,401,048 in inventory, respectively. The Company will maintain an allowance based on specific inventory
items that have shown no activity over a 24-month period. The Company tracks inventory as it is disposed, scrapped or sold at below
cost to determine whether additional items on hand should be reduced in value through an allowance method. As of March 31, 2017,
and December 31, 2016, the Company has determined that no allowance was required.
Valuation of Long-lived Assets and Identifiable
Intangible Assets
The Company reviews for impairment of long-lived
assets and certain identifiable intangible assets whenever events or changes in circumstances indicate that the carrying amount
of any asset may not be recoverable. In the event of impairment, the asset is written down to its fair market value. The Company
determined no impairment adjustment was necessary for the periods presented.
Property and Equipment
Property and equipment is stated at cost, less
accumulated depreciation, and is reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
Depreciation of property and equipment is provided
utilizing the straight-line method over the estimated useful lives, ranging from 5 to 7 years of the respective assets. Expenditures
for maintenance and repairs are charged to expense as incurred.
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 the statements
of operations.
Intangible Asset Patent
The Company developed a patent for an installation
device used in light fixtures and ceiling fans. Costs incurred for submitting the applications to the United States Patent and
Trademark Office for these patents have been capitalized. Patent costs are being amortized using the straight-line method over
the related 15 year lives. The Company begins amortizing patent costs once a filing receipt is received stating the patent serial
number and filing date from the Patent Office.
The Company incurs certain legal and related
costs in connection with patent applications. The Company capitalizes such costs to be amortized over the expected life of the
patent to the extent that an economic benefit is anticipated from the resulting patent or alternative future use is available to
the Company. The Company also capitalizes legal costs incurred in the defense of the Company’s patents when it is believed
that the future economic benefit of the patent will be maintained or increased and a successful defense is probable. Capitalized
patent defense costs are amortized over the remaining expected life of the related patent. The Company’s assessment of future
economic benefit or a successful defense of its patents involves considerable management judgment, and an unfavorable outcome of
litigation could result in a material impairment charge up to the carrying value of these assets.
GE Trademark Licensing Agreement
The Company entered into a Trademark License
Agreement with General Electric on September, 2011 (the “License Agreement”) allowing the Company to utilize the “GE
trademark” on products which meet the stringent manufacturing and quality requirements of General Electric (the “GE
Trademark License”). As described further in Note 5 to these financial statements, the Company and General Electric amended
the License Agreement in August 2014. As a result of that amendment, the Company is required to pay a minimum trademark licensing
fee (the “Royalty Obligation”) to General Electric of $12,000,000. The repayment schedule is based on a percent of
sales, with any unpaid balance due in November 2018. Under SFAS 142 “Accounting for Certain Intangible Assets” the
Company has recorded the value of the Licensing Agreement and will amortize it over the life of the License Agreement, which is
60 months.
The Company measures assets and liabilities
at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents
the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction
between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset
or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value
on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The following are the hierarchical levels of
inputs to measure fair value:
|
•
|
Level
1 – Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
|
|
•
|
Level
2 Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for
similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or
liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or
other means.
|
|
•
|
Level
3 – Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine
fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
|
The carrying amounts of the Company’s
financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts payable & accrued expenses,
certain notes payable and notes payable – related party, approximate their fair values because of the short maturity of these
instruments.
The Company accounts for its derivative liabilities,
at fair value, on a recurring basis under Level 3. See Note 8.
Embedded Conversion Features
The Company evaluates embedded conversion features
within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion feature(s)
should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded
in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC
470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion features.
Derivative Financial Instruments
The Company does not use derivative instruments
to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of it financial instruments, including
stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives.
For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at
its fair value and is then revalued at each reporting date, with changes in the fair value reported as charges or credits to income.
For option based simple derivative financial
instruments, the Company uses the Black Scholes option pricing model to value the derivative instruments at inception and subsequent
valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities
or as equity, is reassessed at the end of each reporting period.
Beneficial Conversion Feature
For conventional convertible debt where the
rate of conversion is below market value, the Company records a “beneficial conversion feature” (“BCF”)
and related debt discount.
When the Company records a BCF, the relative
fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument (offset to additional
paid in capital) and amortized to interest expense over the life of the debt.
Debt Issue Costs and Debt Discount
The Company may record debt issue costs and/or
debt discounts in connection with raising funds through the issuance of debt. These costs may be paid in the form of cash, or equity
(such as warrants). These costs are amortized to interest expense over the life of the debt. If a conversion of the underlying
debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
Original Issue Discount
For certain convertible debt issued, the Company
may provide the debt holder with an original issue discount. The original issue discount would be recorded to debt discount, reducing
the face amount of the note and is amortized to interest expense over the life of the debt.
Extinguishments of Liabilities
The Company accounts for extinguishments of
liabilities in accordance with ASC 86010 (formerly SFAS 140) “Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities”. When the conditions are met for extinguishment accounting, the liabilities are derecognized
and the gain or loss on the sale is recognized.
Stock Based Compensation – Employees
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 the Company is a newly formed corporation
or shares of the Company are thinly traded, the use of share prices established in the Company’s most recent private placement
memorandum (based on sales to third parties), 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:
|
•
|
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.
|
|
•
|
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
|
|
•
|
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.
|
|
•
|
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.
|
Generally, all forms of share based payments,
including stock option grants, warrants and restricted stock grants and stock appreciation rights are measured at their fair value
on the awards’ grant date, based on estimated number of awards that are ultimately expected to vest.
The expense resulting from share based payments
is recorded in general and administrative expense in the statements of operations.
Stock Based Compensation – Non-Employees
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 Subtopic 505-50 of the FASB Accounting
Standards Codification (“Subtopic 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 the Company is a newly formed corporation or shares
of the Company are thinly traded the use of share prices established in the Company’s most recent private placement memorandum,
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:
|
•
|
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.
|
|
•
|
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.
|
|
•
|
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.
|
|
•
|
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.
|
Pursuant to ASC paragraph 505-50-257, if fully
vested, no 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 share option and similar instrument 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.
Revenue Recognition
The Company derives revenues from the sale
of GE branded fans and lighting fixtures to large retailers through retail and online sales.
Revenue is recorded when all of the following
have occurred: (1) persuasive evidence of an arrangement exists, (2) asset is transferred to the customer without further obligation,
(3) the sales price to the customer is fixed or determinable, and (4) collectability is reasonably assured.
Cost of Sales
Cost of sales represents costs directly related
to the production and third party manufacturing of the Company’s products.
Product sold is typically shipped directly
to the customer from the third-party manufacturer; costs associated with shipping and handling is shown as a component of cost
of sales.
Earnings (Loss) Per Share
Basic net earnings (loss) per share is computed
by dividing net income (loss) for the period by the weighted average number of common stock outstanding during each period. Diluted
earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common stock,
common stock equivalents and potentially dilutive securities outstanding during each period.
The Company uses the “treasury stock”
method to determine whether there is a dilutive effect of outstanding convertible debt, option and warrant contracts. For the three-months
ended March 31, 2017 and 2016, the Company reflected net loss and a dilutive net loss, and the effect of considering any common
stock equivalents would have been antidilutive for the period. Therefore, separate computation of diluted earnings (loss) per share
is not presented for the periods presented.
The Company has the following common stock
equivalents at March 31, 2017 and December 31, 2016:
|
|
March
31, 2016
Unaudited
|
|
December
31, 2016
Audited
|
Convertible
Debt (Exercise price - $0.25/share)
|
|
600,000
|
|
|
800,000
|
|
Stock
Warrants (Exercise price - $0.001 - $3.00/share)
|
|
11,888,984
|
|
|
13,555,651
|
|
Stock
Options (Exercise price $0.35 - $3.50/share)
|
|
3,705,000
|
|
|
1,350,000
|
|
Total
|
|
16,193,984
|
|
|
15,705,651
|
|
Related Parties
The Company follows subtopic 850-10 of the
FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.
Pursuant to Section 850-10-20 the related parties
include (a) Affiliates of the Company; (b) Entities for which investments in their equity securities would be required, absent
the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted
for by the equity method by the investing entity; (c) Trusts for the benefit of employees, such as pension and profit sharing
trusts that are managed by or under the trusteeship of management; (d) Principal owners of the Company; (e) Management
of the Company; (f) Other parties with which the Company may deal if one party controls or can significantly influence the
management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing
its own separate interests; and (g) Other parties that can significantly influence the management or operating policies of
the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the
other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The consolidated financial statements shall
include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other
similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of
consolidated or combined financial statements is not required in those statements. The disclosures shall include: (a). the nature
of the relationship(s) involved; (b). a description of the transactions, including transactions to which no amounts or nominal
amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary
to an understanding of the effects of the transactions on the financial statements; (c). the dollar amounts of transactions
for each of the periods for which income statements are presented and the effects of any change in the method of establishing the
terms from that used in the preceding period; and (d). amounts due from or to related parties as of the date of each balance
sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Contingencies
The Company follows subtopic 450-20 of the
FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the
consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one
or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company
or un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings
or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates
that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated
liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material
loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent
liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally
not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. However, there is no assurance that
such matters will not materially and adversely affect the Company’s business, consolidated financial position, and consolidated
results of operations or consolidated cash flows.
Subsequent Events
The Company follows the guidance in Section
855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent
events through the date when the financial statements are issued.
Pursuant to ASU 201009 of the FASB Accounting
Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed
to users, such as through filing them on EDGAR.
Recently Issued Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09,
Stock Compensation,
which is intended to simplify the accounting for share-based payment award transactions. The new standard
will modify several aspects of the accounting and reporting for employee share-based payments and related tax accounting impacts,
including the presentation in the statements of operations and cash flows of certain tax benefits or deficiencies and employee
tax withholdings, as well as the accounting for award forfeitures over the vesting period. The guidance is effective for fiscal
years beginning after December 15, 2016, including interim periods within that year, and will be adopted by the Company in the
first quarter of fiscal 2017. The Company anticipates the new standard will result in an increase in the number of shares used
in the calculation of diluted earnings per share and will add volatility to the Company’s effective tax rate and income tax
expense. The magnitude of such impacts will depend in part on whether significant employee stock option exercises occur.
In April 2015, the FASB issued Accounting Standards
Update No. 2015-03, Interest—Imputation of Interest (Topic 83530): Simplifying the Presentation of Debt Issuance Costs (“ASU
2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance
sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and
measurement guidance for debt issuance costs is not affected by ASU 2015-03. ASU 2015-03 is effective for financial statements
issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company has reclassified
debt issuance costs from prepaid expenses and other current assets and other assets as a reduction to debt in the condensed consolidated
balance sheets.
In July 2015, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of
Inventory (“ASU 2015-11”), which applies guidance on the subsequent measurement of inventory. ASU 2015-11 states that
an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling
price in the ordinary course of business, less reasonable predictable costs of completion, disposal and transportation. The guidance
excludes inventory measured using last-in, first-out or the retail inventory method. ASU 2015-11 is effective for interim and annual
reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is not planning to early adopt ASU
2015-11 and is currently evaluating ASU 2015-11 to determine the potential impact to its condensed consolidated financial statements
and related disclosures.
Other pronouncements issued by the FASB or
other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be
significant to the Company’s financial position, results of operations or cash flows.
Note 3 Furniture and Equipment
Property and equipment consisted of the following
at March 31, 2017 and December 31, 2016:
|
|
March 31, 2017
Unaudited
|
|
December 31, 2016
Audited
|
|
|
|
|
|
Office Equipment
|
|
$
|
9,327
|
|
|
$
|
9,327
|
|
Furniture and Fixtures
|
|
|
33,578
|
|
|
|
33,578
|
|
Tooling and Production
|
|
|
136,835
|
|
|
|
136,835
|
|
Total
|
|
|
179,740
|
|
|
|
179,740
|
|
Less: Accumulated Depreciation
|
|
|
(72,682
|
)
|
|
|
(66,135
|
)
|
Property and Equipment - net
|
|
$
|
107,058
|
|
|
$
|
113,605
|
|
Depreciation expense amounted to $6,547 and
$6,413 for the three-months ended March 31, 2017 and 2016, respectively.
Note 4 Intangible Assets
Intangible assets (patents) consisted of the
following at March 31, 2017 and December 31, 2016:
|
|
March 31, 2017
Unaudited
|
|
December 31, 2016
Audited
|
|
|
|
|
|
Patents
|
|
$
|
165,214
|
|
|
$
|
134,919
|
|
Less: Impairment Charges
|
|
|
—
|
|
|
|
—
|
|
Less: Accumulated Amortization
|
|
|
(30,853
|
)
|
|
|
(28,577
|
)
|
Patents - net
|
|
$
|
134,361
|
|
|
$
|
106,342
|
|
Amortization expense associated with patents
amounted to $2,276 and $1,777 for the three-months ended March 31, 2017 and 2016, respectively.
At March 31, 2017, future amortization of intangible
assets for the years ending follows:
|
Year
Ending December 31
|
|
|
|
|
|
2017
|
|
|
$
|
8,298
|
|
2018
|
|
|
|
11,014
|
|
2019
|
|
|
|
11,014
|
|
2020
|
|
|
|
11,044
|
|
2021
|
|
|
|
11,014
|
|
2022
and Thereafter
|
|
|
|
81,977
|
|
|
|
|
$
|
134,361
|
Actual amortization expense in future periods
could differ from these estimates as a result of future acquisitions, divestitures, impairments and other factors.
Note 5 GE Trademark License Agreement
The Company entered into an amended License
Agreement with General Electric regarding the GE Trademark License. The License Agreement is amortized through its expiration in
November 2018.
|
|
March 31, 2017
Unaudited
|
|
December 31, 2016
Audited
|
GE Trademark License
|
|
$
|
12,000,000
|
|
|
$
|
12,000,000
|
|
Less: Impairment Charges
|
|
|
—
|
|
|
|
—
|
|
Less: Accumulated Amortization
|
|
|
(7,926,423
|
)
|
|
|
(7,324,415
|
)
|
GE Trademark License – net
|
|
$
|
4,073,577
|
|
|
$
|
4,675,585
|
|
Amortization expense associated with the GE
Trademark License amounted to $602,007 and $608,696 for the three-months ended March 31, 2017 and 2016, respectively
At March 31, 2017, future amortization of intangible
assets is as follows for the remaining:
Year
Ending December 31
|
|
2017
|
|
|
|
1,840,466
|
|
|
2018
|
|
|
|
2,233,111
|
|
|
|
|
|
$
|
4,073,577
|
|
Note 6 Notes Payable
At March 31, 2017 and December 31, 2016, the
Company had a note payable to a bank in the amount of $157,233 and $186,823, respectively. The note, dated May 2007, is due in
monthly payments of $10,000 and carries interest at 4.75%. The note is secured by the assets of the Company and personal guarantees
by a shareholder and an officer of the Company, and is due August 2018.
On April 13, 2016, the Company entered in to
an agreement with a third party for a $10,000,000 line of credit. The primary purpose of this line of credit is to fund manufacturing
and product related obligations. The amounts outstanding under the line of credit promissory note carries interest of 8%, due monthly
with principal and unpaid interest due December 31, 2017. The note is secured by the assets of the Company. The outstanding balance
on this note was $2,543,910 and $3,112,737 at March 31, 2017 and December 31, 2016, respectively.
The Company received a $500,000 loan from a
related party in January 2016. The note is on demand and carries interest of 12% and carried a balance of $200,000 at March 31,
2017 and December 31, 2016, respectively.
Principal payments due under the terms of the
notes described above are as follows:
Principal Due in Next 12 months
|
|
|
|
2017
|
|
|
$
|
2,858,466
|
|
|
2018
|
|
|
|
42,677
|
|
|
|
|
|
$
|
2,901,143
|
|
Note 7 Convertible Debt Net
The Company has recorded derivative liabilities
associated with convertible debt instruments, as more fully discussed at Note 8.
|
|
Third Party
|
|
Related Party
|
|
Totals
|
Balance December 31, 2015
|
|
$
|
3,989,950
|
|
|
$
|
50,000
|
|
|
$
|
4,039,950
|
|
Add: Amortization of Debt Discount
|
|
|
474,283
|
|
|
|
—
|
|
|
|
474,283
|
|
Less Repayments/Conversions
|
|
|
(4,314,233
|
)
|
|
|
—
|
|
|
|
(4,314,233
|
)
|
Balance December 31, 2016
|
|
|
150,000
|
|
|
|
50,000
|
|
|
|
200,000
|
|
Add: Amortization of Debt Discount
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Less Repayments/Conversions
|
|
|
(100,000
|
)
|
|
|
—
|
|
|
|
(100,000
|
)
|
Balance March 31, 2017
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
100,000
|
|
Less Current portion
|
|
|
(50,000
|
)
|
|
|
(50,000
|
)
|
|
|
(100,000
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
On November 26, 2013, May 8, 2014 and September
25, 2014 the Company completed closings in connection with its offering (the “Notes Offering”) of its 12% Secured Convertible
Promissory Notes (the “12% Notes”) in the aggregate principal amount of $4,240,100 and/or its 15% Secured Convertible
Promissory Notes in the aggregate principal amount of $30,000 (the “15% Notes”, and together with the 12% Notes, each
a “Note” and collectively, the “Notes”), as applicable, with certain “accredited investors”
(the “Investors”), as defined under Regulation D, Rule 501 of the Securities Act. Pursuant to the Notes Offering, the
Company received $1,752,803, $1,400,000 and $800,500 in net proceeds on November 26, 2013, May 8, 2014 and September 25, 2014,
respectively.
In addition to the terms customarily included
in such instruments, the Notes began accruing interest on the date that each Investor submitted the principal balance of such Investor’s
Note, with the interest thereon becoming due and payable on the one year anniversary, and quarterly thereafter. Upon a default
of the Notes, the interest rate will increase by 2% for each 30 day period until cured. The principal balance of each Note and
all unpaid interest became payable twenty-four (24) months after the date of issuance. The principal and outstanding interest under
the Notes are convertible into shares of the Company’s common stock at $0.25 per share and are secured by a first priority
lien (subject only to an existing note with Signature Bank of Georgia on the Company’s intellectual property and all substitutes,
replacements and proceeds of such intellectual property) pursuant to the terms of a Security Purchase Agreement, dated as of November
26, 2013, May 8, 2014 and September 25, 2014, as applicable, by and between the Company and each Investor.
Pursuant to the Notes Offering, each Investor
also received five (5) year common stock warrants to purchase the Company’s common stock at $0.375 per share (each a “Warrant”
and collectively, the “Warrants”). Investors of the 12% Notes received Warrants with 25% coverage based on a predetermined
valuation of the Company. Investors of the 15% Notes received Warrants with 15% coverage based on the predetermined valuation of
the Company. Investors with a principal investment amount equal to or greater than $250,000 received Warrants with a bonus 40%
coverage (“Bonus Coverage”); however, if an Investor previously invested $250,000 or more in the Notes Offering,
such Investor received Bonus Coverage if such Investor subsequently invested $100,000 or more in the Notes Offering. In addition
to the terms customarily included in such instruments, the Warrants may be exercised by the Investors by providing to the Company
a notice of exercise, payment and surrender of the Warrant.
The Notes and Warrants were treated as derivative
liabilities.
In connection with the Notes Offering, the
Company entered into Registration Rights Agreements, each dated as of November 26, 2013, May 8, 2014 and September 25, 2014, and
each by and between the Company and each of the Investors (collectively, the “Registration Rights Agreements”), whereby
the Company agreed to prepare and file a registration statement with the SEC within sixty (60) days after execution of the applicable
Registration Rights Agreement and to have the registration statement declared effective by the SEC within ninety (90) days thereafter.
Because the Company was unable to file a registration
statement pursuant to the terms of each Registration Rights Agreements dated as of November 26, 2013 or May 8, 2014, the Company
was in default under such Registration Rights Agreements (the “Filing Default Damages”), and because the Company was
unable to have a registration statement declared effective pursuant to the terms of the Registration Rights Agreements dated as
of November 26, 2013, the Company was in default under such Registration Rights agreements (the “Effectiveness Default Damages”).
The Filing Default Damages stopped accruing on the date such registration statement was filed, and the Effectiveness Default Damages
stopped accruing on the date it was declared effective.
The Company invited the Investors holding Notes
dated November 26, 2013 to extend the first interest payment that was scheduled to be paid pursuant to the Notes dated November
26, 2013 (the “Interest Due”) to February 24, 2015 and in exchange offered to capitalize the Interest Due at a rate
of 12% through payment (the “Additional Interest”), all of which was convertible into the Company’s common stock
at a price of $0.25 per share. Through December 31, 2016, the Company has issued in total 2,343,191 shares of its common stock
representing $585,798 in Additional Interest, Interest Due, Filing Default Damages and Effectiveness Default Damages. As of December
31, 2016, all Additional Interest, Interest Due, Filing Default Damages and Effectiveness Default Damages was repaid by the Company.
During 2015, five Investors requested that
the Company withhold payments of interest due under their Notes at no cost to the Company, to allow the Company to address working
capital needs. Such interest due has been or will be paid to the five Investors in cash or simple non-interest bearing promissory
notes, and none of such amounts have been or will be paid in shares of the Company’s capital stock.
In November 2015, the Company invited the holders
of Notes dated November 26, 2013, with respect to outstanding principal and interest due under their respective Notes, to (i) receive
payment in cash, (ii) convert their Notes into shares of the Company’s common stock, or (iii) forbear an election for three
(3) months, or until February 26, 2016, pursuant to a forbearance agreement, during such time interest under their respective Notes
would continue to accrue. In February 2016, the Company invited the same holders to extend their forbearance period to make an
election to convert or redeem their Notes for an additional three months, or until May 26, 2016, under the same terms as the first
forbearance agreements.
In May 2016, the Company invited the holders
of all Notes, where such holders had not already made an election to redeem or convert their Notes, to forbear or extend their
forbearance period to make an election to convert or redeem their Notes until July 31, 2016, which the Company thereafter extended
to August 15, 2016 (the “August 2016 Election”). This also provided a third option to all noteholders, whereby such
holders could convert their respective Note(s) into shares of Series A Convertible Preferred Stock (“Preferred Stock”).
(See Note 7(c)).
Prior to the August 2016 Election, several
Investors had previously elected to receive payment in cash, or convert their Notes into shares of the Company’s common stock,
but most Notes remained outstanding.
From January 1, 2017 through March 31, 2017,
one Investor redeemed $50,000 in principal balance of one Note and one Investor was issued 200,000 shares of Preferred Stock in
connection with its August 2016 Election. These shares were issued subsequent to March 31, 2017. Pursuant to August 2016 Elections
received and effective as of August 15, 2016, through March 31, 2017 the Company redeemed or issued shares of the Company’s
common stock or Preferred Stock, as applicable, in exchange for the principal balance of the Notes, as follows: (i) the payment
of, in the aggregate, $50,000 in principal balance of one Note; (ii) the issuance of 240,000 shares of Common Stock, representing
$60,000 in outstanding Note principal balance; and (iii) the issuance of 13,256,936 shares of Series A Preferred Stock, representing
$3,314,234 in outstanding Note principal balance.
As of March 31, 2017, two notes remained outstanding,
to be converted into 400,000 shares of Preferred Stock or cash repayment, subject to receipt of complete paperwork from the respective
Investor. On April 7, 2017, repayment in cash of $50,000 was made to one Investor, per their request. On April 11, 2017, the Company
issued 200,000 shares of Preferred Stock to one Investor, per their request.
As of May 12, 2017, all Notes have been re-paid
in cash, separate debt obligation or by conversion, and all such Notes have been terminated. All issuances of capital stock in
the August 2016 Election were made only for principal balances due under the Notes, and all interest was paid directly to the Investors.
The debt carries interest between 12% and 15%,
and was due in November 2015, May 2016 and September 2016, as extended to July 31, 2016 pursuant to certain forbearance agreements.
All Notes and Warrants issued in connection
with the Notes Offering are convertible at $0.25 and $0.375/share, respectively, subject to the existence of a “ratchet feature”,
which allows for a lower offering price if the Company offers shares to the public at a lower price.
At March 31, 2017, the Company has outstanding
convertible debt of $100,000, of which $50,000 is from a related party. See (A) above for further discussion. These amounts have
been settled in full as the date of this filing.
(C)
|
Offer to Convert Debt to Preferred Shares
|
By letter to each holder of the Notes, dated
July 22, 2016, the Company requested that each holder indicate its election to (i) redeem its Note, (ii) convert its Note into
the Company’s common stock or (iii) elect to convert its Note into shares of Preferred Stock (the “Preferred Option”),
in each case by August 15, 2016.
For those holders electing the Preferred Option,
each holder has received or will receive shares of the Preferred Stock on a 1 to 1 ratio to the number of shares of the Company’s
common stock which are then convertible under such holder’s respective Note. With respect to interest on junior securities,
dividends, distributions or liquidation preference, shares of Preferred Stock will rank senior to shares of the Company’s
common stock or other junior securities. Along with other terms customary for a class of convertible preferred stock, the Preferred
Stock will be convertible into shares of the Company’s common stock at the same conversion price as the Notes (i.e., USD
$0.25 per share), and will pay interest quarterly at a rate of six percent (6%). The Preferred Stock will be convertible upon the
election of the holder thereof. Shares of the Preferred Stock may be repurchased by the Company upon 30 days’ prior written
notice, in whole or in part, for USD $3.50 per share, provided that during such notice period the holder will continue to have
the option and right to convert its shares of Preferred Stock into shares of the Company’s common stock. Holders will also
have a put option, allowing them to sell their shares of Preferred Stock back to the Company at USD $0.25 per share, the Note conversion
price.
Each holder electing the Preferred Option was
required to enter into an amendment to its Note, providing that the Note will be convertible into the Preferred Stock rather than
the Company’s common stock, and to thereafter elect to convert their Note, as amended, into Preferred Stock. In addition,
each holder will be required to enter into a lockup agreement, whereby the holder will agree not to offer, sell, contract to sell,
pledge, give, donate, transfer or otherwise dispose of (i) the shares of the Company’s common stock it then holds, (ii) the
shares of Preferred Stock obtained upon conversion of its Note, and (iii) the shares of the Company’s common stock underlying
the Preferred Stock. The Note amendments, conversion to Preferred Stock and lockup agreement have been entered into on August 15,
2016. The Note amendments were approved by a majority of the holders of the then outstanding Notes. See above for more details
related to the results of that offering
Note 8 Derivative Liabilities
The Company identified conversion features
embedded within convertible debt and warrants issued in 2013 and 2014 and warrants attached to stock purchases in 2016. The Company
has determined that the features associated with the embedded conversion option, in the form a ratchet provision, should be accounted
for at fair value, as a derivative liability, as the Company cannot determine if a sufficient number of shares would be available
to settle all potential future conversion transactions. Additionally, the Company has issued options that have vested to purchase
stock through our Incentive Plan. Shares have not been reserved with our transfer agent, therefore, they are considered “tainted”
and should be accounted for at fair value, as a derivative liability,
As a result of the application of ASC No. 815,
the fair value of the ratchet feature related to convertible debt and warrants is summarized as follow:
The fair value at the commitment and re-measurement
dates for the Company’s derivative liabilities were based upon the following management assumptions as:
|
|
March 31, 2017
Unaudited
|
|
December 31, 2016
Audited
|
|
|
|
|
|
Balance Beginning of period
|
|
$
|
24,083,313
|
|
|
$
|
24,157,837
|
|
Fair value mark to market adjustment - stock options
|
|
|
2,036,541
|
|
|
|
(268,098
|
)
|
Fair value at the commitment date for options granted
|
|
|
724,253
|
|
|
|
4,625,002
|
|
Fair value mark to market adjustment - convertible debt
|
|
|
8,671,310
|
|
|
|
42,664,939
|
|
Fair value mark to market adjustment - warrants
|
|
|
2,809,570
|
|
|
|
(1,972,844
|
)
|
Fair value at commitment date for warrants issued
|
|
|
1,336,908
|
|
|
|
5,053,387
|
|
Debt settlement on the derivative liability associated with interest
|
|
|
—
|
|
|
|
3,204,363
|
|
Reclassification of derivative liability to Additional Paid In Capital due to share reservation and conversion
|
|
|
(969,967
|
)
|
|
|
(50,431,559
|
)
|
Gain on Settlement of Debt
|
|
|
—
|
|
|
|
(2,949,714
|
)
|
Balance at end of period
|
|
$
|
38,691,928
|
|
|
$
|
24,083,313
|
|
Note 9 Debt Discount
The Company recorded the debt discount to the
extent of the gross proceeds raised, and expensed immediately the remaining fair value of the derivative liability, as it exceeded
the gross proceeds of the note.
Accumulated amortization of derivative discount
amounted to $4,402,773 as of March 31, 2017 and December 31, 2016. During the three-months ended March 31, 2017 and 2016 the Company
recorded $0 and ($276,951) in amortization of debt discount expense, respectively.
The Company recorded a change in the value
of embedded derivative liabilities income/(expense) of ($13,517,422) and $1,996,863 for the three-months ended March 31, 2017 and
2016, respectively.
The Company recorded derivative expense of
($2,061,159) and $0 for the three-months ended March 31 2017 and 2016, respectively.
The Company recorded loss on disposition of
debt as a result of conversion to Common Stock and Preferred Stock of ($630,000) during the three-months ended March 31, 2017.
The loss was a result of the conversion value of the shares received exceeded the face value of the note.
Note 10 Debt Issue Costs
|
|
March
31, 2017
Unaudited
|
|
December
31, 2016
Audited
|
|
|
|
|
|
Debt
Issuance Costs
|
|
$
|
316,797
|
|
|
$
|
316,797
|
|
Total
|
|
|
316,797
|
|
|
|
316,797
|
|
Less:
Accumulated Amortization
|
|
|
(316,797
|
)
|
|
|
(316,797
|
)
|
Debt
Issuance Costs- net
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company recorded amortization expense of
$0 and $8,569 for the three-months ended March 31, 2017 and 2016, respectively.
Note 11 GE Royalty Obligation
In 2011, the Company executed a Trademark Licensing
Agreement with General Electric, which allows the Company the right to market certain ceiling light and fan fixtures displaying
the GE brand. The License Agreement imposes certain manufacturing and quality control conditions that the Company must maintain
in order to continue to use the GE brand.
The License Agreement is nontransferable and
cannot be sublicensed. Various termination clauses are applicable; however, none were applicable as of the periods presented.
In August 2014, the Company entered into a
second amendment to the License Agreement pertaining to its royalty obligations. Under the terms of the amendment, the Company
agreed to pay a total of $12,000,000 by November 2018 for the rights assigned in the original contract. In case the Company does
not pay GE a total of at least $12,000,000 in cumulative royalties over the term of the License Agreement, the difference between
$12,000,000 and the amount of royalties actually paid to GE is owed in December 2018. As of March 31, 2017 and December 31, 2016
there was $11,125,184 and $11,302,423 outstanding under the agreement, respectively.
Payments are due quarterly based upon the prior
quarters’ sales. The Company made payments of $137,084 and $92,914 for the three-months ended March 31, 2017 and 2016, respectively.
The License Agreement obligation will be paid
from sales of GE branded product subject to the following repayment schedule:
Net
Sales in Contract Year
|
Percentage
of Contract Year Net Sales owed to GE
|
|
$0
$50,000,000
|
|
7%
|
$50,000,001
$100,000,000
|
|
6%
|
$100,000,000+
|
|
5%
|
The Company has limited operating history and
does not have the ability to estimate the sales of GE branded product, the liability is classified as long-term. As sales are recognized,
the Company will estimate the portion it expects to pay in the current year and classify as current.
Note 13 Stockholders Deficit
For the three-months ended March 31, 2017 and
twelve-months ended December, 31 2016, the Company issued the following common stock:
Transaction
Type
|
|
|
|
Quantity
|
|
Valuation
|
|
Range
of Value per Share
|
|
2016
Equity Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock issued Board of Directors Compensation
|
|
|
(1)
|
|
|
|
62,000
|
|
|
$
|
42,000
|
|
|
$
|
0.60-1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued per Waiver and Conversion Agreement
|
|
|
(2)
|
|
|
|
1,790,092
|
|
|
|
822,524
|
|
|
|
0.25-0.625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Offering
|
|
|
(3)
|
|
|
|
3,155,000
|
|
|
|
7,538,000
|
|
|
|
1.00-2.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Award
|
|
|
(4)
|
|
|
|
25,000
|
|
|
|
15,000
|
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued for Services
|
|
|
(5)
|
|
|
|
300,000
|
|
|
|
136,250
|
|
|
|
0.25-1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued for Conversion of Debt
|
|
|
(6)
|
|
|
|
443,156
|
|
|
|
110,789
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
|
|
|
|
5,775,248
|
|
|
$
|
8,664,563
|
|
|
$
|
0.25-2.65
|
|
|
2017
Equity Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Offering
|
|
|
(7)
|
|
|
|
83,000
|
|
|
|
237,000
|
|
|
|
2.60-3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued per Exercise of Warrants
|
|
|
(8)
|
|
|
|
1,666,667
|
|
|
|
5,000,000
|
|
|
|
3.00
|
|
|
March
31, 2017
|
|
|
|
|
|
|
1,749,667
|
|
|
$
|
5,237,000
|
|
|
$
|
2.60-3.00
|
|
|
The following is a more detailed description of the Company’s
stock issuance from the table above:
|
(1)
|
Shares issued to Board of Directors
|
The Company added a new Director in November
2015. The Company issued the Director 50,000 shares of Common Stock at $0.60 per share as compensation in February 2016. In addition,
this Director agreed to serve as the Company’s Audit Committee Chair, and received 12,000 shares of Common Stock at $1.00
per share as compensation for these additional responsibilities.
|
(2)
|
Shares Issued in Connection with the Notes or Agreements to Convert
|
In connection with the Agreement and Waiver
and Agreement to Convert, as of the twelve-months ended December 31, 2016, the Company issued an additional 2,343,191 shares of
its common stock as payment for Additional Interest, Interest Due, Filing Default Damages and Effectiveness Default Damages, representing
payment to Investors of $1,210,798. Of this amount, $625,000 is prior year stock awards/grants not issued until 2016.
|
(3)
|
Shares Issued in Connection with Offering
|
On February 19, 2016, the Company completed
a second closing of the November Stock Offering representing aggregate gross proceeds to the Company of $300,000, and thereafter
issued 300,000 shares of its common stock.
In April 2016, the Company completed an offering
of 2,000,000 shares at an offering price of $2.50 and 1,666,667 in warrants with a conversion price of $3.00 per share.
In May 2016, the Company completed an offering
of 675,000 shares at an offering price of $2.60 and 1,350,000 of warrants with a conversion price between $3.00 and $3.50 over
the next three anniversary dates.
In July 2016, the Company completed an offering
for 30,000 shares at $2.60 and an additional 150,000 shares at $2.70 in two separate offerings.
|
(4)
|
Shares Issued Pursuant to Stock Awards.
|
In September 2016, the Company issued 25,000
shares in stock awards at $0.60 per share.
|
(5)
|
Shares Issued for Services
|
In September 2016, the Company issued 300,000
shares issued representing $136,250 in services received. The share conversions were in a range of $0.25 to $1.00 per share.
|
(6)
|
Shares Issued in Conjunction with Retirement of Debt
|
In accordance with the Notes, 443,156 shares
were issued for the retirement of debt during the year ended December 31, 2016.
|
(7)
|
Shares Issued for Common Stock
|
During the three-months ended March 31, 2017,
the Company received proceeds from the issuance of 83,000 shares of common stock to three individuals at prices between $2.60 and
$3.00 per share.
|
(8)
|
Shares issued Pursuant to
Warrants Exercised
|
In March 2017,
warrants were exercised at $3.00 per share (see 3 above) for 1,666,667 shares.
The following is a summary of the Company’s
Preferred Stock Activity
Transaction
Type
|
|
|
|
Quantity
|
|
Valuation
|
|
Range
of Value per Share
|
|
2016
Preferred Stock Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued per Waiver and Conversion Agreement
|
|
|
|
|
|
|
13,056,936
|
|
|
|
44,393,469
|
|
|
|
$3.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2016 Activity
|
|
|
|
|
|
|
13,056,936
|
|
|
$
|
44,393,469
|
|
|
$
|
$3.40
|
|
|
2017
Preferred Stock Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued per Waiver and Conversion Agreement
|
|
|
|
|
|
|
200,000
|
|
|
|
680,000
|
|
|
|
$3.40
|
|
|
March
31, 2017 Activity
|
|
|
|
|
|
|
200,000
|
|
|
$
|
680,000
|
|
|
$
|
$3.40
|
|
|
In accordance with the Company’s Convertible
Notes Payable Preferred Option offering (Note 7 (C) ) 13,256,936 shares of 6% Preferred Stock. The Preferred Stock will be convertible
upon the election of the holder thereof. Shares of the Preferred Stock may be repurchased by the Company upon 30 days’ prior
written notice, in whole or in part, for USD $3.50 per share, provided that during such notice period the holder will continue
to have the option and right to convert its shares of Preferred Stock into shares of the Company’s common stock. Holders
will also have a put option, allowing them to sell their shares of Preferred Stock back to the Company at USD $0.25 per share,
the Note conversion price, and therefore the stock is classified as Mezzanine equity rather than permanent equity The stock was
valued based upon the value of Common Shares publicly traded nearest the conversion date. During the three-months ended March 31,
2017 the Company paid dividends in the amount of $48,114 to the Preferred Stock shareholders.
The following is a summary of the Company’s
stock option activity:
|
|
|
|
|
|
Weighted Average
|
|
Aggregate
|
|
|
|
|
Weighted Average
|
|
Remaining Contractual Life
|
|
Intrinsic
|
|
|
Options
|
|
Exercise Price
|
|
(In Years)
|
|
Value
|
2016 Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Granted
|
|
|
1,150,000
|
|
|
$
|
0.835
|
|
|
|
10.00
|
|
|
$
|
1,700,000
|
|
Forfeited/Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total 2016 Activity
|
|
|
1,150,000
|
|
|
$
|
0.835
|
|
|
|
8.66
|
|
|
$
|
1,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Q1 Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Granted
|
|
|
2,355,000
|
|
|
|
.838
|
|
|
|
7.80
|
|
|
$
|
4,500,000
|
|
Forfeited/Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total Q1 2017 Activity
|
|
|
2,355,000
|
|
|
$
|
0.838
|
|
|
|
7.80
|
|
|
$
|
4,500,000
|
|
|
(1)
|
The Company has issued options that have vested to purchase stock
through our Incentive Plan. Shares have not been reserved with our transfer agent, therefore, they are considered “tainted”.
The Company has determined that they should be accounted for at fair value, as a derivative liability, see Note 8 for further details.
|
The following is a summary of the Company’s
stock option activity:
|
Number
of Warrants
|
|
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Life (in Years)
|
Balance,
December 31, 2015
|
9,728,984
|
|
$
|
0.289
|
2.1
|
Issued
|
3,826,667
|
|
|
3.28
|
2.0
|
Exercised
|
—
|
|
|
—
|
—
|
Cancelled/Forfeited
|
—
|
|
|
—
|
—
|
Balance,
December 31, 2016
|
13,555,651
|
|
$
|
0.72
|
2.0
|
Issued
|
-
|
|
|
-
|
-
|
Exercised
|
(1,666,667)
|
|
|
3.00
|
—
|
Cancelled/Forfeited
|
—
|
|
|
—
|
—
|
Balance,
March 31, 2017
|
11,888,984
|
|
$
|
0.69
|
1.9
|
During 2016, the Company issued warrants to
four (4) different groups totaling 3,826,667. These warrants had lives ranging from one to five years at strike prices between
$3.00 and $3.50 per share.
In March 2017, 1,666,667 warrants were exercised
at $3.00 per share.
(E)
|
2015 Stock Incentive Plan
|
On April 27, 2015, the Board approved the Company’s
2015 Stock Incentive Plan (the “Incentive Plan”). Under the Incentive Plan, the Board has the sole authority to implement,
interpret, and/or administer the Incentive Plan unless the Board delegates all or any portion of its authority to implement, interpret,
and/or administer the Incentive Plan to a committee of the Board, or (ii) the authority to grant and administer awards under the
Incentive Plan to an officer of the Company. The Incentive Plan relates to the issuance of up to 5,000,000 shares of the Company’s
common stock, subject to adjustment, and shall be effective for ten (10) years, unless earlier terminated. Certain options to be
granted to employees under the Incentive Plan are intended to qualify as Incentive Stock Options (“ISOs”) pursuant
to Section 422 of the Internal Revenue Code of 1986, as amended, while other options granted under the Incentive Plan will be nonqualified
options not intended to qualify as Incentive Stock Options ISOs (“Nonqualified Options”), either or both as provided
in the agreements evidencing the options described.
Note 14 Commitments
In January 2014, the Company executed a 39-month
lease for a corporate headquarters. The Company paid a security deposit of $27,020. The lease expires April, 2017
In October, 2014, the Company executed a 53-month
lease for a new corporate headquarters with a base rent of $97,266 escalating annually through 2019. The Company paid a security
deposit of $1,914.
In September, 2015, the Company amended the
current lease for a smaller space at the same terms.
In October, 2014, the Company entered into
a sublease agreement to sublease its previous office space through November 2016. In connection with the sublease, the Company
collected $34,981 as a security deposit.
The minimum rent obligations are approximately
as follows:
|
|
Minimum
|
|
Sublease
|
|
Net
|
Year
|
|
Obligation
|
|
Rentals
|
|
Obligation
|
|
2017
|
|
|
|
16,750
|
|
|
|
—
|
|
|
|
16,750
|
|
|
2018
|
|
|
|
22,989
|
|
|
|
—
|
|
|
|
22,989
|
|
|
2019
|
|
|
|
7,872
|
|
|
|
—
|
|
|
|
7,872
|
|
|
Total
|
|
|
$
|
47,611
|
|
|
$
|
—
|
|
|
$
|
47,611
|
|
In November 2014, the Company entered into
an employment agreement with its new Chief Executive Officer. In addition to salary, the agreement provided for the issuance of
750,000 restricted shares of the Company’s common stock to him, which vested and were issued as follows: 250,000 shares after
the first 6 months of employment and 500,000 additional shares at December 31, 2015. Under terms of the agreement the executive
would receive additional compensation in the form of stock options to purchase shares of Company stock equal to one half of one
percent (0.5%) of quarterly net income. The strike price of the options will be established at the time of the grant. The options
will vest in twelve months and expire after sixty months. In addition to the stock options compensation, the executive will receive
cash compensation equal to one half of one percent (0.5%) of annual sales up to $20 million and one quarter of one percent (0.25%)
for annual sales $20 million and 3% of annual net income. These 750,000 shares were issued in 2016 and valued at $0.625 per share.
On September 1, 2016, the Company entered into
a new employment agreement with Mr. Campi. The agreement provides for a base salary of $150,000; 120,000 shares of The Company’s
common stock in a “Sign on Bonus” which will vest December 31, 2017; 0.25% of annual gross sales and 3% of annual adjusted
gross income in cash compensation and 0.50% of quarterly net income in options, the strike price to be determined at the time of
grant. Such options will expire 5 years after issuance.
For the twelve-months ended December 31, 2016
and 2015, Mr. Campi earned approximately $31,600 and $14,400, respectively, under this agreement. No stock or options have been
issued.
The Company entered into a 3-year consulting
agreement with a director which was terminated effective September 1, 2016, and carries an annual payment of $150,000 cash, stock
or five-year options equal to one half of one percent (0.5%) of the Company’s annual net sales. For the three-months ended
March 31, 2017 and 2016, Mr. Kohen earned approximately $13,180 and $8,464, respectively, under this agreement. No stock or options
have been issued.
On September 1, 2016, the Company modified
the above agreement. The compensation was changed to $250,000 per annum, an annual grant of the Company’s common stock of
340,000 shares which vest in its entirety January 1, 2019, and stock options equal to 0.50% of the Company’s gross revenue
with 5-year vesting. In addition, the Chairman was granted a “Sign on Bonus” of 120,000 shares of the Company’s
common stock which will vest January 1, 2020 and a supplemental bonus of options which is tied to the stock performance of the
Company.
(C)
|
Employee
Agreement – President
|
On August 17, 2016, the Company entered into
an Employment Agreement with Mark Wells, its new President. Mr. Wells receives a salary of $250,000; 1,025,000 shares in the Company’s
common stock which will vest in its entirety January 1, 2019; 0.25% of the Company’s net revenue and a “Sign-on Bonus”
of 120,000 shares of the Company’s common stock which vests January 1, 2017. For the twelve-months ended December 31, 2016,
Mr. Wells earned $6,590 under this employment agreement for the three-months ended March 31, 2017.
(D)
|
Employment
Agreement – Chief Operating Officer
|
Effective July 1, 2016, the Company entered
into an Executive Employment Agreement with Patricia Barron, its Chief Operations Officer. Ms. Barron receives a base salary of
$120,000 per year and incentive compensation equal to 0.25% of the Company’s net revenue paid in cash. For the twelve-months
ended December 31, 2016, Ms. Barron earned approximately $6,590 and $4,232 for the three-months ended March 31, 2017 and 2016,
respectively.
Note 15 Subsequent Events
On April 7, 2017, the Company repaid $50,000
in convertible debt in connection with such holder’s Note as issued and previously amended on August 15, 2016, and election
to receive the full principal balance of the outstanding Note in cash.
On April 11, 2017, the Company issued 200,000
shares of its Series A Convertible Preferred Stock to a related party Investor, in connection with such holder’s Note as
issued and previously amended on August 15, 2016, and election to convert the full principal balance of the outstanding Note into
Series A Convertible Preferred Stock, at a conversion price of $0.25 per share.
On April 11, 2017, the Company entered into
a securities subscription agreement with an accredited investor, whereby such investor subscribed for and received 16,666 shares
of our common stock for $3.00 per share and a five-year option to purchase up to 50,000 shares of the Company’s common stock
at $3.00 per share. On April 4, 2017, the Company received gross proceeds of $50,000 from the subscriber, and on May 2, 2017, the
Company issued 16,666 shares of its common stock pursuant thereto.
On April 11, 2017 the Company increased the number of shares
reserved for options awarded and issued under the Incentive Plan to 3,660,000 shares, to cover options issued during the quarter
ended March 31, 2017. The reservation of these shares eliminated the need to record any shares as a derivative liability.