NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 – DESCRIPTION OF BUSINESS
Sports
Field Holdings, Inc. (the “Company”, “Sports Field Holdings”, “we”, “our”, or
“us”) is a Nevada corporation engaged in product development, engineering, manufacturing, and the construction, design
and building of athletic facilities, as well as supplying its own proprietary high end synthetic turf products to the sports industry.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do
not include all of the information and disclosures required by GAAP for annual financial statements. In the opinion of management,
such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair
presentation of the condensed financial position of the Company as of June 30, 2016 and the results of operations for the three
and six months ended June 30, 2016 and cash flows for the six months ended June 30, 2016. The results of operations for the three
and six months ended June 30, 2016 are not necessarily indicative of the operating results for the full year ending December 31,
2016 or any other period.
These
condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related
disclosures of the Company as of December 31, 2015 and for the year then ended, which were filed with the Securities and Exchange
Commission (“SEC”) on Form 10-K on April 12, 2016.
NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying condensed consolidated financial statements include the accounts of Sports Field Holdings, Inc. and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of condensed consolidated 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 disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported
amounts of revenue and expenses during the periods. Actual results could differ from those estimates. The Company’s significant
estimates and assumptions include the accounts receivable allowance for doubtful accounts, percentage of completion revenue recognition
method, the useful life of fixed assets and assumptions used in the fair value of stock-based compensation.
Revenues
and Cost Recognition
Revenues
from construction contracts are included in contract revenue in the condensed consolidated statements of operations and are recognized
under the percentage-of-completion accounting method. The percent complete is measured by the cost incurred to date compared to
the estimated total cost of each project. This method is used as management considers expended cost to be the best available measure
of progress on these contracts, the majority of which are completed within one year, but may occasionally extend beyond one year.
Inherent uncertainties in estimating costs make it at least reasonably possible that the estimates used will change within the
near term and over the life of the contracts.
Contract
costs include all direct material and labor costs and those indirect costs related to contract performance and completion. Provisions
for estimated losses on uncompleted contracts are made in the period in which such losses are determined. General and administrative
costs are charged to expense as incurred.
Changes
in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final
contract settlements, may result in revisions to costs and income. Such revisions are recognized in the period in which they are
determined.
Costs
and estimated earnings in excess of billings are comprised principally of revenue recognized on contracts (on the percentage-of-completion
method) for which billings had not been presented to customers because the amounts were not billable under the contract terms
at the balance sheet date. In accordance with the contract terms, any unbilled receivables at period end will be billed subsequently.
Amounts are billed based on contractual terms. Billings in excess of costs and estimated earnings represent billings in excess
of revenues recognized.
Cash
and Cash Equivalents
The
Company considers all short-term highly liquid investments with a remaining maturity at the date of purchase of three months or
less to be cash equivalents. As of June 30, 2016 and December 31, 2015 the company did not have any cash equivalents.
Property,
Plant and Equipment
Property,
plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated
using the straight-line method over the estimated useful lives of the assets, which generally range from 3 to 5 years. Gains and
losses from the retirement or disposition of property and equipment are included in operations in the period incurred. Maintenance
and repairs are expensed as incurred.
Stock-Based
Compensation
The
Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award.
For employees, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is
generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. The fair value
amount is then recognized over the period during which services are required to be provided in exchange for the award, usually
the vesting period. Awards granted to directors are treated on the same basis as awards granted to employees.
Concentrations
of Credit Risk
Financial
instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash
and cash equivalents. The Company places its cash and temporary cash investments with credit quality institutions. At times, such
amounts may be in excess of the FDIC insurance limit.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require
collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the
outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if
receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management.
The maximum accounting loss from the credit risk associated with accounts receivable is the amount of the receivable recorded,
which is the face amount of the receivable, net of the allowance for doubtful accounts. As of June 30, 2016 and December 31, 2015,
the Company’s accounts receivable balance was $187,202 and $151,168, respectively, and the allowance for doubtful accounts
is $0 in each period.
Research
and Development
Research
and development expenses are charged to operations as incurred. For the three months ended June 30, 2016 and 2015, the Company
incurred research and development expenses of $28,674 and $0, respectively. For the six months ended June 30, 2016 and 2015, the
Company incurred research and development expenses of $88,447 and $0, respectively.
Warranty
Costs
The
Company generally provides a warranty on the products installed for up to 8 years with certain limitations and exclusions based
upon the manufacturer’s product warranty; therefore the Company does not believe a warranty reserve is required as of June
30, 2016 and December 31, 2015.
Fair
Value of Financial Instruments
Accounting
Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value
of certain financial instruments. The carrying value of cash and cash equivalents, accounts payable and accrued liabilities, and
short-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these
instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized
or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future
cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities
have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.
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 would be recorded as a debt discount against the face amount of the
respective debt instrument. The debt discount attributable to the BCF is amortized over the period from issuance to the date that
the debt matures.
Derivative
Instruments
The
Company evaluates its convertible debt, warrants or other contracts to determine if those contracts or embedded components of
those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-15. The result of this accounting
treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability.
In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations
as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at
the conversion date and then that fair value is reclassified to equity.
In
circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also
other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative
instruments are accounted for as a single, compound derivative instrument.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject
to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date.
Net
Income (Loss) Per Common Share
The
Company computes basic net income (loss) per share by dividing net income (loss) per share available to common stockholders by
the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities.
Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially
dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable.
The computation of basic and diluted loss per share excludes potentially dilutive securities because their inclusion would be
anti-dilutive. Anti-dilutive securities excluded from the computation of basic and diluted net loss per share for the
six months ended June 30, 2016 and 2015, respectively, are as follows:
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock
|
|
|
662,543
|
|
|
|
500,000
|
|
Options to purchase common stock
|
|
|
622,500
|
|
|
|
230,000
|
|
Unvested restricted common shares
|
|
|
100,000
|
|
|
|
-
|
|
Convertible Notes
|
|
|
679,498
|
|
|
|
456,075
|
|
Totals
|
|
|
2,064,541
|
|
|
|
1,186,075
|
|
Shares
outstanding
Shares
outstanding include shares of unvested restricted stock. Unvested restricted stock included in reportable shares outstanding was
100,000 and 0 shares as of June 30, 2016 and 2015, respectively. Shares of unvested restricted stock are excluded from our calculation
of basic weighted average shares outstanding, but their dilutive impact is added back in the calculation of diluted weighted average
shares outstanding.
Significant
Customers
The Company’s business focuses on
securing a smaller number of high quality, highly profitable projects, which sometimes results in having a concentration of sales
and accounts receivable among a few customers. This concentration is customary among the design and build industry for a company
of our size. As we continue to grow and are awarded more projects, this concentration will continue to decrease.
At June 30, 2016, the Company had three
customers representing 100.0% of the total accounts receivable balance.
At December 31, 2015, the Company had
two customers representing 94% of the total accounts receivable balance.
For
the three months ended June 30, 2016, the Company had three customers that represented 46%, 16% and 26% of the total revenue and
for the three months ended June 30, 2015, the Company had two customers that represented 74% and 16% of the total revenue.
For
the six months ended June 30, 2016, the Company had three customers that represented 24%, 51% and 17% of the total revenue and
for the six months ended June 30, 2015, the Company had two customers that represented 45% and 49% of the total revenue.
Reclassifications
Certain
items in the prior year financial statements have been reclassified to conform to the current year presentation.
Recently
Adopted Accounting Guidance
In April 2015, the FASB
issued Accounting Standards Update No. 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation
of Debt Issuance Costs
, or ASU 2015-03. ASU 2015-03 amends current presentation guidance by requiring 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. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be
presented as an asset in the balance sheet. We adopted the provisions of ASU 2015-03 on January 1, 2016 and prior period amounts
have been reclassified to conform to the current period presentation. As of December 31, 2015, $23,037 of debt issuance costs
were reclassified in the condensed consolidated balance sheet from current assets to convertible notes payable. The adoption of
ASU 2015-03 did not materially impact our condensed consolidated financial position, results of operations or cash flows.
In
June 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-12,
Compensation-Stock
Compensation
. The amendments in this update apply to reporting entities that grant their employees share-based payments
in which the terms of the award provide that a performance target can be achieved after the requisite service period. This Accounting
Standards Update is the final version of Proposed Accounting Standards Update EITF-13D-Compensation-Stock Compensation (Topic
718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after
the Requisite Service Period, which has been deleted. The amendments require that a performance target that affects vesting
and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should
apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such
awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation
cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent
the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance
target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation
cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized
during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted
to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service
and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the
stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite
service period. The amendments in this update are effective for annual periods and interim periods within those annual periods
beginning after December 15, 2015, and early adoption is permitted.
We adopted the provisions
of ASU 2014-12 on January 1, 2016. The adoption of ASU 2014-12 did not impact our condensed consolidated financial position, results
of operations or cash flows.
Recent
Accounting Guidance Not Yet Adopted
During
May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which
requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new
guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising
from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to
obtain or fulfill a contract. In July 2015, the FASB voted to delay the effective date of ASU 2014-09 by one year to the first
quarter of 2018 to provide companies sufficient time to implement the standards. Early Adoption will be permitted, but not before
the first quarter of 2017. Adoption can occur using one of two prescribed transition methods. The Company is currently evaluating
the impact of the new standard.
In
August 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-15,
Presentation of
Financial Statements-Going Concern.
The Update provides U.S. GAAP guidance on management’s responsibility in evaluating
whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures.
For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial
doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are
issued. This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2013-300-Presentation of
Financial Statements (Topic 205): Disclosure of Uncertainties about an Entity’s Going Concern Presumption, which has been
deleted. The amendments in this update are effective for the annual period ending after December 15, 2016, and for annual
periods and interim periods thereafter. The adoption of ASU 2014-15 is not expected to have a material impact on our financial
position, results of operations or cash flows.
In
February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")
No. 2016-02, “Leases” (topic 842). The FASB issued this update to increase transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those
fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.
In
March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.
2016-06, “Derivatives and Hedging” (topic 815). The FASB issued this update to clarify the requirements for assessing
whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely
related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the
embedded call (put) options solely in accordance with the four-step decision sequence. The updated guidance is effective for annual
periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is
permitted. The Company is currently evaluating the impact of the new standard.
In
April 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.
2016-09, “Compensation – Stock Compensation” (topic 718). The FASB issued this update to improve the accounting
for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several
aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b)
classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated guidance
is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early
adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.
In
April 2016, the Financial Accounting Standards Board (‘FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing” (topic 606).
In March 2016, the Financial Accounting Standards Board (‘FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross verses
Net)” (topic 606). These amendments provide additional clarification and implementation guidance on the previously issued
ASU 2014-09, “Revenue from Contracts with Customers”. The amendments in ASU 2016-10 provide clarifying guidance on
materiality of performance obligations; evaluating distinct performance obligations; treatment of shipping and handling costs;
and determining whether an entity's promise to grant a license provides a customer with either a right to use an entity's intellectual
property or a right to access an entity's intellectual property. The amendments in ASU 2016-08 clarify how an entity should identify
the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain
types of arrangements. The adoption of ASU 2016-10 and ASU 2016-08 is to coincide with an entity's adoption of ASU 2014-09, which
we intend to adopt for interim and annual reporting periods beginning after December 15, 2017. The Company is currently evaluating
the impact of the new standard.
There
were no other new accounting pronouncements that were issued or became effective since the issuance of our 2015 Annual Report
on Form 10-K that had, or are expected to have, a material impact on our condensed consolidated financial position, results of
operations or cash flows.
Subsequent
Events
Management
has evaluated subsequent events or transactions occurring through the date on which the financial statements were 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 condensed consolidated financial statements, except as disclosed.
NOTE
3 – GOING CONCERN
As
reflected in the accompanying condensed consolidated financial statements, as of June 30, 2016 the Company had a cash deficit
of $(3,518) and a working capital deficit of $(2,272,290). Furthermore, the Company had a net loss and net cash used in operations
of $(2,144,962) and (1,393,016), respectively, for the six months ended June 30, 2016 and an accumulated deficit totaling $(12,414,480).
These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The
ability of the Company to continue its operations as a going concern is dependent on Management's plans, which include the raising
of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including
but not limited to term notes, until such time that funds provided by operations are sufficient to fund working capital requirements.
The
Company will require additional funding to finance the growth of its current and expected future operations as well as to achieve
its strategic objectives. The Company believes its current available cash along with anticipated revenues may be insufficient
to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable
to the Company, if at all.
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any
adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should
the Company be unable to continue as a going concern.
NOTE
4 – COSTS AND ESTIMATED EARNINGS ON CONTRACTS IN PROCESS
Following
is a summary of costs, billings, and estimated earnings on contracts in process as of June 30, 2016 and December 31, 2015:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Costs incurred on contracts in progress
|
|
$
|
4,686,789
|
|
|
$
|
5,395,046
|
|
Estimated earnings (losses)
|
|
|
(642,505
|
)
|
|
|
(863,259
|
)
|
|
|
|
4,044,284
|
|
|
|
4,531,787
|
|
Less billings to date
|
|
|
(4,088,125
|
)
|
|
|
(4,524,817
|
)
|
|
|
$
|
(43,841
|
)
|
|
$
|
6,970
|
|
The
above accounts are shown in the accompanying condensed consolidated balance sheet under these captions at June 30, 2016 and December
31, 2015:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Costs and estimated earnings in excess of billings
|
|
$
|
97,796
|
|
|
$
|
137,016
|
|
Billings in excess of costs and estimated earnings
|
|
|
(82,322
|
)
|
|
|
-
|
|
Provision for estimated losses on uncompleted contracts
|
|
|
(59,315
|
)
|
|
|
(130,046
|
)
|
|
|
$
|
(43,841
|
)
|
|
$
|
6,970
|
|
Warranty
Costs
During
the three and six months ended June 30, 2016 the Company incurred costs of approximately $8,300 and $17,500, respectively. During
the three and six months ended June 30, 2015 the Company incurred costs of approximately $206,000 and $206,000, respectively,
relating to the installation of materials by a subcontractor that has been released from the Company. The Company has implemented
policies and procedures to avoid these costs in the future. The Company generally provides a warranty on the products installed
for up to 8 years with certain limitations and exclusions based upon the manufacturer’s product warranty; therefore, the
Company does not believe a warranty reserve is required as of June 30, 2016.
NOTE
5 – PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consists of the following:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Furniture and equipment
|
|
$
|
20,278
|
|
|
$
|
20,278
|
|
Total
|
|
|
20,278
|
|
|
|
20,278
|
|
Less: accumulated depreciation
|
|
|
(8,057
|
)
|
|
|
(6,029
|
)
|
|
|
$
|
12,221
|
|
|
$
|
14,249
|
|
Depreciation
expense for the three and six months ended June 30, 2016 was $1,014 and $2,028, respectively.
Depreciation
expense for the three and six months ended June 30, 2015 was $7,225 and $14,451, respectively.
NOTE
6 – DEBT
Convertible
Notes
On
May 7, 2015, the Company issued unsecured convertible promissory notes (collectively the “Notes”) in an aggregate
principal amount of $450,000 to three accredited investors (collectively the “Note Holders”) through a private placement.
The notes pay interest equal to 9% of the principal amount of the notes, payable in one lump sum, and mature on February 1, 2016
unless the notes are converted into common stock if the Company undertakes a qualified offering of securities of at least $2,000,000
(the “Qualified Offering”). The principal of the notes are convertible into shares of common stock at a conversion
price that is the lower of $1.00 per share or the price per share offered in a Qualified Offering. In order to induce the investors
to invest in the notes, one of the Company’s shareholders assigned an aggregate of 45,000 shares of his common stock to
such investors. The Company recorded a $45,000 debt discount relating to the 45,000 shares of common stock issued with an offsetting
entry to additional paid in capital. The debt discount shall be amortized to interest expense over the life of the notes. As part
of the transaction, we incurred placement agent fees of $22,500 and legal fees of $22,500 which were recorded as debt issue costs
and shall be amortized over the life of the notes. The outstanding principal balance on the notes at December 31, 2015 was $450,000.
The
notes matured on February 1, 2016. On March 31, 2016, the Note Holders entered into a letter agreement whereby, effective as of
February 1, 2016, they waived any and all defaults that may or may not have occurred prior to the date thereof (the “Waiver”).
As consideration for the Waiver, the Company issued the Note Holders an aggregate of 45,000 shares of the Company’s common
stock. The principal amount on the Notes increased from $450,000 to $490,500 as the initial interest amount, $40,500 as of February
1, 2016, was added to the principal amount of the Notes. The maturity date of the Notes was extended to July 1, 2016 and the Notes
shall pay interest as of February 1, 2016 at a rate of 9% per annum, payable in one lump sum on the maturity date. In addition,
on any note conversion date from February 1, 2016 through July 1, 2016, the Notes are convertible into shares of the Company’s
common stock at a conversion price of $1.00 per share. On any Note conversion after July 1, 2016, the notes are convertible into
shares of the Company’s common stock at a conversion price that is the lower of (i) $1.00 per share and (ii) the volume-weighted
average price for the last five trading days preceding the conversion date. All remaining terms of the Notes remained the same.
Glenn
Tilley, a director of the Company, is the holder of $163,500 of principal of the aforementioned Notes.
As of July 1, 2016, the Company is
not compliant with the repayment terms of the Notes but no defaults under the Notes have been called by the Note Holders. As of
that date, the outstanding principal balance on the Notes was $450,000. The Company is currently conducting good faith negotiations
with the Note Holders to further extend the maturity date, however, there can be no assurance that a further extension will be
granted.
In
accordance with ASC 470, since the present value of the cash flows under the new debt instrument was not at least ten percent
different from the present value of the remaining cash flows under the terms of the original debt instrument, the Company accounted
for the Waiver as a debt modification. Accordingly, the Company recorded a debt discount of $49,500 in the condensed consolidated
balance sheet. The debt discount shall be amortized to interest expense over the life of the note.
On
August 19, 2015, we entered into a Securities Purchase Agreement (the “Agreement”) with a private investor (the “Investor”).
Under the Agreement, the Investor agreed to purchase convertible debentures in the aggregate principal amount of up to $450,000
(together the “Debentures” and each individual issuance a “Debenture”), bearing interest at a rate of
0% per annum, with maturity on the thirty-six (36) month anniversary of the respective date of issuance.
On
the Initial Closing Date, we issued and sold to the Investor, and the Investor purchased from us, a first Debenture in the principal
amount of $150,000 for a purchase price of $135,000. $15,000 was recorded as an original issue discount and will be accreted over
the life of the note to interest expense. The Agreement provides that, subject to our compliance with certain conditions to closing,
at the request of the Company and approval by the Investor, (i) we will issue and sell to the Investor, and the Investor will
purchase from us, a second Debenture in the principal amount of $150,000 for a purchase price of $135,000 and (ii) thereafter,
we will issue and sell to the Investor, and the Investor will purchase from us, a third Debenture in the principal amount of $150,000
for a purchase price of $135,000.
The
principal amount of the Debentures can be converted at the option of the Investor into shares of our common stock at a conversion
price per share of $1.00 until the six month anniversary of each closing date. If the Debenture is not repaid within six
months, the Investor will be able to convert such Debenture at a conversion price equal to 65% of the lowest closing bid price
for our common stock during the previous 20 trading days, subject to the terms and conditions contained in the Debenture. If the
Debentures are repaid within 90 days of the date of issuance, there is no prepayment penalty or premium. Following such
time, a prepayment penalty or premium will apply. As part of the transaction, we agreed to pay the Investor $5,000 and issue
25,000 shares of our Common Stock for certain due diligence and other transaction related costs. In-addition the Company incurred
placement agent fees of $7,500 and legal fees of $7,500. The Company recorded a $25,000 debt discount relating to the 25,000 shares
of common stock issued. The debt discount shall be amortized to interest expense over the life of the note. The remaining fees
were recorded as debt issue costs and shall be amortized over the life of the note.
The
Company assessed the conversion feature of the Debentures on the date of issuance and at end of each subsequent reporting period
and concluded the conversion feature of the Debentures do not qualify as a derivative because there is no market mechanism for
net settlement and it is not readily convertible to cash. The Company will reassess the conversion feature of the Debentures for
derivative treatment at the end of each subsequent reporting period.
The
outstanding principal balance on the Debentures at December 31, 2015 was $150,000. On February 19, 2016, the Company paid the
Debentures in full along with a prepayment penalty in the amount of $45,000.
On
February 22, 2016 (the “Effective Date”), the Company issued a convertible note in the principal aggregate amount
of $170,000 to a private investor. The note pays interest at a rate of 12% per annum and matures on August 19, 2016 (the “Maturity
Date”). The Note is convertible into shares of the Company’s common stock at a conversion price equal to: (i) from
the Effective Date through the Maturity Date at $1.00 per share; and (ii) beginning one day after the Maturity Date, or notwithstanding
the foregoing, at any time after the Company has registered shares of its common stock underlying the note in a registration statement
on Form S-1 or any other form applicable thereto, the lower of $1.00 per share or the variable conversion price (as defined in
the note).
The
Company used the proceeds of the note to pay off a debenture issued in favor of a private investor on August 19, 2015. The debenture
was in the principal amount of $150,000 and as of the date of this filing the investor has been paid all principal and interest
due in full satisfaction thereof.
As
additional consideration for issuing the note, on the Effective Date the Company issued to the investor 35,000 shares of the Company’s
restricted common stock. The Company recorded a $30,637 debt discount relating to the 35,000 shares of common stock issued. The
debt discount shall be amortized to interest expense over the life of the convertible note.
The
intrinsic value of the convertible note, when issued, gave rise to a beneficial conversion feature which was recorded as a discount
to the note of $67,637 to be amortized over the period from issuance to the date that the debt matures.
The
Company assessed the conversion feature of the note on the date of issuance and at end of each subsequent reporting period and
concluded the conversion feature of the note did not qualify as a derivative because there is no market mechanism for net settlement
and it is not readily convertible to cash. The Company will reassess the conversion feature of the note for derivative treatment
at the end of each subsequent reporting period.
The
outstanding principal balance on the convertible note at June 30, 2016 was $170,000.
Promissory
Notes
On
September 15, 2015, the Company entered into a short term loan agreement with an investor. The principal amount of the loan was
$200,000. The first $100,000 of the loan is payable upon the Company raising $500,000 in a qualified offering. The remaining balances
is payable upon the Company raising $1,000,000 in a qualified offering. The loan bears interest at a rate of 8%. As part of the
transaction, we incurred placement agent fees of $10,000 which were recorded as debt issue costs and shall be amortized over the
life of the loan. On May 3, 2016, the Company paid 10,000 in note principal and $10,000 of accrued interest on the loan and the
Company entered into a promissory note with the lender for the remaining principal amount of $190,000. Pursuant to the terms of
the promissory note agreement, the note bears interest at a rate of 8% and requires the Company to make one monthly principal
payment of $10,000, one monthly principal payment of $12,500, eleven monthly principal payments of $15,000 and one monthly principal
payment of $2,500, all along with interest starting on June 1, 2016. The note matures on July 1, 2017 and is unsecured. The outstanding
principal balance on the note at June 30, 2016 was $170,000.
On
September 21, 2015, the Company entered into a promissory note with an investor in the principal amount of $163,993. The
Company received proceeds of $155,993 and $8,000 was recorded as an original issue discount which will be accreted over the
life of the note to interest expense. The promissory note is due on demand and carries a 5.0% interest rate. The promissory
note is secured by all assets of the Company. On November 17, 2015, the Company paid $50,000 of principal on the note. The
outstanding principal balance on the note at December 31, 2015 was $113,993. During the six months ended June 30, 2016, the
Company paid the remaining note principal of $113,993 in full. As of June 30, 2016, accrued interest due was
$2,486.
On
January 26, 2016, the Company entered into a finance agreement with IPFS Corporation (“IPFS”). Pursuant to the terms
of the agreement, IPFS loaned the Company the principal amount of $65,006, which would accrue interest at 3.5% per annum, to partially
fund the payment of the premium of the Company’s general liability insurance. The agreement requires the Company to make
nine monthly payments of $7,328.66, including interest starting on February 27, 2016.
As
of June 30, 2016, the outstanding balance related to this finance agreement was $29,102.
On
November 30, 2015, the Company entered into a finance agreement with First Insurance Funding (“FIF”). Pursuant to
the terms of the agreement, FIF loaned the Company the principal amount of $29,700, which would accrue interest at 3.8% per annum,
to partially fund the payment of the premium of the Company’s directors and officers insurance. The agreement requires the
Company to make nine monthly payments of $3,352.47, including interest starting on January 3, 2016.
As
of June 30, 2016, the outstanding balance related to this finance agreement was $6,673.
NOTE
7- FACTOR AGREEMENT
On
March 28, 2016, the Company entered into an agreement with a financial services company (the “Factor”) for the purchase
and sale of accounts receivables. The financial services company advances up to 80% of qualified customer invoices and holds the
remaining 20% as a reserve until the customer pays the financial services company. The released reserves are returned to the Company,
less applicable discount fees. The Company is initially charged 2.0% on the face value of each invoice purchased and 0.008% for
every 30 days the invoice remains outstanding. Uncollectable customer invoices are charged back to the Company after 90 days.
During the six months ended June 30, 2016, accounts receivable purchased by the Factor amounted to $353,648 and advances from
the Factor amounted to $282,917. At June 30, 2016 the advances from the factor, inclusive of fees, amounted to $58,788. Advances
from the Factor are collateralized by all accounts receivable of the Company.
NOTE
8- STOCKHOLDERS EQUITY (DEFICIT)
There
is not yet a viable market for the Company’s common stock to determine its fair value, therefore management is required
to estimate the fair value to be utilized in the determining stock-based compensation costs. In estimating the fair value, management
considers recent sales of its common stock to independent qualified investors and other factors. Considerable management judgment
is necessary to estimate the fair value. Accordingly, actual results could vary significantly from management’s
estimates.
Preferred
Stock
The
Company has authorized 20,000,000 shares of preferred stock, with a par value of $0.00001 per share. As of June 30, 2016 and December
31, 2015, the Company has -0- shares of preferred stock issued and outstanding.
Common
Stock
The
Company has authorized 250,000,000 shares of common stock, with a par value of $0.00001 per share. As of June 30, 2016 and December
31, 2015, the Company has 16,281,571 and 13,915,331 shares of common stock issued and outstanding, respectively.
Common
stock issued in placement of debt
As
part of a securities purchase agreement entered into on February 19, 2016, we agreed to issue an investor 35,000 shares of our
common stock.
Common
stock issued in debt modification
As
part of a debt modification entered into on March 31, 2016, we agreed to issue three investors an aggregate of 45,000 shares of
our common stock.
Common
stock issued for services
On
March 31, 2016, 1,000 shares of common stock were granted to a certain employee with a fair value of $1,100.
On
June 30, 2016, 1,500 shares of common stock were granted to a certain employee with a fair value of $1,650.
During
the six months ended June 30, 2016, 489,000 shares of common stock valued at $524,150 were issued to various consultants for professional
services provided to the Company.
As
discussed in Note 10, Jeromy Olson was issued 250,000 shares of common stock valued at $275,000 as per the terms of his employment
agreement with the company as Chief Executive Officer.
Sale
of common stock
During
the six months ended June 30, 2016, the Company sold 1,544,740 shares of common stock to investors in exchange for $1,699,214
in gross proceeds in connection with the private placement of the Company’s stock.
In
connection with the private placement the Company incurred fees of $220,929. In addition, 154,475 five year warrants with an exercise
price of $1.10 were issued to the placement agent. The Company valued the warrants at $69,147 on the commitment date using a Black-Scholes-Merton
option pricing model. The value of the warrants was a direct cost of the private placement and has been recorded as a reduction
in additional paid in capital.
Stock
options issued for services
During the six months ended June 30, 2016,
the Company's board of directors authorized the grant of 200,000 stock options, having a total fair value of approximately $97,500,
with a vesting period of 2.00 years. These options expire on January 4, 2021.
The
Company uses the Black-Scholes option pricing model to determine the fair value of the options granted. In applying the Black-Scholes
option pricing model to options granted, the Company used the following weighted average assumptions:
|
|
For the Six Months Ended June 30,
|
|
|
|
2016
|
|
Risk free interest rate
|
|
|
1.73
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
45.25
|
%
|
Expected life in years
|
|
|
5
|
|
Forfeiture Rate
|
|
|
0.00
|
%
|
Since
the Company has limited trading history, volatility was determined by averaging volatilities of comparable companies.
The
expected term of the option, taking into account both the contractual term of the option and the effects of employees’ expected
exercise and post-vesting employment termination behavior: 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-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. The
contractual term is used as the expected term for share options and similar instruments that do not qualify to use the simplified
method.
The
following is a summary of the Company’s stock option activity during the six months ended June 30, 2016:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
Outstanding - January 31, 2016
|
|
|
430,000
|
|
|
$
|
1.03
|
|
|
|
5.00
|
|
Granted
|
|
|
200,000
|
|
|
|
1.00
|
|
|
|
5.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
(7,500
|
)
|
|
|
1.50
|
|
|
|
-
|
|
Outstanding - June 30, 2016
|
|
|
622,500
|
|
|
$
|
1.02
|
|
|
|
4.07
|
|
Exercisable - June 30, 2016
|
|
|
355,000
|
|
|
$
|
1.04
|
|
|
|
3.95
|
|
At
June 30, 2016 and 2015, the total intrinsic value of options outstanding was $60,000 and $0, respectively.
At
June 30, 2016 and 2015, the total intrinsic value of options exercisable was $32,500 and $0, respectively.
Stock-based
compensation for stock options has been recorded in the condensed consolidated statements of operations and totaled $35,150 and
$69,721 for the three and six months ended June 30, 2016, respectively, and $12,317 and $23,201 for the three and six months ended
June 30, 2015, respectively. As of June 30, 2016, the remaining balance of unamortized expense is $134,564 and is expected to
be amortized over a remaining period of 1.25 years.
Stock
Warrants
The
following is a summary of the Company’s stock warrant activity during the six months ended June 30, 2016:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
Outstanding - January 1, 2016
|
|
|
508,068
|
|
|
$
|
1.00
|
|
|
|
3.13
|
|
Granted
|
|
|
154,475
|
|
|
|
1.10
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding - June 30, 2016
|
|
|
662,543
|
|
|
$
|
1.03
|
|
|
|
3.12
|
|
Exercisable - June 30, 2016
|
|
|
662,543
|
|
|
$
|
1.03
|
|
|
|
3.12
|
|
At
June 30, 2016 and 2015, the total intrinsic value of warrants outstanding and exercisable was $49,625 and $0, respectively.
NOTE
9 - RELATED PARTY TRANSACTIONS
Jeromy
Olson, the Chief Executive Officer of the Company, owns 33.3% of a sales management and consulting firm, NexPhase Global that
provides sales services to the Company. These services include the retention of two full-time senior sales representatives including
the current National Sales Director of the Company. Consulting expenses pertaining to the firm’s services were $61,000 and
$122,000 for the three and six months ended June 30, 2016, respectively. Included in consulting expense for the three and six
months ended June 30, 2016 were 10,000 and 20,000 shares of common stock valued at $11,000 and $22,000, respectively, issued to
Nexphase Global.
Consulting
expenses pertaining to the firm’s services were $40,000 and $80,000 for the three and six months ended June 30, 2015. Included
in consulting expense for the three and six months ended June 30, 2015 were 10,000 and 20,000 shares of common stock valued at
$10,000 and $20,000, respectively, issued to Nexphase Global.
Glenn
Tilley, a director of the Company, was issued 15,000 shares of our common stock as part of a Waiver entered into with Mr. Tilley
on March 31, 2016. (See Note 6 - Convertible Notes - May 7, 2015 Notes).
NOTE
10 – COMMITMENTS AND CONTINGENCIES
Services
Agreements
On
August 12, 2015, the Company entered into a Services Agreement with Aranea Partners. Aranea Partners agreed to provide investor
relations services to the Company for a period of 12 months. As compensation for the services, the Company issued 50,000 shares
of the Company common stock on August 12, 2015. On August 12, 2016, the Company is obligated to issue an additional 100,000 shares
of the Company’s common stock. The Company has recorded compensation expense relating to the agreement of $39,782 and $79,563
during the three and six months ended June 30, 2016, respectively.
On
August 4, 2015, the Company entered into a Services Agreement with a consultant. The consultant agreed to provide investor relations
services to the Company for a period of 12 months. As compensation for the services, the Company was obligated to issue 62,500
shares of the Company common stock on August 16, 2015. On November 15, 2016, the Company is obligated to issue an additional 62,500
shares of the Company’s common stock. The Company has recorded compensation expense relating to the agreement of $32,633
and $65,266 during the three and six months ended June 30, 2016, respectively.
On
February 19, 2016 (the “Effective Date”), the Company entered into a Services Agreement with a consultant. The consultant
agreed to provide investor relations services to the Company for a period of 12 months. As compensation for the services, the
Company shall pay the consultant $12,000 per month and is obligated to issue 62,500 shares of the Company common stock upon the
90-day anniversary of the Effective Date and on the 180-day, 270-day and 360-day anniversary of the Effective Date, if the agreement
is renewed as outline in the terms of the service. The Company may terminate this agreement by providing 5 days advance written
notice in the first 60 days of entering into this agreement and with 30 days advance written notice thereafter for the duration
of the agreement. The Company has recorded compensation expense relating to the equity portion of the agreement of $68,374 and
$99,180 during the three and six months ended June 30, 2016, respectively.
On
April 14, 2016 (the “Effective Date”), the Company entered into a Services Agreement with a consultant. The consultant
agreed to provide financial and operational services to the Company. The agreement terminates on March 31, 2017. As compensation
for the services, the Company shall pay the consultant $2,400 per month and is obligated to issue $1,000 in shares of the Company
common stock to be issued quarterly in arrears based on a share price equal to the 30-day moving average share price. The Company
may terminate this agreement by providing 21 days advance written notice for the duration of the agreement. The Company has recorded
compensation expense relating to the equity portion of the agreement of $2,500 and $2,500 during the three and six months ended
June 30, 2016, respectively.
Consulting
Agreements
In
March 2014, the Company reached an agreement with a consulting firm owned by the CEO of the Company to provide non-exclusive sales
services. The consulting firm will receive between 3.5% and 5% commissions on sales referred to the Company. In addition, the
consulting firm will receive a monthly fee of $6,000, 50,000 shares of common stock upon execution of the agreement, and 10,000
shares of common stock at the beginning of each three month period for the term of the agreement and any renewal periods thereafter.
The agreement is for 18 months, and is renewable for successive 18 month terms. On December 10, 2014, the consulting agreement
was amended. The monthly fee was increased to $10,000 per month retroactive to September 1, 2014 and 50,000 additional shares
of common stock were issued. In addition, the consulting firm will be issued qualified stock options as follows:
|
●
|
100,000
stock options at an exercise price of $1.50 per share that vest on December 31, 2015
|
|
●
|
100,000
stock options at an exercise price of $1.75 per share that vest on December 31, 2016
|
|
●
|
100,000
stock options at an exercise price of $2.50 per share that vest on December 31, 2017
|
The
options will be issued after the Company adopts a formal option plan that is approved by the Board of Directors.
On
March 14, 2016, the consulting agreement was further amended. The monthly fee was increased to $20,000 per month for a period
of twelve months. At the end of the twelve month period the monthly payment reverts back to $10,000.
In
March 2014, the Company reached an agreement with a consulting firm to provide non-exclusive sales services. The consulting firm
will receive up to 5% commissions on sales referred to the Company. The term of the agreement is for one year, and automatically
renews for successive one year terms unless either party notifies the other, in writing, of its intention not to renew at least
60 days before the end of the initial term of this agreement or any renewal term. As compensation for the services, the Company
shall pay the consultant $2,500 per month and is obligated to issue 50,000 shares of the Company common stock upon execution of
the agreement and 10,000 shares of the Company common stock at the beginning of each three month period for the term of the agreement
and any renewal periods thereafter. The Company may terminate this agreement by providing 5 days advance written notice in the
first 60 days of entering into this agreement and with 30 days advance written notice thereafter for the duration of the agreement.
The Company has recorded compensation expense relating to the equity portion of the agreement of $11,000 and $22,000 during the
three and six months ended June 30, 2016, respectively.
In
February 2015, the Company reached an agreement with a consulting firm to provide non-exclusive sales services with an effective
date of February 10, 2015 (the “Effective Date”). The agreement expires on December 31, 2017 and automatically renews
for successive one year terms unless either party notifies the other, in writing, of its intention not to renew at least 15 days
before the end of the initial term of this agreement or any renewal term. As compensation for the services, the consultant will
receive (i) 5% commissions on sales of products or services other than turf referred to the Company; (ii) commission based on
square footage of turf sold to certain parties as outlined in the agreement; (iii) 100,000 shares of the Company common stock
(the “Payment Shares”) upon execution of the agreement, which shall be subject to certain Clawback provisions. “Clawback”
means (i) if this agreement is terminated by the Company prior to December 31, 2016, then 50,000 of the Payment Shares shall be
forfeited, and cancelled by the Company; and (i) if this Agreement is terminated by the Company prior to December 31, 2017, then
25,000 of the Payment Shares shall be forfeited, and cancelled by the Company. No equity compensation will be owed in connection
with any renewal term. The Company has recorded compensation expense relating to the equity portion of the agreement of $9,057
and $18,114 during the three and six months ended June 30, 2016, respectively.
In
February 2015, the Company reached an agreement with an individual to provide non-exclusive sales services with an effective date
of January 1, 2015 (the “Effective Date”). The individual will receive up to 5% commissions on sales referred to the
Company. The term of the agreement is for 18 months from the date of execution, and automatically renews for successive one year
terms unless either party notifies the other, in writing, of its intention not to renew at least 90 days before the end of the
initial term of this agreement or any renewal term. As compensation for the services, the Company shall pay the consultant $5,000
per month and is obligated to issue 25,000 shares of the Company common stock within 30 days of execution of the agreement, 25,000
shares of the Company common stock within 15 days of the date of execution and delivery of a certain synthetic turf contract and
20,000 shares of the Company common stock upon reaching certain sales milestones. The Company has recorded compensation expense
relating to the equity portion of the agreement of $4,166 and $8,333 during the three and six months ended June 30, 2016, respectively.
In
November 2015, the Company reached an agreement with an individual to provide non-exclusive sales services with an effective date
of January 1, 2015 (the “Effective Date”). The term of the agreement is for 3 years from the date of execution, and
automatically renews for successive one year terms unless either party notifies the other, in writing, of its intention not to
renew at least 90 days before the end of the initial term of this agreement or any renewal term. As compensation for the services,
the Company is obligated to issue 75,000 shares of the Company common stock (the “Payment Shares”) within 30 days
of execution of the agreement, which shall be subject to certain Clawback provisions. “Clawback” means (i) if this
agreement is terminated by the Company prior to September 30, 2016, then 50,000 of the Payment Shares shall be forfeited, and
cancelled by the Company; and (i) if this Agreement is terminated by the Company prior to June 30, 2017, then 25,000 of the Payment
Shares shall be forfeited, and cancelled by the Company. No equity compensation will be owed in connection with any renewal term.
The Company has recorded compensation expense relating to the equity portion of the agreement of $6,850 and $13,700 during the
three and six months ended June 30, 2016, respectively.
In
December 2015, the Company reached an agreement with an individual to provide non-exclusive sales services. The individual will
receive up to 5% commissions on sales referred to the Company. The term of the agreement is for 18 months from the date of execution,
and automatically renews for successive one year terms unless either party notifies the other, in writing, of its intention not
to renew at least 90 days before the end of the initial term of this agreement or any renewal term. As compensation for the services,
the Company is obligated to issue 25,000 shares of the Company common stock within 30 days of execution of the agreement, 125,000
shares of the Company common stock which shall vest at the rate of 25,000 shares per quarter, effective beginning as of the quarter
ending March 31, 2016 and 20,000 shares of the Company common stock upon reaching certain sales milestones. No equity compensation
will be owed in connection with any renewal term. The Company has recorded compensation expense relating to the equity portion
of the agreement of $27,399 and $54,799 during the three and six months ended June 30, 2016, respectively.
In
March 2016, the Company reached an agreement with an individual to provide non-exclusive sales services with an effective date
of March 15, 2016 (the “Effective Date”). The individual will receive up to 1% commissions on sales referred to the
Company. The term of the agreement is for one year, and automatically renews for successive one year terms unless either party
notifies the other, in writing, of its intention not to renew at least 60 days before the end of the initial term of this agreement
or any renewal term. As compensation for the services, the Company is obligated to issue 4,000 shares of the Company common stock
on the 15
th
day of each month for the first 4 months of this agreement; and (ii) 10,000 shares of the Company common
stock for every $1 million in gross revenue earned by the Company attributable to projects sold by the individual. The Company
has recorded compensation expense relating to the equity portion of the agreement of $4,387 and $5,159 during the three and six
months ended June 30, 2016, respectively.
In April 2016, the Company reached an
agreement with an individual to provide non-exclusive sales services with an effective date of April 20, 2016 (the “Effective
Date”). The individual will receive up to 4% commissions on sales referred to the Company. The term of the agreement is
for one year, and automatically renews for successive one year terms. The Company may terminate this agreement by providing 60
days advance written notice for the duration of the agreement. As compensation for the services, the Company is obligated to issue
4,000 shares of the Company common stock on the 15
th
day of each month for the first 6 months of this agreement; and
(ii) 10,000 shares of the Company common stock for every $1 million in gross revenue earned by the Company attributable to projects
sold by the individual. The Company has recorded compensation expense relating to the equity portion of the agreement of $4,387
and $5,159 during the three and six months ended June 30, 2016, respectively.
Employment
Agreements
In
September 2014, Jeromy Olson entered into a 40 month employment agreement to serve in the capacity of CEO, with subsequent one
year renewal periods. The CEO will receive a monthly salary of $10,000 that (1) will increase to $13,000 upon the Company achieving
gross revenues of at least $10,000,000, as amended, and an operating margin of at least 15%, and (2) will increase to $16,000
per month upon the Company achieving gross revenues of at least $15,000,000 and an operating margin of at least 15%. The agreement
provides for cash bonuses of 15% of the annual Adjusted EBITDA between $1 and $1,000,000, 10% of the annual Adjusted EBITDA between
$1,000,001 and $2,000,000 and 5% of the annual Adjusted EBITDA greater than $2,000,000. For purposes of the agreement, Adjusted
EBITDA is defined as earnings before interest, taxes, depreciation and amortization less share based payments, gains or losses
on derivative instruments and other non-cash items approved by the Board of Directors. The CEO was issued 250,000 shares of common
stock on the date of the agreement and will receive 250,000 shares of common stock on January 1, 2016 provided the agreement is
still in effect. Lastly, the CEO will be issued qualified stock options as follows:
|
●
|
100,000
stock options at an exercise price of $1.50 per share that vest on December 31, 2015
|
|
●
|
100,000
stock options at an exercise price of $1.75 per share that vest on December 31, 2016
|
|
●
|
100,000
stock options at an exercise price of $2.50 per share that vest on December 31, 2017
|
The
options will be issued after the Company adopts a formal option plan that is approved by the Board of Directors.
Director
Agreements
On
January 4, 2016, the Company entered into a director agreement with Glenn Tilley, concurrent with Mr. Tilley’s appointment
to the Board of Directors of the Company (the “Board”) effective January 4, 2016. The director agreement may, at the
option of the Board, be automatically renewed on such date that Mr. Tilley is re-elected to the Board. Pursuant to the director
agreement, Mr. Tilley is to be paid a stipend of One Thousand Dollars ($1,000) per meeting of the Board, which shall be contingent
upon his attendance at the meetings being in person, rather than via telephone or some other electronic medium. Additionally,
Mr. Tilley shall receive non-qualified stock options (the “Options”) to purchase Two Hundred Thousand (200,000) shares
of the Company’s common stock. The exercise price of the Options shall be One Dollar ($1.00) per share. The Options shall
vest in equal amounts over a period of two (2) years at the rate of Twenty Five Thousand (25,000) shares per fiscal quarter on
the last day of each such quarter, commencing January 4, 2016. The total grant date value of the options was $97,535 which shall
be expensed over the vesting period.
Advisory
Board Agreements
On
February 11, 2016, the Company entered into an advisory board agreement with John Brenkus, effective June 1, 2016 (the (“Effective
Date”). The term of the agreement is for a period of 24 months commencing on the Effective Date. Pursuant to the agreement,
Mr. Brenkus is to be issued 25,000 shares of the Company common stock at the beginning of each quarter starting on the Effective
Date through the term of the agreement. The Company has recorded compensation expense relating to the agreement of $8,740 and
$8,740 during the three and six months ended June 30, 2016, respectively.
Supply
Agreement
On
December 2, 2015, IMG Academy LLC (“IMG”) and the Company entered into an Official Supplier Agreement (the “Agreement”).
The term of the Agreement is January 1, 2016 through December 31, 2019. The Agreement grants SFE certain defined promotional opportunities
and supplier benefits. For the exclusive rights given to SFE in the Agreement, SFE will pay IMG $626,000. The payment terms are
1/3 after completion and acceptance of the lacrosse field built by SFE, 1/3 fifteen (15) months later and 1/3 30 months later
plus IMG is capped on the price per square ft it will pay for future turf fields. If the Agreement is terminated at any time,
the unpaid balance on the $626,000 owed to IMG still remains payable. As of June 30, 2016 the Company has accrued a liability
of $78,250 related to the Agreement and is included in accounts payable and accrued expenses at June 30, 2016.
Placement
Agent and Finders Agreements
The Company entered into a non-exclusive agreement with GP Nurmenkari, Inc. (“GP”)
effective June 28, 2016 (the “GP Agreement”) and ending on August 31, 2016 (the “GP Term”), pursuant to
which GP will introduce the Company to one or more investors (“Investors”) in connection with providing the Company
with equity and/or debt financing.
GP
will be compensated for its services under the agreement as follows:
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(A)
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The Company shall pay consideration to GP at each closing, in cash, a fee in an amount equal to 4.5% of the
aggregate gross proceeds raised from (i) each sale of securities pursuant to a financing.
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(B)
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The Company shall grant and deliver to GP at each closing of a Financing warrants to purchase common stock
of the Company (the “GP Warrants”) in the amount equal to (i) in the case of an equity financing, the amount that is
5.5% of the securities sold pursuant to such equity financing and (ii) in the case of a debt financing, the number of shares of
common stock of the Company that can be purchased with 5.5% of the amount of cash funded pursuant to such debt financing, based
on the highest trading price of the Company’s common stock as of the trading date immediately preceding the date of such
closing. The GP Warrants shall (i) be exercisable commencing on the date of issuance at a price equal to the lower of (x) $0.70
per share and (y) the market price equal to the trailing volume weighted average price (VWAP) for the seven trading days immediately
preceding the date of such closing, (ii) expire seven years after the date of issuance, and (iii) include the most favorable anti-dilution
protection contained in the Company’s current securities or included in any security issued by the Company during the term
of the Warrants, a cashless and automatic exercise provision, customary registration rights, and shall be non-redeemable.
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(C)
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If within twenty-four months from the date of the agreement, the Company completes any financing of equity
or debt with any Investors who participated in a financing, the Company will pay to GP upon the closing of such financing all compensation
set forth in the GP Agreement.
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(D)
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If at any time within the twelve months following the expiration of the GP Agreement, the Company completes
a transaction or receives consideration from any person (i) who has issued a term sheet to the Company through GP during the GP
Term; (ii) with whom the Company or GP had discussions during the GP Term, then, the Company shall pay GP the cash fee described
above.
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Litigation
The
Company is engaged in an administrative proceeding against a former employee who was terminated from his positions with the Company
for cause on May 12, 2014. The former employee has claimed he is due between $24,000 and $48,000 in unpaid wages. The Company
believes this claim to be unfounded and is in the process of settling the matter while continuing to vigorously defend itself.
Operating
Leases
On
September 23, 2015, the Company entered into a new lease agreement for its office space in Illinois. The lease commences on January
1, 2016 and expires on December 31, 2016. The lease has minimum monthly payments of $1,045. The rents for the first and seventh
months of 2016 are free. The lease automatically renews for periods of 12 months unless a three month notice is provided by either
the Company or the landlord. The Company was required to pay a security deposit to the lessor totaling $2,090. Deferred rent at
June 30, 2016 and December 31, 2015 was immaterial.
For
the three months ended June 30, 2016 and 2015, the Company incurred rent expense of $2,854 and $1,906, respectively. For the six
months ended June 30, 2016 and 2015, the Company incurred rent expense of $6,471 and $12,017, respectively.
NOTE
11 – SUBSEQUENT EVENTS
Subsequent
to June 30, 2016, the Company sold 170,453 shares of common stock to investors in exchange for $187,498 in gross proceeds in connection
with the private placement of the Company’s stock.
In
connection with the private placement the Company incurred fees of $24,375. In addition, 17,045 five year warrants with an exercise
price of $1.10 were issued to the placement agent. The Company valued the warrants on the commitment date using a Black-Scholes-Merton
option pricing model. The value of the warrants was a direct cost of the private placement and has been recorded as a reduction
in additional paid in capital.
Subsequent
to June 30, 2016, 62,000 shares of common stock were issued to a consultant for professional services provided to the Company.
On
July 14, 2016, the Company closed a Credit Agreement (the “Credit Agreement”) by and among the Company and First Form,
Inc. (the “Borrowers”) and Genlink Capital, LLC, as lender (“Genlink”). Pursuant to the Credit Agreement,
Genlink agreed to loan the Company up to a maximum of $1 million for general operating expenses. An initial amount of $670,000
was funded by Genlink at the closing of the Credit Agreement. Any increase in the amount extended to the Borrowers shall be at
the discretion of Genlink.
The
amounts borrowed pursuant to the Credit Agreement are evidenced by a Revolving Note (the “Revolving Note”) and the
repayment of the Revolving Note is secured by a first position security interest in substantially all of the Company’s assets
in favor of Genlink, as evidenced by a Security Agreement by and among the Borrowers and Genlink (the “Security Agreement”).
The Revolving Note is due and payable, along with interest thereon, on December 20, 2017, and bears interest at the rate of 15%
per annum, increasing to 19% upon the occurrence of an event of default. The Company incurred loan fees of approximately $35,000
for entering into the Credit Agreement. In addition, as per the terms of the GP Finders Agreement (See Note 10), the Company is
obligated to pay a fee of $30,150 to GP and issue GP 51,395 common stock purchase warrants. The Company must pay a minimum of
$75,000 in interest over the life of the loan. The principal balance on the note as of the date of this filing was $670,000.
On
August 3, 2016, the Company entered into a sponsorship agreement with the National Council of Youth Sports (NCYS).
NCYS agreed to provide marketing support services to the Company for a period of 12 months. The term of the agreement is
for one year, and automatically renews for successive one year terms unless either party notifies the other, in writing, of its
intention not to renew at least 60 days before the end of the initial term of this agreement or any renewal term. The Company
will compensate NCYS an annual non-refundable sponsorship fee of $20,000 per year, with $5,000 due upon signing of the agreement
and three (3) additional $5,000 payments made every 4 weeks successively, and $20,000 per year thereafter due on the anniversary
renewal date for the term of the agreement. Furthermore, the Company will compensate NCYS an additional commission fee for each
referral/introduction that results in a business transaction. The amount of commission fee due is 2.0% of the Total Invoice Price
of the Project. “Total Invoice Price” shall mean the total contract price at which a Project is invoiced to the customer.
No fee shall be due or payable until the Company has entered into the business transaction with those that NCYS has introduced.
The fee shall be paid as follows: (i) on the 10th day following the date on which construction begins, half (50%) will be due
and payable and (ii) upon the Company’s receipt of payment in full the remaining half (50%) shall be due and payable.