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.
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 non-conductive 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 also 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, 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 “plug-in” ceiling fans and light fixtures under the General Electric
(“GE”) 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 unaudited condensed 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 June 2013, increasing the ownership percentage
from 94.35% back to 98.8%. During 2014, there was no activity in the Subsidiary. Its pro rata share of the Company’s 2014
and 2015 loss from operations is recognized in the financial statements.
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 $5,062,130 and $450,868 in money market
as of June 30, 2016 and December 31, 2015, respectively.
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 three months ended June 30, 2016 and for the year ended December 31, 2015:
|
|
June
30, 2016
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
$
|
1,314,128
|
|
|
$
|
234,309
|
|
Allowance for Doubtful
Accounts
|
|
|
—
|
|
|
|
—
|
|
Net Accounts
Receivable
|
|
$
|
1,314,128
|
|
|
$
|
234,309
|
|
|
|
|
|
|
|
|
|
|
All amounts are deemed collectible at June
30, 2016 and December 31, 2015 and accordingly, the Company has not incurred any bad debt expense at June 30, 2016 and December
31, 2015.
Inventory
Inventory consists of finished
goods purchased, which are valued at the lower of cost or market value, with cost being determined on the firstin, firstout 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 June,
2016 and December 31, 2015, the Company had $2,438,900 and $263,871 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 June 30, 2016 and December 31, 2015, the Company has determined that no allowance is 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 57 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 June, 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.
Fair Value of Financial Instruments
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 47020 “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 7181030 of the FASB Accounting Standards Codification.
Pursuant to paragraph 71810306 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 71810502(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 71810S991, 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 71810502(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 50550 of the FASB Accounting
Standards Codification (“Subtopic 50550”).
Pursuant to ASC Section
5055030, 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 71810502(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 71810502(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 50550257,
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 50550451) depends on the specific facts and circumstances. Pursuant to ASC paragraph 50550451,
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 5055030 provides
guidance on the determination of the measurement date for transactions that are within the scope of this Subtopic.
Pursuant to Paragraphs 50550258 and 50550259, 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 5055030S991,
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 six months ended June 30, 2016 and 2015, 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 June 30, 2016 and December 31, 2015:
|
|
June
30, 2016
(Unaudited)
|
|
December 31, 2015
(Audited)
|
Convertible
Debt (Exercise price - $0.25/share)
|
|
14,296,935
|
|
|
18,056,935
|
|
Stock
Warrants (Exercise price - $0.001 - $3.00/share)
|
|
12,745,651
|
|
|
9,728,984
|
|
Stock
Options (Exercise price $0.35)
|
|
200,000
|
|
|
200,000
|
|
Total
|
|
27,242,586
|
|
|
27,985,919
|
|
Related Parties
The Company follows subtopic
85010 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party
transactions.
Pursuant to Section 8501020
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 unaudited condensed 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
45020 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 8551050 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 April 2015, the FASB issued
Accounting Standards Update No. 201503, Interest—Imputation of Interest (Topic 83530): Simplifying the Presentation of Debt
Issuance Costs (“ASU 201503”). ASU 201503 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 201503. ASU 201503 is effective
for financial statements issued for fiscal years beginning after December 15, 2015, 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. 201511, Inventory (Topic 330): Simplifying the Measurement
of Inventory (“ASU 201511”), which applies guidance on the subsequent measurement of inventory. ASU 201511 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 201511 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
201511 and is currently evaluating ASU 201511 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 June 30, 2016 and December 31, 2015:
|
|
June
30, 2016
(Unaudited)
|
|
December
31, 2015
(Audited)
|
|
|
|
|
|
|
|
|
|
Office Equipment
|
|
$
|
146,162
|
|
|
$
|
136,611
|
|
Furniture and Fixtures
|
|
|
31,848
|
|
|
|
30,561
|
|
Total
|
|
|
178,010
|
|
|
|
167,172
|
|
Less: Accumulated Depreciation
|
|
|
(52,658)
|
|
|
|
(39,651)
|
|
Property and Equipment - net
|
|
$
|
125,352
|
|
|
$
|
127,521
|
|
Depreciation expense amounted to $6,593 and
$13,006 for the three and six months ended June 30, 2016, respectively; and $5,404 and $10,868 for the three and six months ended
June 30, 2015, respectively.
Note 4 Intangible Assets
Intangible assets (patents) consisted of the
following at June 30, 2016 and December 31, 2015:
|
|
June
30, 2016
(Unaudited)
|
|
December
31, 2015
(Audited)
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
123,247
|
|
|
$
|
103,792
|
|
Less: Impairment Charges
|
|
|
—
|
|
|
|
—
|
|
Less: Accumulated Amortization
|
|
|
(24,297)
|
|
|
|
(20,618)
|
|
Patents - net
|
|
$
|
98,950
|
|
|
$
|
83,174
|
|
Amortization expense associated with
patents amounted to $1,902 and $3,679 for the three and six months ended June 30, 2016, respectively, and $1,305 and $2,320 for
the three and six months ended June 30, 2015, respectively.
At June 30, 2016, future amortization of intangible
assets was as follows:
|
Year Ending December 31
|
|
|
|
|
|
|
2016
|
|
|
$
|
4,142
|
|
|
2017
|
|
|
|
8,217
|
|
|
2018
|
|
|
|
8,217
|
|
|
2019
|
|
|
|
8,216
|
|
|
2020
|
|
|
|
8,239
|
|
|
2021 and Thereafter
|
|
|
|
61,919
|
|
|
|
|
|
$
|
98,950
|
|
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 trademarking of its products. The License Agreement is amortized through its expiration
in November 2018.
|
|
|
June 30, 2016
|
|
|
|
December 31, 2015
|
|
|
|
|
(Unaudited)
|
|
|
|
(Audited)
|
|
GE Trademark
License
|
|
$
|
12,000,000
|
|
|
$
|
12,000,000
|
|
Less: Impairment Charges
|
|
|
—
|
|
|
|
—
|
|
Less: Accumulated Amortization
|
|
|
(6,093,645
|
)
|
|
|
(4,876,234
|
)
|
Patents-net
|
|
$
|
5,906,355
|
|
|
$
|
7,123,746
|
|
Amortization expense associated with the GE
Trademark Licenses amounted to $608,696 and $1,217,391 for the three and six months ended June 30, 2016, respectively, and $608,696
and $1,210,702 for the three and six months ended June 30, 2015, respectively.
At June 30, 2016, future amortization of intangible
assets is as follows for the remaining:
Year
Ending December 31
|
|
2016
|
|
|
$
|
1,230,689
|
|
|
2017
|
|
|
|
2,441,472
|
|
|
2018
|
|
|
|
2,234,194
|
|
|
|
|
|
$
|
5,906,355
|
|
Note 6 Letter of Credit
On April 13, 2016 the Company entered into a $10,000,000 Line of Credit Promissory
Note with a third party (the “Line of Credit”). The Line of Credit is secured by inventory, accounts receivable
and other assets. The Line of Credit is being used to fund purchase orders, inventory and for other working capital purposes,
and carries interest at 8% per annum, Interest on the outstanding principal is due monthly and the Line of Credit expires
December 31, 2017. Availability under the Line of Credit was $7,346,375 at June 30, 2016.
Note
7 Note Payable to Bank
At
June 30, 2016 and December 31, 2015 the Company had a note payable to a bank in the amount of $245,910 and $301,744, 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.
Principal
payments due under the terms of this note are as follows:
|
Principal Due in Next 12 months
|
|
|
|
|
|
2016
|
|
|
$
|
80,490
|
|
2017
|
|
|
|
114,555
|
|
2018
|
|
|
|
39,410
|
|
2019
|
|
|
|
11,455
|
|
|
|
|
$
|
245,910
|
Note 8 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, 2014
|
|
$
|
1,911,995
|
|
|
$
|
26,999
|
|
|
$
|
1,938,994
|
|
Add:
Amortization of Debt Discount
|
|
|
2,077,955
|
|
|
|
23,001
|
|
|
|
2,100,956
|
|
Balance
December 31, 2015
|
|
|
3,989,950
|
|
|
|
50,000
|
|
|
|
4,039,950
|
|
Add:
Amortization of Debt Discount
|
|
|
474,283
|
|
|
|
—
|
|
|
|
474,283
|
|
Less
Repayments
|
|
|
(940,000)
|
|
|
|
—
|
|
|
|
(940,000)
|
|
Balance
June 30, 2016
|
|
|
3,524,233
|
|
|
|
50,000
|
|
|
|
3,574,233
|
|
Less
Current portion
|
|
|
(3,524,233)
|
|
|
|
(50,000)
|
|
|
|
(3,574,233)
|
|
Long-Term
Convertible Debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
In
connection with the May 8, 2014 and June 25, 2014 closings of the Notes Offering (defined below), the Company issued 5,390,100
detachable warrants. The notes and warrants were treated as derivative liabilities.
On
November 26, 2013, May 8, 2014 and June 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. The entire aggregate principal amount of the Notes of $3,574,234 outstanding as of June 30, 2016 and $4,270,100
was outstanding as of December 31, 2015, such amount being exclusive of securities converted into the Notes separate from the
Notes Offering. 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 June 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 or will become due and payable twenty-four (24)
months after the date of issuance. The Notes may be prepaid with or without a penalty depending on the date of the prepayment.
The principal and 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 June 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.
In
connection with the Notes Offering, the Company entered into Registration Rights Agreements, each dated as of November 26, 2013,
May 8, 2014 and June 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”). Pursuant to the Registration Rights Agreement, the Filing Default Damages mandate that the Company shall pay
to the Investors, for each thirty (30) day period of such failure and until the filing date of the registration statement and/or
the common stock may be sold pursuant to Rule 144, an amount in cash, as partial liquidated damages and not as a penalty, equal
to 2% percent of the aggregate gross proceeds paid by the Investors for the Notes. If the Company fails to pay any partial liquidated
damages in full within five (5) days of the date payable, which is the Note maturity date, the Company shall pay interest thereon
at a rate of 18% per annum until such amounts, plus all such interest thereon, are paid in full.
In
addition, 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”). Pursuant to the Registration Rights Agreement, the Effectiveness Default Damages mandated that the interest
rate due under the Note corresponding to such Registration Rights Agreement will increase 2% above the then effective interest
rate of such Note, and shall continue to increase by 2% every 30 days until a registration statement is declared effective. The
Company’s registration statement covering its common stock, into which the Notes may be converted, was first filed on August
1, 2014, and was declared effective by the SEC on October 22, 2014. 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.
On
December 11, 2014, the Company sent a letter to the Investors holding Notes dated November 26, 2013 (the “2013 Investors”)
concerning the first interest payment that was scheduled to be paid pursuant to the Notes dated November 26, 2013 on the one year
anniversary of the date that each 2013 Investor submitted payment for their Note (the “First Interest Payments”).
The Company invited the 2013 Investors to convert the First Interest Payments into shares of the Company’s common stock
to further this purpose. The Company also asked each 2013 Investor to execute an Agreement and Waiver (the “Agreement and
Waiver”), which granted the Company a grace period, deferring the Company’s obligation to make payment of the First
Interest Payment and interest that was due under the Note through November 26, 2014 (the “Interest Due”) until February
24, 2015 (the “Extension”), during which time such deferment would not be considered an Event of Default under the
2013 Investor’s Note. In return for granting the Extension, the Company offered to capitalize the Interest Due at a rate
of 12% (the “Additional Interest”), which was convertible into shares of the Company’s common stock at the conversion
price of $0.25 per share as of February 24, 2014, unless the 2013 Investor requested to receive the Additional Interest in cash
15 days prior to the end of the Extension.
On
January 23, 2015, the Company sent a letter agreement to the Investors holding Notes dated November 26, 2013 and May 8, 2014,
which constituted all Investors with Filing Default Damages or Effectiveness Default Damages due to them pursuant to the Registration
Rights Agreements dated as of November 26, 2013 or May 8, 2014 (the “Agreement to Convert”). The Company invited the
Investors, as applicable, to elect to convert the Interest Due and/or the Filing Default Damages and Effectiveness Default Damages
into shares of the Company’s common stock at a price of $0.25 per share, and asked each Investor, as applicable, to make
such election by acknowledging and returning the Agreement to Convert to the Company. In connection with the Agreement and Waiver
and Agreement to Convert, the Company issued 1,718,585 shares of its common stock representing $429,646 in Additional Interest,
Interest Due, Filing Default Damages and Effectiveness Default Damages during the year ended December 31, 2015. The total accrued
unpaid Additional Interest, Interest Due, Filing Default Damages and Effectiveness Default Damages as of December 31, 2015 amounted
to $410,633 and $252,335 as of June 30, 2016.
In
February 2016, the Company issued an additional 624,606 shares of its common stock as payment for Additional Interest, Interest
Due, Filing Default Damages and Effectiveness Default Damages, representing payment to Investors of $156,152. Through June 30,
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 in connection with the Agreement and Waiver and Agreement to Convert.
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
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. 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.
See note 15, Subsequent Events, for additional
information.
The debt carries interest between 12% and 15%,
and was due in November 2015, May 2016 and June 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 per 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
June 30, 2016, the Company has outstanding convertible debt of $3,574,233, which is payable within the next twelve months.
|
(D)
|
Subsequent
Offer to Convert Debt to Preferred Shares
|
See
note 15, Subsequent Events.
Note 9 Derivative
Liabilities
The
Company identified conversion features embedded within convertible debt and warrants issued in 2013 and 2014. 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.
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:
|
|
June 30, 2016
(Unaudited)
|
|
December 31, 2015
(Audited)
|
Balance Beginning of period
|
|
$
|
24,157,838
|
|
|
$
|
5,140,758
|
Reclassification of derivative liabilities to additional paid in capital related to warrants exercised that ceased being a derivative liability
|
|
|
-
|
|
|
|
(189,613)
|
Extinguishment of Derivative Liability - Conversion of Interest to Shares
|
|
|
-
|
|
|
|
(209,604)
|
Fair value mark to market adjustment - stock options
|
|
|
302,455
|
|
|
|
134,162
|
Fair value mark to market adjustment - convertible debt
|
|
|
32,698,025
|
|
|
|
18,835,664
|
Fair value mark to market adjustment - warrants
|
|
|
688,827
|
|
|
|
446,471
|
Fair value at commitment date for warrants issued
|
|
|
4,963,451
|
|
|
|
-
|
Fair value mark to market adjustment for interest
|
|
|
1,772,308
|
|
|
|
-
|
Balance at end of period
|
|
$
|
64,582,904
|
|
|
$
|
24,157,838
|
|
|
|
Commitment Date
|
|
|
|
Re-measurement Date
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
150
|
%
|
|
|
150
|
%
|
Expected term
|
|
|
2 5 years
|
|
|
|
0.00 – 3.24 years
|
|
Risk free interest rate
|
|
|
0.29%-1.68%
|
|
|
|
0.21% -0.71%
|
|
Note 10 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 $4,205,443 as of June 30, 2016 and $4,153,611 for the year ended December 31,
2015.
The Company recorded a change in the value
of embedded derivative liabilities income/ (expense) of ($36,757,591) and $362,697 for the three months ended June 30, 2016 and
2015, respectively and ($34,760,728) and $635,689 for the six months ended June 30, 2016 and 2015, respectively.
Note 11 Debt
Issue Costs
|
|
June
30, 2016
|
|
December
31, 2015
(
Audited)
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Debt
Issuance Costs
|
|
$
|
316,797
|
|
|
$
|
316,797
|
|
Total
|
|
|
316,797
|
|
|
|
316,797
|
|
Less:
Accumulated Amortization
|
|
|
316,797
|
|
|
|
(302,192)
|
|
Debt
Issuance Costs- net
|
|
$
|
-
|
|
|
$
|
14,605
|
|
The Company recorded
amortization expense of $8,569 and $38,612 for the three months ended June 30, 2016 and 2015, respectively, and $14,605 and $77,657
for the six months ended June 30, 2016 and 2015, respectively.
Note 12
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 June 30, 2016 and December 31, 2015.
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.
Payments
are due quarterly based upon the prior quarters’ sales. The Company made payments of $220,483 and $149,722 for the six months
ended June 30, 2016 and 2015, 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 six months
ended June 30, 2016 and year ended December, 31 2015, the Company issued the following common stock:
Transaction
Type
|
|
|
|
Quantity
|
|
Valuation
|
|
Range
of Value per Share
|
|
2015
Equity Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued per Waiver and Conversion Agreement
|
|
|
(1)
|
|
|
$
|
1,718,585
|
|
|
$
|
429,646
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued per Employment Agreement of CEO
|
|
|
(2)
|
|
|
|
750,000
|
|
|
|
173,688
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued per Stock Rights Offering
|
|
|
(3)
|
|
|
|
3,782,666
|
|
|
|
2,210,032
|
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued per Stock Rights Offering- to be issued
|
|
|
(4)
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
1.00
|
|
|
December
31 2015
|
|
|
|
|
|
|
6,751,251
|
|
|
$
|
3,313,366
|
|
|
$
|
0.25-1.00
|
|
|
Common
Stock issued Board of Directors Compensation
|
|
|
(5)
|
|
|
|
62,000
|
|
|
|
42,000
|
|
|
|
0.60-1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued per Waiver and Conversion Agreement
|
|
|
(6)
|
|
|
|
790,092
|
|
|
|
197,523
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock offering
|
|
|
(7)
|
|
|
|
2,975,000
|
|
|
|
7,055,000
|
|
|
|
1.00-2.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Award
|
|
|
(8)
|
|
|
|
25,000
|
|
|
|
15,000
|
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued for Services
|
|
|
(9)
|
|
|
|
200,000
|
|
|
|
76,250
|
|
|
|
0.25-1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2016
|
|
|
|
|
|
|
4,052,092
|
|
|
$
|
7,385,773
|
|
|
$
|
0.25-2.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following is a more detailed description of the Company’s stock issuance from the table above:
|
(1)
|
Agreement
and Waiver and Agreement to Convert
|
The
Company issued 1,718,585 shares at $0.25 per share, representing $429,646 in penalties and interest, in connection with the Agreement
and Waiver and the Agreement to Convert. For a complete description of the Agreement and Waiver and the Agreement to Convert,
see Note 7 above.
|
(2)
|
Shares
Issued to Chief Executive Officer
|
In
November 2014, the Company entered into an Employment Agreement with its current Chief Executive Officer, which provided for stock
based compensation equal to 750,000 of restricted shares, of which 250,000 shares vested in May 2015 and 500,000 shares vested
in December 2015. These shares were issued at $0.25 per share and were issued subsequent to December 31, 2015.
|
(3)
|
Shares
Issued in Connection with Stock Offering
|
In
May 2015, the Company offered to existing shareholders a maximum of 6,666,667 shares of common stock at an issuance cost of $0.60
per share for a total of $4,000,000 (the “May Stock Offering”). The May Stock Offering concluded on November 15, 2015
the Company will issue 3,782,666 shares in connection with three closings.
|
(4)
|
Shares
Issued in Connection with Stock Offering
|
In
November 2015, the Company offered to new and existing shareholders a maximum of 2,000,000 shares of common stock at an issuance
cost of $1.00 per share for a total of $2,000,000 (the “November Stock Offering”). On December 24, 2015, the Company
closed subscriptions for 500,000 shares of common stock pursuant to the November Stock Offering, and on January 4, 2016, the stock
certificates representing those shares were issued. Shares Issued in Board of Directors Compensation.
|
(5)
|
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.
|
(6)
|
Shares
Issued in Connection with the Notes or Agreements to Convert
|
In
connection with the Agreement and Waiver and Agreement to Convert, during the six months ended June 30, 2016, the Company issued
an additional 624,606 shares of its common stock as payment for Additional Interest, Interest Due, Filing Default Damages and
Effectiveness Default Damages, representing payment to Investors of $156,152.
In
February 2016, the Company issued 165,486 shares of its common stock upon full conversion of a Note by a 2013 Investor. In total,
$229,998 was paid to Investors in February 2016 in cash or shares of common stock.
|
(7)
|
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.
|
(8)
|
Shares
Issued Pursuant to Stock Awards.
|
In
June 2016, the Company issued 25,000 shares in stock awards at $0.60 per share.
|
(9)
|
Shares
Issued for Services
|
In
June 2016, the Company issued 200,000 shares issued representing $76,250 in services received. The share conversions were in a
range of $0.25 to $1.00 per share.
The
following is a summary of the Company’s stock option activity:
|
|
Options
|
|
Exercise
Price
|
|
(In
Years)
|
|
Value
|
Balance- December 31, 2014
|
|
|
200,000
|
|
|
|
0.375
|
|
|
|
2.18
|
|
|
$
|
324,829
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited/Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance- December 31, 2015
|
|
|
200,000
|
|
|
|
0.375
|
|
|
|
2.18
|
|
|
$
|
324,829
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Granted (1)
|
|
|
1,150,000
|
|
|
|
0.835
|
|
|
|
1.38
|
|
|
$
|
1,700,000
|
|
Forfeited/Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance- June 30, 2016
|
|
|
1,350,000
|
|
|
|
0.835
|
|
|
|
1.38
|
|
|
$
|
1,700,000
|
|
(1) The options granted
subsequent to December 31, 2015 will become effective July 31, 2016.
(C) Warrants Issued
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, 2014
|
9,728,984
|
|
|
0.375
|
3.9
|
Exercised
|
—
|
|
|
—
|
—
|
Cancelled/Forfeited
|
—
|
|
|
—
|
—
|
Balance, December 31, 2015
|
9,728,984
|
|
$
|
0.375
|
3.2
|
Issued
|
3,016,667
|
|
$
|
3.45
|
1.68
|
Exercised
|
—
|
|
|
—
|
—
|
Cancelled/Forfeited
|
—
|
|
|
—
|
—
|
Balance, June 30, 2016
|
12,745,651
|
|
$
|
1.1
|
3.37
|
|
(C)
|
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
(i)
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.
The Incentive Plan further provides that awards
granted under the Incentive Plan cannot be exercised until a majority of the Company’s shareholders have approved the Incentive
Plan. As of June 30, 2016, the Company’s shareholders approved the Incentive Plan which became effective on July 31, 2016.
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.
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
October, 2014, the Company entered into a sublease agreement to sublease its previous office space through March 2017. 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
|
2016
|
|
33,375
|
|
21,778
|
|
11,597
|
2017
|
|
46,568
|
|
22,263
|
|
24,305
|
2018
|
|
25,154
|
|
-
|
|
25,154
|
2019
|
|
8,615
|
|
-
|
|
8,615
|
|
|
|
|
|
|
|
Total
|
$
|
113,712
|
$
|
44,041
|
$
|
69,671
|
|
|
|
|
|
|
|
|
(B)
|
Employment
Agreement – Chief Executive Officer
|
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 to him, vesting as follows: 250,000 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. For the six months ended June 30, 2016 and 2015, the Executive earned $18,012 and $11,096,
respectively, under this agreement. No stock or options have been issued.
The
Company has a 3 year consulting agreement with a director which expires in November 2016, and carries an annual payment of $150,000
cash, stock or 5 year options equal to one half of one percent (0.5%) of the Company’s annual net sales. For the six months
ended June 30, 2016 and 2015, the Executive earned $18,012 and $11,096, respectively, under this agreement. No stock or options
have been issued.
|
(D)
|
Advance
from Related Party
|
A director and shareholder of the Company provided
an unsecured short-term 12% per annum interest bearing advance of $500,000 in February 2016. As of June 30, 2016, the outstanding
balance is $200,000.
Note 15 Subsequent Events
Offer to Convertible Debt Holders
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 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%) per year. 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 has
been or will be 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 lock-up 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. Elections made by holders are due and the Note amendments, conversion to Preferred
Stock and lock-up agreement are being entered into on August 15, 2016, subject to at least a majority of the noteholders of the
then-outstanding Notes entering into the Note amendment or otherwise consenting to the Note amendment.