Item 1. 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.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Financial Statements
Note 1 Organization and Nature of Operations
SQL Technologies Corp. (f/k/a
Safety
Quick Lighting
& Fans Corp.), a Florida corporation (the “Company”),
was
originally
organized in May
2004
as
a limited
liability
company
under the
name
of
Safety
Quick
Light,
LLC. The Company was converted to corporation
on
November
6,
2012.
Effective
August
12,
2016,
the
Company
changed
its
name
from
“Safety
Quick Lighting
& Fans Corp.” to “SQL Technologies Corp.” The Company
holds
a
number
of worldwide patents,
and has received a variety
of
final electrical
code
approvals,
including
UL
Listing and CSA approval
(for
the
United
States and
Canadian
Markets), and CE
(for
the
European market). The Company maintains offices in Georgia, Florida and
in Foshan, Peoples
Republic
of
China.
The Company is engaged
in the business of developing proprietary technology that enables a quick and safe installation of electrical fixtures, such as
light fixtures and ceiling fans, by the use of a power plug installed in ceiling and wall electrical junction boxes. The Company’s
main technology consists of a weight bearing, fixable socket and a revolving plug for conducting electric power and supporting
an electrical appliance attached to a wall or ceiling. The socket is comprised of a nonconductive body that houses conductive rings
connectable to an electric power supply through terminals in its side exterior.
The
plug
is also comprised
of
a
nonconductive body
that houses
corresponding
conductive
rings,
attaches
to
the
socket
via
a male post and is
capable of
feeding electric
power
to an
appliance.
The
plug includes
a
second structural element
allowing
it to revolve and a releasable
latching
which,
when engaged, provides
a retention force
between
the
socket and
the plug
to prevent
disengagement. The socket and
plug
can
be detached
by
releasing
the
latch, thereby disengaging
the
electric
power
from
the plug.
The socket is
designed
to
replace
the
support bar incorporated in electric
junction
boxes,
and
the plug
can
be
installed
in
light
fixtures,
ceiling
fans
and
wall
sconce
fixtures.
The Company markets consumer
friendly, energy saving “plugin” ceiling fans and light fixtures under the General Electric Company (“GE”
or “General Electric”) brand as well as “conventional” ceiling lights and fans carrying the GE brand. The
Company also owns 98.8% of SQL Lighting & Fans LLC (the “Subsidiary”). The Subsidiary was formed in Florida on
April 27, 2011, and is in the business of manufacturing the patented device that the Company owns. The Subsidiary had no activity
during the periods presented.
The Company’s fiscal year end is December
31.
Note 2 Summary
of
Significant
Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements
of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.
GAAP) under the accrual basis of accounting.
Use of Estimates
The preparation of financial
statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying notes.
Such estimates and assumptions
impact both assets and liabilities, including but not limited to: net realizable value of accounts receivable and inventory, estimated
useful lives and potential impairment of property and equipment, the valuation of intangible assets, estimate of fair value of
share based payments and derivative liabilities, estimates of fair value of warrants issued and recorded as debt discount, estimates
of tax liabilities and estimates of the probability and potential magnitude of contingent liabilities.
Making estimates requires management
to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation
or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate
could change in the near term due to one or more future nonconforming events. Accordingly, actual results could differ significantly
from estimates.
Risks and Uncertainties
The Company’s operations
are subject to risk and uncertainties including financial, operational, regulatory and other risks including the potential risk
of business failure.
The Company has experienced,
and in the future expects to continue to experience, variability in its sales and earnings. The factors expected to contribute
to this variability include, among others, (i) the uncertainty associated with the commercialization and ultimate success of the
product, (ii) competition inherent at large national retail chains where product is expected to be sold (iii) general economic
conditions and (iv) the related volatility of prices pertaining to the cost of sales.
Principles of Consolidation
The consolidated financial
statements include the accounts of SQL Technologies Corp. (f/k/a Safety Quick Lighting and Fans Corp.) and the Subsidiary, SQL
Lighting & Fans LLC. All intercompany accounts and transactions have been eliminated in consolidation.
Non-controlling Interest
In May 2012, in connection
with the sale of the Company’s membership units in the Subsidiary, the Company’s ownership percentage in the Subsidiary
decreased from 98.8% to 94.35%. The Company then reacquired these membership units in September 2013, increasing the ownership
percentage from 94.35% back to 98.8%. During 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 $4,997,643 and
$450,868
in
money market as
of
September
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 September 30, 2016 and for the year ended December 31, 2015:
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September
30, 2016
(Unaudited)
|
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December
31, 2015
(Audited)
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable
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|
$
|
1,669,322
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$
|
234,309
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Allowance
for Doubtful Accounts
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—
|
|
|
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—
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Net
Accounts Receivable
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$
|
1,669,322
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$
|
234,309
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All amounts are deemed
collectible at September 30, 2016 and December 31, 2015 and accordingly, the Company has not incurred any bad debt expense at September
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
first-in, first-out (FIFO) method. The Company
periodically
reviews historical
sales
activity
to determine
potentially
obsolete
items and also
evaluates
the
impact
of
any
anticipated changes
in future
demand.
At September 30, 2016 and
December 31, 2015, the Company had $2,969,766 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 September 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
5 to 7
years
of
the
respective assets.
Expenditures
for maintenance and repairs are charged to expense as
incurred.
Upon sale or retirement
of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is
reflected in the statements of operations.
Intangible Asset Patent
The Company developed a
patent for an installation device used in light fixtures and ceiling fans. Costs incurred for submitting the applications to the
United States Patent and Trademark Office for these patents have been capitalized. Patent costs are being amortized using the straight-line
method over the related 15 year lives. The Company begins amortizing patent costs once a filing receipt is received stating the
patent serial number and filing date from the Patent Office.
The Company incurs certain
legal and related costs in connection with patent applications. The Company capitalizes such costs to be amortized over the expected
life of the patent to the extent that an economic benefit is anticipated from the resulting patent or alternative future use is
available to the Company. The Company also capitalizes legal costs incurred in the defense of the Company’s patents when
it is believed that the future economic benefit of the patent will be maintained or increased and a successful defense is probable.
Capitalized patent defense costs are amortized over the remaining expected life of the related patent. The Company’s assessment
of future economic benefit or a successful defense of its patents involves considerable management judgment, and an unfavorable
outcome of litigation could result in a material impairment charge up to the carrying value of these assets.
GE Trademark Licensing Agreement
The Company entered
into
a
Trademark
License Agreement
with
General Electric
on
September, 2011 (the “License Agreement”)
allowing
the
Company to
utilize the
“GE trademark”
on
products
which
meet
the
stringent
manufacturing and
quality
requirements
of
General
Electric (the “GE
Trademark
License”).
As
described further in
Note
5 to these financial statements,
the
Company and General Electric amended
the
License Agreement in
August
2014.
As
a result
of
that
amendment,
the
Company is required to pay a minimum trademark
licensing
fee (the
“Royalty
Obligation”)
to General Electric
of $12,000,000.
The repayment
schedule
is based
on
a percent
of
sales,
with
any
unpaid
balance
due
in November
2018.
Under
SFAS
142 “Accounting
for Certain
Intangible
Assets”
the
Company has
recorded
the
value
of
the
Licensing
Agreement
and
will
amortize it
over
the
life
of
the
License
Agreement,
which
is
60 months.
The Company measures
assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements,
which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be,
in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants
would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework
for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned
a hierarchical level.
The following are the hierarchical
levels of inputs to measure fair value:
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•
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Level
1 – Observable
inputs
that
reflect
quoted
market prices in
active
markets for
identical
assets
or
liabilities.
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•
|
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.
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•
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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.
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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 9.
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:
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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.
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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
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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.
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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:
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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.
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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.
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•
|
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.
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Risk-free
rate(s).
An
entity
that
uses a method
that
employs different
risk-free rates shall disclose
the
range
of
riskfree 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; cost 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 nine months ended September 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 September 30, 2016 and December 31, 2015:
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
Convertible
Debt (Exercise price - $0.25/share)
|
|
6,976,935
|
|
|
18,056,935
|
Stock
Warrants (Exercise price- $0.375 - $3.00/share)
|
|
12,745,651
|
|
|
9,728,984
|
Stock
Options (Exercise price $0.60 - $3.50/share)
|
|
1,350,000
|
|
|
200,000
|
Total
|
|
21,072,586
|
|
|
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
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
September 30, 2016 and December 31, 2015:
|
|
September
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
|
|
|
(59,365)
|
|
|
|
(39,651)
|
|
Property
and Equipment - net
|
|
$
|
118,645
|
|
|
$
|
127,521
|
|
Depreciation
expense amounted to
$6,707
and
$19,714
for
the
three and nine months
ended
September
30,
2016;
and
$5,603
and
$16,471
for
the
three and nine
months
ended
September
30,
2015,
respectively.
Note 4 Intangible Assets
Intangible assets (patents) consisted of the following
at September 30, 2016 and December 31, 2015:
|
|
September
30, 2016
(Unaudited)
|
|
December
31, 2015
(Audited)
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
126,669
|
|
|
$
|
103,792
|
|
Less:
Impairment Charges
|
|
|
—
|
|
|
|
—
|
|
Less:
Accumulated Amortization
|
|
|
(26,392)
|
|
|
|
(20,618)
|
|
Patents
- net
|
|
$
|
100,277
|
|
|
$
|
83,174
|
|
Amortization expense associated with patents
amounted to $2,095 and $5,774 for the three and nine months ended September 30, 2016, respectively, and $1,384 and $3,705 for the
three and nine months ended September 30, 2015, respectively.
At September 30, 2016, future amortization
of intangible assets:
Year
Ending December 31
|
|
|
|
|
2016
|
|
|
$
|
2,129
|
2017
|
|
|
|
8,445
|
2018
|
|
|
|
8,445
|
2019
|
|
|
|
8,445
|
2020
|
|
|
|
8,468
|
2021
and Thereafter
|
|
|
|
64,345
|
|
|
|
$
|
100,277
|
Actual amortization
expense in future periods could differ from these estimates as a result of future acquisitions, divestitures, impairments and
other factors.
Note 5 GE Trademark
License Agreement
The Company
entered into an amended License Agreement with General Electric regarding the GE Trademark License. The License Agreement is amortized
through its expiration in November 2018.
|
|
September 30, 2016
(Unaudited)
|
|
December
31, 2015
(Audited)
|
GE Trademark License
|
|
$
|
12,000,000
|
|
|
$
|
12,000,000
|
Less: Impairment Charges
|
|
|
—
|
|
|
|
—
|
Less: Accumulated Amortization
|
|
|
(6,709,030)
|
|
|
|
(4,876,254)
|
Patents – net
|
|
$
|
5,290,970
|
|
|
$
|
7,123,746
|
Amortization
expense associated
with the
GE
Trademark
License amounted to
$615,385
and
$1,832,776
for
the
three and nine months
ended
September
30, 2016, respectively,
and
$615,385
and
$1,826,087
for
the
three and nine months
ended
September
30,
2015,
respectively.
At September 30, 2016, future
amortization of intangible assets is as follows for the remaining:
Year
Ending December 31
|
|
2016
|
|
|
$
|
615,385
|
|
|
2017
|
|
|
|
2,441,472
|
|
|
2018
|
|
|
|
2,234,113
|
|
|
|
|
|
$
|
5,290,970
|
|
Note 6 Notes Payable
At
September 30, 2016 and December 31, 2015, the Company had a note payable to a bank in the amount of $216,170 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.
On
April 13, 2016, the company entered in to an agreement with a third party for a $10,000,000 line of credit. The primary purpose
of this line of credit is to fund manufacturing and product related obligations. The note carries interest of 8%, due monthly
with principal and unpaid interest due December 31, 2017. The note is secured by the assets of the company. The outstanding balance
on this note was $3,006,124 at September 30, 2016.
Principal
payments due under the terms of this note are as follows:
Principal
Due in Next 12 months
|
|
|
|
|
2016
|
|
|
$
|
111,894
|
2017
|
|
|
|
3,110,400
|
|
|
|
$
|
3,222,294
|
The Company received a
$500,000 loan from a related party in January 2016. The note is on demand and carries interest of 12%. As of September 30, 2016
the outstanding balance is $200,000.
Note 7 Convertible Debt Net
The Company has recorded
derivative liabilities associated with convertible debt instruments, as more fully discussed at Note 8.
|
|
Third
Party
|
|
Related
Party
|
|
Totals
|
Balance
December 31, 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/Conversions
|
|
|
(2,770,000)
|
|
|
|
—
|
|
|
|
(2,770,000)
|
|
Balance
June 30, 2016
|
|
|
1,694,233
|
|
|
|
50,000
|
|
|
|
1,744,234
|
|
Less
Current portion
|
|
|
(1,694,233)
|
|
|
|
(50,000)
|
|
|
|
(1,744,234)
|
|
Long-Term
Convertible Debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
On
November 26, 2013, May 8, 2014 and September 25, 2014 the Company completed closings in connection with its offering (the “Notes
Offering”) of its 12% Secured Convertible Promissory Notes (the “12% Notes”) in the aggregate principal amount
of $4,240,100 and/or its 15% Secured Convertible Promissory Notes in the aggregate principal amount of $30,000 (the “15%
Notes”, and together with the 12% Notes, each a “Note” and collectively, the “Notes”), as applicable,
with certain “accredited investors” (the “Investors”), as defined under Regulation D, Rule 501 of the
Securities Act. The entire aggregate principal amount of the Notes of $3,574,234 outstanding as of September 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 September 25, 2014, respectively.
In
addition
to
the
terms customarily
included
in such instruments,
the
Notes
began
accruing interest
on
the
date that
each Investor submitted
the
principal
balance of
such Investor’s
Note, with the
interest thereon becoming
due
and
payable
on
the
one
year anniversary, and quarterly thereafter.
Upon
a default
of
the
Notes,
the
interest rate
will
increase
by 2%
for each
30
day period
until
cured. The
principal balance of
each
Note
and all
unpaid
interest became
payable
twenty-four (24)
months
after
the
date
of
issuance. The
principal
and outstanding interest
under
the Notes
are
convertible
into
shares
of
the
Company’s common stock at
$0.25 per share and are secured
by
a
first
priority
lien
(subject
only
to an
existing
note with
Signature Bank
of
Georgia
on
the
Company’s
intellectual
property and all substitutes, replacements and proceeds
of
such
intellectual
property) pursuant to
the
terms
of
a
Security Purchase Agreement,
dated
as
of
November
26,
2013,
May
8,
2014
and
September
25,
2014,
as
applicable,
by
and
between
the
Company
and
each
Investor.
Pursuant
to the Notes Offering, each Investor also received five (5) year common stock warrants to purchase the Company’s common
stock at $0.375 per share (each a “Warrant” and collectively, the “Warrants”). Investors of the 12% Notes
received Warrants with 25% coverage based on a predetermined valuation of the Company. Investors of the 15% Notes received Warrants
with 15% coverage based on the predetermined valuation of the Company. Investors with a principal investment amount equal to or
greater than $250,000 received Warrants with a bonus 40% coverage (“Bonus Coverage”); however, if an Investor
previously invested $250,000 or more in the Notes Offering, such Investor received Bonus Coverage if such Investor subsequently
invested $100,000 or more in the Notes Offering. In addition to the terms customarily included in such instruments, the Warrants
may be exercised by the Investors by providing to the Company a notice of exercise, payment and surrender of the Warrant.
The
Notes and Warrants were treated as derivative liabilities.
In
connection with the Notes
Offering,
the
Company entered
into
Registration
Rights
Agreements, each
dated
as
of
November
26,
2013,
May
8,
2014
and September
25,
2014,
and each
by
and
between
the
Company and each
of
the
Investors
(collectively,
the
“Registration
Rights
Agreements”), whereby
the
Company agreed to prepare and file a registration
statement
with the
SEC
within
sixty (60)
days
after
execution of
the
applicable
Registration
Rights
Agreement and to
have
the
registration statement declared effective
by
the
SEC
within
ninety
(90)
days
thereafter.
Because
the
Company was
unable
to file a registration
statement pursuant to
the
terms
of
each
Registration
Rights
Agreements
dated
as
of
November
26, 2013
or
May
8,
2014,
the
Company was in default
under
such Registration
Rights
Agreements (the “Filing Default Damages”), and
because
the
Company was
unable
to
have
a registration
statement declared effective pursuant to
the
terms
of
the
Registration
Rights
Agreements
dated
as
of
November
26,
2013,
the
Company was in default
under
such Registration
Rights
agreements
(the “Effectiveness Default Damages”). The Filing Default Damages
stopped
accruing
on
the
date
such registration statement was filed, and
the
Effectiveness Default Damages
stopped
accruing
on
the
date
it was declared
effective.
The Company
invited
the
Investors
holding
Notes
dated
November
26, 2013 to extend the
first
interest payment
that
was
scheduled
to
be paid
pursuant to
the Notes
dated
November
26, 2013 (the “Interest Due”) to
February
24,
2015 and in exchange
offered
to
capitalize
the
Interest
Due
at a rate
of
12% through payment
(the
“Additional
Interest”), all of which was convertible into
the
Company’s common
stock at a price
of
$0.25 per share. Through September 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. As of September 30, 2016, all Additional Interest, Interest Due, Filing Default Damages and
Effectiveness Default Damages was repaid by the Company.
During
2015, five Investors requested that the Company withhold payments of interest due under their Notes at no cost to the Company,
to allow the Company to address working capital needs. Such interest due has been or will be paid to the five Investors, and none
of such amounts have been or will be paid in shares of the Company’s capital stock.
In November 2015, the Company invited
the holders of Notes dated November 26, 2013, with respect to outstanding principal and interest due under their respective Notes,
to (i) receive payment in cash, (ii) convert their Notes into shares of the Company’s common stock, or (iii) forbear an
election for three (3) months, or until February 26, 2016, pursuant to a forbearance agreement, during such time interest under
their respective Notes would continue to accrue. In February 2016, the Company invited the same holders to extend their forbearance
period to make an election to convert or redeem their Notes for an additional three months, or until May 26, 2016, under the same
terms as the first forbearance agreement.
In
May 2016, the Company invited the holders of all Notes, where such holders had not already made an election to redeem or convert
their Notes, to forbear or extend their forbearance period to make an election to convert or redeem their Notes until July 31,
2016, which the Company thereafter extended to August 15, 2016 (the “August 2016 Election”). This also provided a
third option to all noteholders, whereby such holders could convert their respective Note(s) into shares of Series A Convertible
Preferred Stock (“Preferred Stock”).
As of September 30, 2016,
The Company received elections, in connection with the August 2016 Election, to (i) convert three (3) Notes into 240,000 shares
of common stock of the Company representing an aggregate principal balance of $60,000, and (ii) convert 33 Notes into 13,456,936
shares of Preferred Stock representing an aggregate principal balance of $3,364,234. The Company received no elections in connection
with the August 2016 Election to redeem Notes. Two (2) Investors holding Notes representing an aggregate principal balance of $100,000
have not responded to the August 2016 Election. Other than the two (2) aforementioned Investors, all Investors had elected to redeem
or convert their Notes into shares of common stock or Preferred Stock.
All issuances of capital stock in
the August 2016 Election have been or will be made only for principal balances due under the Notes, and all interest has been
or will be paid directly to the Investors.
See
Note 14, Subsequent Events, for additional information.
The
debt carries interest between 12% and 15%, and was due in November 2015, May 2016 and September 2016, as extended to July 31,
2016 pursuant to certain forbearance agreements.
All
Notes and Warrants issued in connection with the Notes Offering are convertible at $0.25 and $0.375/share, respectively, subject
to the existence of a “ratchet feature”, which allows for a lower offering price if the Company offers shares to the
public at a lower price.
At September 30, 2016, the Company
has outstanding convertible debt of $1,744,233, which is payable within the next twelve months.
|
(C)
|
Offer
to
Convert Debt
to
Preferred
Shares
|
By
letter to each holder of the Notes, dated July 22, 2016, the Company requested that each holder indicate its election to (i) redeem
its Note, (ii) convert its Note into the Company’s common stock or (iii) elect to convert its Note into shares of Preferred
Stock (the “Preferred Option”), in each case by August 15, 2016.
For
those
holders
electing
the
Preferred
Option,
each
holder
has received or will
receive shares
of
the
Preferred
Stock
on
a 1 to 1 ratio
to
the
number
of
shares
of
the
Company’s common stock
which
are
then convertible
under
such
holder’s respective
Note.
With respect to interest
on
junior
securities,
dividends,
distributions
or
liquidation
preference, shares
of
Preferred
Stock
will
rank
senior
to shares
of
the
Company’s common stock
or
other junior
securities.
Along with other
terms customary for a class
of convertible
preferred
stock,
the
Preferred
Stock
will
be convertible
into
shares
of
the
Company’s common
stock at
the
same conversion price as
the Notes
(i.e., USD $0.25 per share), and will pay interest quarterly at a rate of six percent (6%). The Preferred Stock will be
convertible upon the election of the holder thereof. Shares of the Preferred Stock may be repurchased by the Company upon 30 days’
prior written notice, in whole or in part, for USD $3.50 per share, provided that during such notice period the holder will continue
to have the option and right to convert its shares of Preferred Stock into shares of the Company’s common stock. Holders
will also have a put option, allowing them to sell their shares of Preferred Stock back to the Company at USD $0.25 per share,
the Note conversion price.
Each holder electing the
Preferred Option was required to enter into an amendment to its Note, providing that the Note will be convertible into the
Preferred Stock rather than the Company’s common stock, and to thereafter elect to convert their Note, as amended, into
Preferred Stock. In addition, each holder will be required to enter into a lockup agreement, whereby the holder will
agree not to offer, sell, contract to sell, pledge, give, donate, transfer or otherwise dispose of (i) the shares of the
Company’s common stock it then holds, (ii) the shares of Preferred Stock obtained upon conversion of its Note, and
(iii) the shares of the Company’s common stock underlying the Preferred Stock. The Note amendments, conversion to
Preferred Stock and lockup agreement have been entered into on August 15, 2016. The Note amendments were approved by a
majority of the holders of the then outstanding Notes.
During the quarter ended
September 30, 2016, noteholders converted $1,770,000 in convertible debt under the Notes into 7,080,000 of Preferred Stock pursuant
to the Preferred Option, and the Company had received elections to convert an additional $1,594,234 in convertible debt under the
Notes into 6,376,936 shares of Preferred Stock upon receipt of complete paperwork and original Notes (or in the alternative, a
Declaration of Loss of Security) from the respective noteholders. All issuances of Preferred Stock pursuant to the Preferred Option
have been or will be made only for principal balances due under the Notes, and all interest has been or will be paid directly to
the noteholders.
Note
8 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:
|
|
September
30, 2016
|
|
December
31, 2015
|
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
|
|
|
(743,624)
|
|
|
|
134,162
|
|
Fair
value at the commitment date for options granted
|
|
|
2,446,918
|
|
|
|
-
|
|
Fair
value mark to market adjustment - convertible debt
|
|
|
39,604,884
|
|
|
|
18,835,664
|
|
Fair
value mark to market adjustment - warrants
|
|
|
(1,467,629)
|
|
|
|
446,471
|
|
Fair
value at commitment date for warrants issued
|
|
|
4,963,451
|
|
|
|
-
|
|
Debt
settlement on the derivative liability associated with interest
|
|
|
(180,783)
|
|
|
|
-
|
|
Reclassification
of derivative liability to Additional Paid In Capital due to share reservation
|
|
|
(45,015,362)
|
|
|
|
-
|
|
Fair
value mark to market adjustment for interest
|
|
|
1,251,167
|
|
|
|
-
|
|
Balance
at end of period
|
|
$
|
25,016,860
|
|
|
$
|
24,157,838
|
|
|
|
|
Commitment Date
|
|
|
|
Recommitment
Date
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
150
|
%
|
|
|
150
|
%
|
Expected term
|
|
|
2-5 years
|
|
|
|
0.00 – 3.24 years
|
|
Risk Free Interest Rate
|
|
|
.29%-2.61%
|
|
|
|
.21%-.88%
|
|
Note 9
Debt Discount
The
Company recorded the debt discount to the extent of the gross proceeds raised, and expensed immediately the remaining fair value
of the derivative liability, as it exceeded the gross proceeds of the note.
Accumulated
amortization of derivative discount amounted to $4,402,773 as of September 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 ($3,183,183) and ($7,993,408) for the three months ended September 30, 2016 and 2015, respectively, and ($38,644,799) and ($7,357,719)
for the nine months ended September 30, 2016 and 2015, respectively.
The Company recorded derivative
expense of ($2,446,918) and $0 for the three months ended and ($7,410,369) and $0 for the nine months ended September 30, 2016
and 2015, respectively.
The Company recorded loss on disposition
of debt as a result of conversion to Common Stock and Preferred Stock of ($22,121,217). The loss was a result of the conversion
value of the shares received exceeded the face value of the note.
Note 10
Debt Issue Costs
|
|
September
30, 2016
|
|
December
31, 2015
|
|
|
(Unaudited)
|
|
(Audited)
|
Debt Issuance
Costs
|
|
$
|
316,77
|
|
|
$
|
316,77
|
|
Total
|
|
|
316,77
|
|
|
|
316,77
|
|
Less: Accumulated Amortization
|
|
|
316,77
|
|
|
|
(302,192
|
)
|
Debt Issuance Costs
|
|
$
|
—
|
|
|
$
|
14,605
|
|
The
Company recorded amortization expense
of $0
and
$39,441
for
the
three
months ended
September
30, 2016
and
2015,
respectively, and
$14,605
and
$117,098
for
the
nine months
ended
September
30, 2016
and
2015,
respectively.
Note 11 GE Royalty Obligation
In
2011, the Company executed a Trademark Licensing Agreement with General Electric, which allows the Company the right to market
certain ceiling light and fan fixtures displaying the GE brand. The License Agreement imposes certain manufacturing and quality
control conditions that the Company must maintain in order to continue to use the GE brand.
The
License Agreement is nontransferable and cannot be sublicensed. Various termination clauses are applicable, however, none were
applicable as of September 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 $319,170 and $170,699 for the nine
months ended September 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 12
Stockholders Deficit
(A) Common
Stock
For the nine months ended
September 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)
|
|
|
|
1,790,092
|
|
|
|
822,524
|
|
|
|
0.25-.625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock offering
|
|
|
(7)
|
|
|
|
3,155,000
|
|
|
|
7,538,000
|
|
|
|
1.00-2.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Award
|
|
|
(8)
|
|
|
|
25,000
|
|
|
|
15,000
|
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued for Services
|
|
|
(9)
|
|
|
|
300,000
|
|
|
|
136,250
|
|
|
|
0.25-1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued for Conversion of Debt
|
|
|
(10)
|
|
|
|
243,156
|
|
|
|
816,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2016
|
|
|
|
|
|
|
5,575,248
|
|
|
$
|
9,370,563
|
|
|
$
|
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,
as
of
the
nine months
ended
September
30,
2016,
the
Company issued an
additional
2,343,191
shares
of its
common stock as payment for
Additional
Interest,
Interest
Due,
Filing Default Damages and Effectiveness Default Damages, representing
payment to Investors
of
$585,798.
|
(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.
In July 2016 the
Company completed an offering for 30,000 shares at $2.60 and an additional 150,000 shares at $2.70 in two separate offerings.
|
(8)
|
Shares
Issued Pursuant to Stock
Awards.
|
In September 2016, the Company
issued 25,000 shares in stock awards at $0.60 per share.
|
(9)
|
Shares
Issued for
Services
|
In September 2016, the Company issued 300,000
shares issued representing $136,250 in services received. The share conversions were in a range of $0.25 to $1.00 per share.
|
(10)
|
Shares
Issued in Conjunction with Retirement of Debt
|
In accordance
with the Notes, 243,156 shares were issued for the retirement of debt during the period.
(B)
Stock Options
The following is a summary
of the Company’s stock option activity:
|
|
|
|
|
|
Weighted
Average
|
|
Aggregate
|
|
|
|
|
Weighted
Average
|
|
Remaining
Contractual Life
|
|
Intrinsic
|
|
|
Options
|
|
Exercise
Price
|
|
(In
Years)
|
|
Value
|
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
|
|
|
1,150,000
|
|
|
|
0.835
|
|
|
|
1.38
|
|
|
$
|
1,700,000
|
|
Forfeited/Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance-
September 30, 2016
|
|
|
1,350,000
|
|
|
|
0.835
|
|
|
|
1.38
|
|
|
$
|
1,700,000
|
|
(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,
September 30, 2016
|
12,745,651
|
|
$
|
1.1
|
3.37
|
(D) 2015 Stock Incentive Plan
On
April 27, 2015, the Board approved the Company’s 2015 Stock Incentive Plan (the “Incentive Plan”). Under the
Incentive Plan, the Board has the sole authority to implement, interpret, and/or administer the Incentive Plan unless the Board
delegates all
or
any
portion of its authority
to
implement, interpret,
and/or
administer
the
Incentive
Plan to a committee
of
the
Board,
or
(ii)
the
authority
to grant and
administer awards
under the
Incentive Plan to an officer
of
the
Company. The Incentive Plan relates to
the
issuance
of up
to
5,000,000
shares
of
the
Company’s common
stock,
subject to adjustment, and shall
be
effective for ten (10) years, unless earlier
terminated. Certain
options
to
be
granted
to employees
under the
Incentive Plan are
intended
to qualify as Incentive Stock
Options
(“ISOs”)
pursuant to Section
422
of
the
Internal
Revenue Code of
1986,
as
amended,
while other
options
granted
under
the
Incentive Plan
will
be nonqualified
options
not intended
to qualify
as Incentive Stock
Options
ISOs
(“Nonqualified
Options”),
either or
both
as
provided
in
the
agreements
evidencing the
options
described.
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. The Incentive Plan which became effective July 31, 2016
|
(D)
|
Issuance
of Convertible Preferred Stock
|
During the quarter
ended the Company offered current note holders the convert their shares to Preferred Stock (see Note 7 (C
)).
In conjunction with that offered the company issued 7,080,000 shares of Preferred Stock value of $24,072,000. The valuation was
based on a share price of $3.40 which was the closing price on the OTC of the Company’s stock on September 1, 2016.
Note 13 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
|
|
16,418
|
|
-
|
|
16,418
|
2017
|
|
65,700
|
|
-
|
|
65,700
|
2018
|
|
66,508
|
|
-
|
|
66,508
|
2019
|
|
22,384
|
|
-
|
|
22,384
|
|
|
|
|
|
|
|
Total
|
$
|
171,010
|
$
|
-
|
$
|
171,010
|
|
(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 of the Company’s common stock to him, which vested and
were issued as follows: 250,000 shares after the first 6 months of employment and 500,000 additional shares at December 31, 2015.
Under terms of the agreement the executive would receive additional compensation in the form of stock options to purchase shares
of Company stock equal to one half of one percent (0.5%) of quarterly net income. The strike price of the options will be established
at the time of the grant. The options will vest in twelve months and expire after sixty months. In addition to the stock options
compensation, the executive will receive cash compensation equal to one half of one percent (0.5%) of annual sales up to $20 million
and one quarter of one percent (0.25%) for annual sales $20 million and 3% of annual net income.
On September 1, 2016, the Company entered into
a new employment agreement with Mr. Campi. The agreement provides for a base salary of $150,000; 120,000 shares of The Company’s
common stock in a “Sign On Bonus” which will vest December 31, 2017; 0.25% of annual gross sales and 3% of annual adjusted
gross income in cash compensation and 0.50% of quarterly net income in options, the strike price to be determined at the time of
grant. Such options will expire 5 years after issuance.
For the nine months ended September 30, 2016
and 2015, Mr. Campi earned approximately $23,000 and $11,000
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 nine months ended September 30, 2016 and 2015, Mr. Kohen earned
approximately $28,000 and $11,000, respectively, under this agreement. No stock or options have been issued.
On
September 1, 2016 the Company modified the above agreement. The compensation was changed to $250,000 per annum, an annual grant
of the Company’s common stock of 340,000 shares which vest in its entirety January 1, 2019; Stock options equal to .005%
of the Company’s gross revenue with 5 year vesting. In addition the Chairman was granted a “Sign On Bonus” of
120,000 shares of the Company’s common stock which will vest January 1, 2020 and a supplemental bonus of options which is
tied to the stock performance of the Company.
(D) Employment
Agreement – President
On August 16,
2017 the Company entered into an Employment Agreement with Mark Wells, its new President. Mr
.
Wells receives a salary of $250,000; 1,025,000 shares in the Company’s common stock which will vest in its entirety January
1, 2019; 0.25% of the Company’s net revenue and a “Sign on Bonus” of 120,000 shares of the Company’s common
stock which vests January 1, 2017. For the nine months ended September 30, 2016, Mr. Wells was issued 100,000 shares of the Company’s
common stock and earned $10,000 in commissions pursuant to the terms of a Consulting Agreement, dated June 1, 2015, between the
Company and Mr. Wells, whereby Mr. Wells provided independent sales consultant services.
|
(D)
|
Employment Agreement – Chief Operating Officer
|
Effective July
1, 2016, the Company entered into an Executive Employment Agreement with Patricia Barron, its Chief Operations Officer. Ms. Barron
receives a base salary of $120,000 per year
and
incentive compensation equal to 0.25% of the Company’s net revenue paid in cash. For the nine months ended September 30,
2016, Ms. Barron earned approximately $5,100 under this agreement.
Note
14 Subsequent Events
Since October 1, 2016, the
Company has issued 5,576,936 shares of Preferred Stock, representing $1,394,234 in Note principal. In total from August 15, 2016
through November 14, 2016, the Company has issued 240,000 shares of its common stock, representing $60,000 in Note principal, and
12,656,936 shares of Preferred Stock, representing $3,164,234 in Note principal, in connection with the August 2016 Election. The
Company will issue an additional 800,000 shares of Preferred Stock, representing $200,000 in Note principal, upon receipt of complete
paperwork and original Notes (or in the alternative, a Declaration of Loss of Security) from the respective Investors. All issuances
of capital stock in the August 2016 Election will be made only for principal balances due under the Notes, and all interest has
been or will be paid directly to the Investors.