NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 – DESCRIPTION OF BUSINESS
Sports
Field Holdings, Inc. (the “Company”, “Sports Field Holdings”, “we”, “our”, or
“us”) is a Nevada corporation engaged in product development, engineering, manufacturing, and the construction, design
and building of athletic facilities, as well as supplying its own proprietary high end synthetic turf products to the sports industry.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do
not include all of the information and disclosures required by GAAP for annual financial statements. In the opinion of management,
such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair
presentation of the condensed financial position of the Company as of September 30, 2016 and the results of operations for the
three and nine months ended September 30, 2016 and cash flows for the nine months ended September 30, 2016. The results of operations
for the three and nine months ended September 30, 2016 are not necessarily indicative of the operating results for the full year
ending December 31, 2016 or any other period.
These
condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related
disclosures of the Company as of December 31, 2015 and for the year then ended, which were filed with the Securities and Exchange
Commission (“SEC”) on Form 10-K on April 12, 2016.
NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying condensed consolidated financial statements include the accounts of Sports Field Holdings, Inc. and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported
amounts of revenue and expenses during the periods. Actual results could differ from those estimates. The Company’s significant
estimates and assumptions include the accounts receivable allowance for doubtful accounts, percentage of completion revenue recognition
method, the useful life of fixed assets and assumptions used in the fair value of stock-based compensation.
Revenues
and Cost Recognition
Revenues
from construction contracts are included in contract revenue in the condensed consolidated statements of operations and are recognized
under the percentage-of-completion accounting method. The percent complete is measured by the cost incurred to date compared to
the estimated total cost of each project. This method is used as management considers expended cost to be the best available measure
of progress on these contracts, the majority of which are completed within one year, but may occasionally extend beyond one year.
Inherent uncertainties in estimating costs make it at least reasonably possible that the estimates used will change within the
near term and over the life of the contracts.
Contract
costs include all direct material and labor costs and those indirect costs related to contract performance and completion. Provisions
for estimated losses on uncompleted contracts are made in the period in which such losses are determined. General and administrative
costs are charged to expense as incurred.
Changes
in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final
contract settlements, may result in revisions to costs and income. Such revisions are recognized in the period in which they are
determined.
Costs
and estimated earnings in excess of billings are comprised principally of revenue recognized on contracts (on the percentage-of-completion
method) for which billings had not been presented to customers because the amounts were not billable under the contract terms
at the balance sheet date. In accordance with the contract terms, any unbilled receivables at period end will be billed subsequently.
Amounts are billed based on contractual terms. Billings in excess of costs and estimated earnings represent billings in excess
of revenues recognized.
Cash
and Cash Equivalents
The
Company considers all short-term highly liquid investments with a remaining maturity at the date of purchase of three months or
less to be cash equivalents. As of September 30, 2016 and December 31, 2015 the company did not have any cash equivalents.
Property,
Plant and Equipment
Property,
plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated
using the straight-line method over the estimated useful lives of the assets, which generally range from 3 to 5 years. Gains and
losses from the retirement or disposition of property and equipment are included in operations in the period incurred. Maintenance
and repairs are expensed as incurred.
Stock-Based
Compensation
The
Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award.
For employees, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is
generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. The fair value
amount is then recognized over the period during which services are required to be provided in exchange for the award, usually
the vesting period. Awards granted to directors are treated on the same basis as awards granted to employees.
Concentrations
of Credit Risk
Financial
instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash
and cash equivalents. The Company places its cash and temporary cash investments with credit quality institutions. At times, such
amounts may be in excess of the FDIC insurance limit.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require
collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the
outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if
receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management.
The maximum accounting loss from the credit risk associated with accounts receivable is the amount of the receivable recorded,
which is the face amount of the receivable, net of the allowance for doubtful accounts. As of September 30, 2016 and December
31, 2015, the Company’s accounts receivable balance was $14,704 and $151,168, respectively, and the allowance for doubtful
accounts is $0 in each period.
Research
and Development
Research
and development expenses are charged to operations as incurred. For the three months ended September 30, 2016 and 2015, the Company
incurred research and development expenses of $0 and $0, respectively. For the nine months ended September 30, 2016 and 2015,
the Company incurred research and development expenses of $88,447 and $0, respectively.
Warranty
Costs
The
Company generally provides a warranty on the products installed for up to 8 years with certain limitations and exclusions based
upon the manufacturer’s product warranty; therefore the Company does not believe a warranty reserve is required as of September
30, 2016 and December 31, 2015.
Fair
Value of Financial Instruments
Accounting
Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value
of certain financial instruments. The carrying value of cash and cash equivalents, accounts payable and accrued liabilities, and
short-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these
instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized
or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future
cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities
have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.
Beneficial
Conversion Feature
For
conventional convertible debt where the rate of conversion is below market value, the Company records a “beneficial conversion
feature” (“BCF”) and related debt discount.
When
the Company records a BCF the relative fair value of the BCF would be recorded as a debt discount against the face amount of the
respective debt instrument. The debt discount attributable to the BCF is amortized over the period from issuance to the date that
the debt matures.
Derivative
Instruments
The
Company evaluates its convertible debt, warrants or other contracts to determine if those contracts or embedded components of
those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-15. The result of this accounting
treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability.
In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations
as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at
the conversion date and then that fair value is reclassified to equity.
In
circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also
other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative
instruments are accounted for as a single, compound derivative instrument.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject
to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date.
Net
Income (Loss) Per Common Share
The
Company computes basic net income (loss) per share by dividing net income (loss) per share available to common stockholders by
the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities.
Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially
dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable.
The computation of basic and diluted loss per share excludes potentially dilutive securities because their inclusion would be
anti-dilutive. Anti-dilutive securities excluded from the computation of basic and diluted net loss per share for the
nine months ended September 30, 2016 and 2015, respectively, are as follows:
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock
|
|
|
679,588
|
|
|
|
500,000
|
|
Options to purchase common stock
|
|
|
622,500
|
|
|
|
430,000
|
|
Unvested restricted common shares
|
|
|
217,593
|
|
|
|
-
|
|
Convertible Notes
|
|
|
2,102,615
|
|
|
|
616,310
|
|
Totals
|
|
|
3,622,296
|
|
|
|
1,546,310
|
|
Shares
outstanding
Shares
outstanding include shares of unvested restricted stock. Unvested restricted stock included in reportable shares outstanding was
217,593 and 0 shares as of September 30, 2016 and 2015, respectively. Shares of unvested restricted stock are excluded from our
calculation of basic weighted average shares outstanding, but their dilutive impact is added back in the calculation of diluted
weighted average shares outstanding.
Significant
Customers
The
Company’s business focuses on securing a smaller number of high quality, highly profitable projects, which sometimes results
in having a concentration of sales and accounts receivable among a few customers. This concentration is customary among the design
and build industry for a company of our size. As we continue to grow and are awarded more projects, this concentration will continue
to decrease.
At
September 30, 2016, the Company had one customer representing 100.0% of the total accounts receivable balance.
At
December 31, 2015, the Company had two customers representing 94% of the total accounts receivable balance.
For
the three months ended September 30, 2016, the Company had four customers that represented 10%, 17%, 28%, and 43% of the total
revenue and for the three months ended September 30, 2015, the Company had three customers that represented 14%, 62% and 23% of
the total revenue.
For
the nine months ended September 30, 2016, the Company had five customers that represented 15%, 33%, 17%, 11% and 15% of the total
revenue and for the nine months ended September 30, 2015, the Company had four customers that represented 18%, 28%, 39%, and 13%
of the total revenue.
Reclassifications
Certain
items in the prior year financial statements have been reclassified to conform to the current year presentation.
Recently
Adopted Accounting Guidance
In
April 2015, the FASB issued Accounting Standards Update No. 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying
the Presentation of Debt Issuance Costs
, or ASU 2015-03. ASU 2015-03 amends current presentation guidance by requiring that
debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying
amount of that debt liability, consistent with debt discounts. Prior to the issuance of ASU 2015-03, debt issuance costs were
required to be presented as an asset in the balance sheet. We adopted the provisions of ASU 2015-03 on January 1, 2016 and prior
period amounts have been reclassified to conform to the current period presentation. As of December 31, 2015, $23,037 of debt
issuance costs were reclassified in the condensed consolidated balance sheet from current assets to convertible notes payable.
The adoption of ASU 2015-03 did not materially impact our condensed consolidated financial position, results of operations or
cash flows.
In
June 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-12,
Compensation-Stock
Compensation
. The amendments in this update apply to reporting entities that grant their employees share-based payments
in which the terms of the award provide that a performance target can be achieved after the requisite service period. This Accounting
Standards Update is the final version of Proposed Accounting Standards Update EITF-13D-Compensation-Stock Compensation (Topic
718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after
the Requisite Service Period, which has been deleted. The amendments require that a performance target that affects vesting
and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should
apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such
awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation
cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent
the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance
target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation
cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized
during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted
to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service
and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the
stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite
service period. The amendments in this update are effective for annual periods and interim periods within those annual periods
beginning after December 15, 2015, and early adoption is permitted. We adopted the provisions of ASU 2014-12 on January
1, 2016. The adoption of ASU 2014-12 did not impact our condensed consolidated financial position, results of operations or cash
flows.
Recent
Accounting Guidance Not Yet Adopted
During
May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which
requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new
guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising
from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to
obtain or fulfill a contract. In July 2015, the FASB voted to delay the effective date of ASU 2014-09 by one year to the first
quarter of 2018 to provide companies sufficient time to implement the standards. Early Adoption will be permitted, but not before
the first quarter of 2017. Adoption can occur using one of two prescribed transition methods. The Company is currently evaluating
the impact of the new standard.
In
August 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-15,
Presentation of
Financial Statements-Going Concern.
The Update provides U.S. GAAP guidance on management’s responsibility in evaluating
whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures.
For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial
doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are
issued. This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2013-300-Presentation of
Financial Statements (Topic 205): Disclosure of Uncertainties about an Entity’s Going Concern Presumption, which has been
deleted. The amendments in this update are effective for the annual period ending after December 15, 2016, and for annual
periods and interim periods thereafter. The adoption of ASU 2014-15 is not expected to have a material impact on our financial
position, results of operations or cash flows.
In
February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")
No. 2016-02, “Leases” (topic 842). The FASB issued this update to increase transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those
fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.
In
March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.
2016-06, “Derivatives and Hedging” (topic 815). The FASB issued this update to clarify the requirements for assessing
whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely
related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the
embedded call (put) options solely in accordance with the four-step decision sequence. The updated guidance is effective for annual
periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is
permitted. The Company is currently evaluating the impact of the new standard.
In
April 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.
2016-09, “Compensation – Stock Compensation” (topic 718). The FASB issued this update to improve the accounting
for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several
aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b)
classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated guidance
is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early
adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.
In
April 2016, the Financial Accounting Standards Board (‘FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing” (topic 606).
In March 2016, the Financial Accounting Standards Board (‘FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross verses
Net)” (topic 606). These amendments provide additional clarification and implementation guidance on the previously issued
ASU 2014-09, “Revenue from Contracts with Customers”. The amendments in ASU 2016-10 provide clarifying guidance on
materiality of performance obligations; evaluating distinct performance obligations; treatment of shipping and handling costs;
and determining whether an entity's promise to grant a license provides a customer with either a right to use an entity's intellectual
property or a right to access an entity's intellectual property. The amendments in ASU 2016-08 clarify how an entity should identify
the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain
types of arrangements. The adoption of ASU 2016-10 and ASU 2016-08 is to coincide with an entity's adoption of ASU 2014-09, which
we intend to adopt for interim and annual reporting periods beginning after December 15, 2017. The Company is currently evaluating
the impact of the new standard.
In
August 2016, the Financial Accounting Standards Board (‘FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments." ASU No. 2016-15
addresses specific cash flow classification issues where there is currently diversity in practice including debt prepayment and
proceeds from the settlement of insurance claims. ASU 2016-15 is effective for annual periods beginning after December 15, 2017,
with early adoption permitted. The Company is currently evaluating the impact of the new standard.
There
were no other new accounting pronouncements that were issued or became effective since the issuance of our 2015 Annual Report
on Form 10-K that had, or are expected to have, a material impact on our condensed consolidated financial position, results of
operations or cash flows.
Subsequent
Events
Management
has evaluated subsequent events or transactions occurring through the date on which the financial statements were issued.
Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required
adjustment or disclosure in the condensed consolidated financial statements, except as disclosed.
NOTE
3 – GOING CONCERN
As reflected in the accompanying condensed
consolidated financial statements, as of September 30, 2016 the Company had a working capital deficit of $(1,952,354). Furthermore,
the Company had a net loss and net cash used in operations of $(2,882,280) and $(2,026,048), respectively, for the nine months
ended September 30, 2016 and an accumulated deficit totaling $(13,151,798). These factors raise substantial doubt about the Company’s
ability to continue as a going concern.
The
ability of the Company to continue its operations as a going concern is dependent on Management's plans, which include the raising
of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including
but not limited to term notes, until such time that funds provided by operations are sufficient to fund working capital requirements.
The
Company will require additional funding to finance the growth of its current and expected future operations as well as to achieve
its strategic objectives. The Company believes its current available cash along with anticipated revenues may be insufficient
to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable
to the Company, if at all.
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any
adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should
the Company be unable to continue as a going concern.
NOTE
4 – COSTS AND ESTIMATED EARNINGS ON CONTRACTS IN PROCESS
Following
is a summary of costs, billings, and estimated earnings on contracts in process as of September 30, 2016 and December 31, 2015:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Costs incurred on contracts in progress
|
|
$
|
5,243,778
|
|
|
$
|
5,395,046
|
|
Estimated earnings (losses)
|
|
|
(524,331
|
)
|
|
|
(863,259
|
)
|
|
|
|
4,719,447
|
|
|
|
4,531,787
|
|
Less billings to date
|
|
|
(4,584,731
|
)
|
|
|
(4,524,817
|
)
|
|
|
$
|
134,716
|
|
|
$
|
6,970
|
|
The
above accounts are shown in the accompanying condensed consolidated balance sheet under these captions at September 30, 2016 and
December 31, 2015:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Costs and estimated earnings in excess of billings
|
|
$
|
247,197
|
|
|
$
|
137,016
|
|
Billings in excess of costs and estimated earnings
|
|
|
(58,375
|
)
|
|
|
-
|
|
Provision for estimated losses on uncompleted contracts
|
|
|
(54,106
|
)
|
|
|
(130,046
|
)
|
|
|
$
|
134,716
|
|
|
$
|
6,970
|
|
Warranty
Costs
During the three and nine months ended September
30, 2016 the Company incurred costs of approximately $103,600 and $121,000, respectively. A substantial amount of the warranty
costs incurred during the three and nine months ended September 30, 2016 related to subgrade infill materials used on a 2015 project.
Since then, neither this supplier nor this infill material has been used again. During the three and nine months ended September
30, 2015 the Company incurred costs of approximately $21,863 and $227,863, respectively, relating to the installation of materials
by a subcontractor that has been released from the Company. The Company has implemented policies and procedures to avoid these
costs in the future. The Company generally provides a warranty on the products installed for up to 8 years with certain limitations
and exclusions based upon the manufacturer’s product warranty; therefore, the Company does not believe a warranty reserve
is required as of September 30, 2016.
NOTE
5 – PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consists of the following:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Furniture and equipment
|
|
$
|
20,278
|
|
|
$
|
20,278
|
|
Total
|
|
|
20,278
|
|
|
|
20,278
|
|
Less: accumulated depreciation
|
|
|
(9,071
|
)
|
|
|
(6,029
|
)
|
|
|
$
|
11,207
|
|
|
$
|
14,249
|
|
Depreciation
expense for the three and nine months ended September 30, 2016 was $1,014 and $3,042, respectively.
Depreciation
expense for the three and nine months ended September 30, 2015 was $7,225 and $21,676, respectively.
NOTE
6 – DEBT
Convertible
Notes
On
May 7, 2015, the Company issued unsecured convertible promissory notes (each a “Note” and collectively the
“Notes”) in an aggregate principal amount of $450,000 to three accredited investors (collectively the “Note
Holders”) through a private placement. The notes pay interest equal to 9% of the principal amount of the notes, payable
in one lump sum, and mature on February 1, 2016 unless the notes are converted into common stock if the Company undertakes a
qualified offering of securities of at least $2,000,000 (the “Qualified Offering”). The principal of the notes
are convertible into shares of common stock at a conversion price that is the lower of $1.00 per share or the price per share
offered in a Qualified Offering. In order to induce the investors to invest in the notes, one of the Company’s
shareholders assigned an aggregate of 45,000 shares of his common stock to such investors. The Company recorded a $45,000
debt discount relating to the 45,000 shares of common stock issued with an offsetting entry to additional paid in capital.
The debt discount shall be amortized to interest expense over the life of the notes. As part of the transaction, we incurred
placement agent fees of $22,500 and legal fees of $22,500 which were recorded as debt issue costs and shall be amortized over
the life of the notes. The outstanding principal balance on the notes at December 31, 2015 was $450,000.
The
notes matured on February 1, 2016. On March 31, 2016, the Note Holders entered into a letter agreement whereby, effective as of
February 1, 2016, they waived any and all defaults that may or may not have occurred prior to the date thereof (the “First
Waiver”). As consideration for the First Waiver, the Company issued the Note Holders an aggregate of 45,000 shares of the
Company’s common stock. The principal amount on the Notes increased from $450,000 to $490,500 as the initial interest amount,
$40,500 as of February 1, 2016, was added to the principal amount of the Notes. The maturity date of the Notes was extended to
July 1, 2016 and the Notes shall pay interest as of February 1, 2016 at a rate of 9% per annum, payable in one lump sum on the
maturity date. In addition, on any note conversion date from February 1, 2016 through July 1, 2016, the Notes are convertible
into shares of the Company’s common stock at a conversion price of $1.00 per share. On any Note conversion after July 1,
2016, the Notes are convertible into shares of the Company’s common stock at a conversion price that is the lower of (i)
$1.00 per share and (ii) the volume-weighted average price for the last five trading days preceding the conversion date. All remaining
terms of the Notes remained the same.
Subsequent to the First Waiver, the
Notes matured on July 1, 2016. On September 7, 2016, one Note Holder entered into a letter agreement whereby, effective as of August
1, 2016, they waived any and all defaults that may or may not have occurred prior to the date thereof (the “Second Waiver”).
As consideration for the Second Waiver, the Company issued the Note Holder an aggregate of 40,000 shares of the Company’s
common stock and added $15,000 to the principal amount of the note. The principal amount on the Note increased from $218,000 to
$242,810 as the accrued interest amount, $9,810 as of August 1, 2016 and the aforementioned $15,000 of consideration, was added
to the principal amount of the Note. The maturity date of the Note was extended to January 1, 2017 and the Note shall pay interest
as of August 1, 2016 at a rate of 15% per annum, payable in one lump sum on the maturity date. In addition, on any note conversion
date from August 9, 2016 through January 1, 2017, the Note is convertible into shares of the Company’s common stock at a
conversion price of $1.00 per share. On any Note conversion after January 1, 2017, the Note is convertible into shares of the Company’s
common stock at a conversion price that is the lower of (i) $1.00 per share and (ii) the volume-weighted average price for the
last five trading days preceding the conversion date. All remaining terms of the Note remained the same.
On October 21, 2016, a second Note Holder entered into a letter agreement whereby, effective as of August
1, 2016, they waived any and all defaults that may or may not have occurred prior to the date thereof (the “Second Waiver”).
As consideration for the Second Waiver, the Company issued the Note Holder an aggregate of 30,000 shares of the Company’s
common stock. The principal amount on the Note increased from $163,500 to $170,858 as the accrued interest amount, $7,358 as of
August 1, 2016, was added to the principal amount of the Note. The maturity date of the Note was extended to January 1, 2017 and
the Note shall pay interest as of August 1, 2016 at a rate of 15% per annum, payable in one lump sum on the maturity date. In
addition, on any note conversion date from August 9, 2016 through January 1, 2017, the Note is convertible into shares of the
Company’s common stock at a conversion price of $1.00 per share. On any Note conversion after January 1, 2017, the Note
is convertible into shares of the Company’s common stock at a conversion price that is the lower of (i) $1.00 per share
and (ii) the volume-weighted average price for the last five trading days preceding the conversion date. All remaining terms of
the Note remained the same.
Glenn
Tilley, a director of the Company, is the holder of $163,500 of principal as of September 30, 2016 of the aforementioned Notes.
As of July 1, 2016, the Company was not compliant
with the repayment terms of one of the Notes but no defaults under the Note have been called by the Note Holder. As September
30, 2016, the outstanding principal balance on the Note was $109,000. The Company is currently conducting good faith negotiations
with the Note Holder to further extend the maturity date, however, there can be no assurance that a further extension will be
granted. The Company is currently accruing interest on the Note at the default interest rate of 15% per annum.
First
Waiver
In
accordance with ASC 470, since the present value of the cash flows under the new debt instrument was not at least ten percent
different from the present value of the remaining cash flows under the terms of the original debt instrument, the Company accounted
for the First Waiver as a debt modification. Accordingly, the Company recorded a debt discount of $49,500 in the condensed consolidated
balance sheet. The debt discount shall be amortized to interest expense over the life of the note.
Second
Waiver
In
accordance with ASC 470, since the present value of the cash flows under the new debt instrument was at least ten percent different
from the present value of the remaining cash flows under the terms of the original debt instrument, the Company accounted for
the Second Waiver as a debt extinguishment. Accordingly, the Company recorded a loss on extinguishment of debt of $35,400 in the
condensed consolidated statement of operations.
The Company assessed
the conversion feature of the Note in default at the end of the reporting period and concluded the conversion feature of the Note
did not qualify as a derivative because there is no market mechanism for net settlement and it is not readily convertible to cash.
The Company will reassess the conversion feature of the Note for derivative treatment at the end of each subsequent reporting period.
On
August 19, 2015, we entered into a Securities Purchase Agreement (the “Agreement”) with a private investor (the “Investor”).
Under the Agreement, the Investor agreed to purchase convertible debentures in the aggregate principal amount of up to $450,000
(together the “Debentures” and each individual issuance a “Debenture”), bearing interest at a rate of
0% per annum, with maturity on the thirty-six (36) month anniversary of the respective date of issuance.
On
the Initial Closing Date, we issued and sold to the Investor, and the Investor purchased from us, a first Debenture in the principal
amount of $150,000 for a purchase price of $135,000. $15,000 was recorded as an original issue discount and will be accreted over
the life of the note to interest expense. The Agreement provides that, subject to our compliance with certain conditions to closing,
at the request of the Company and approval by the Investor, (i) we will issue and sell to the Investor, and the Investor will
purchase from us, a second Debenture in the principal amount of $150,000 for a purchase price of $135,000 and (ii) thereafter,
we will issue and sell to the Investor, and the Investor will purchase from us, a third Debenture in the principal amount of $150,000
for a purchase price of $135,000.
The
principal amount of the Debentures can be converted at the option of the Investor into shares of our common stock at a conversion
price per share of $1.00 until the six month anniversary of each closing date. If the Debenture is not repaid within six
months, the Investor will be able to convert such Debenture at a conversion price equal to 65% of the lowest closing bid price
for our common stock during the previous 20 trading days, subject to the terms and conditions contained in the Debenture. If the
Debentures are repaid within 90 days of the date of issuance, there is no prepayment penalty or premium. Following such
time, a prepayment penalty or premium will apply. As part of the transaction, we agreed to pay the Investor $5,000 and issue
25,000 shares of our Common Stock for certain due diligence and other transaction related costs. In-addition the Company incurred
placement agent fees of $7,500 and legal fees of $7,500. The Company recorded a $25,000 debt discount relating to the 25,000 shares
of common stock issued. The debt discount shall be amortized to interest expense over the life of the note. The remaining fees
were recorded as debt issue costs and shall be amortized over the life of the note.
The
Company assessed the conversion feature of the Debentures on the date of issuance and at end of each subsequent reporting period
and concluded the conversion feature of the Debentures do not qualify as a derivative because there is no market mechanism for
net settlement and it is not readily convertible to cash. The Company will reassess the conversion feature of the Debentures for
derivative treatment at the end of each subsequent reporting period.
The
outstanding principal balance on the Debentures at December 31, 2015 was $150,000. On February 19, 2016, the Company paid the
Debentures in full along with a prepayment penalty in the amount of $45,000.
On February 22, 2016 (the “Effective
Date”), the Company issued a convertible note in the principal aggregate amount of $170,000 to a private investor. The note
pays interest at a rate of 12% per annum and matures on August 19, 2016 (the “Maturity Date”). The Note is convertible
into shares of the Company’s common stock at a conversion price equal to: (i) from the Effective Date through the Maturity
Date at $1.00 per share; and (ii) beginning one day after the Maturity Date, or notwithstanding the foregoing, at any time after
the Company has registered shares of its common stock underlying the Note in a registration statement on Form S-1 or any other
form applicable thereto, the lower of i) $1.00 per share and ii) 60% of the volume-weighted average price for the last twenty
trading days preceding the conversion date.
The
Company used the proceeds of the note to pay off a debenture issued in favor of a private investor on August 19, 2015. The debenture
was in the principal amount of $150,000 and as of the date of this filing the investor has been paid all principal and interest
due in full satisfaction thereof.
As additional consideration for issuing
the note, on the Effective Date the Company issued to the investor 35,000 shares of the Company’s restricted common stock.
The Company recorded a $30,637 debt discount relating to the 35,000 shares of common stock issued. The debt discount was amortized
to interest expense over the life of the convertible note.
The intrinsic value of the convertible
note, when issued, gave rise to a beneficial conversion feature which was recorded as a discount to the note of $67,637 and was
amortized over the period from issuance to the date that the debt matured.
The Company assessed
the conversion feature of the note on the date of issuance, on the date of default and at the end of each subsequent reporting
period and concluded the conversion feature of the note did not qualify as a derivative because there is no market mechanism for
net settlement and it is not readily convertible to cash. The Company will reassess the conversion feature of the note for derivative
treatment at the end of each subsequent reporting period.
The outstanding principal balance on
the convertible note at September 30, 2016 was $170,000.
As of August 19, 2016, the Company is not
compliant with the repayment terms of this note but no defaults under the note have been called by the note holder. The Company
is currently conducting good faith negotiations with the note holder to further extend the maturity date, however, there can be
no assurance that a further extension will be granted. The Company recorded $17,850 in penalty interest during the nine months
ended September 30, 2016 as a result of the default. Accrued interest on this note is $18,525 as of September 30, 2016.
Promissory
Notes
On September 15, 2015, the Company entered
into a short term loan agreement with an investor. The principal amount of the loan was $200,000. The first $100,000 of the loan
is payable upon the Company raising $500,000 in a qualified offering (as defined therein). The remaining balances is payable upon
the Company raising $1,000,000 in a qualified offering. The loan bears interest at a rate of 8%. As part of the transaction, we
incurred placement agent fees of $10,000 which were recorded as debt issue costs and shall be amortized over the life of the loan.
On May 3, 2016, the Company paid 10,000 in note principal and $10,000 of accrued interest on the loan and the Company entered into
a promissory note with the lender for the remaining principal amount of $190,000. Pursuant to the terms of the promissory note
agreement, the note bears interest at a rate of 8% and requires the Company to make one monthly principal payment of $10,000, one
monthly principal payment of $12,500, eleven monthly principal payments of $15,000 and one monthly principal payment of $2,500,
all along with interest starting on June 1, 2016. The note matures on July 1, 2017 and is unsecured. The outstanding principal
balance on the note at September 30, 2016 was $127,500.
On
September 21, 2015, the Company entered into a promissory note with an investor in the principal amount of $163,993. The Company
received proceeds of $155,993 and $8,000 was recorded as an original issue discount which will be accreted over the life of the
note to interest expense. The promissory note is due on demand and carries a 5.0% interest rate. The promissory note is secured
by all assets of the Company. On November 17, 2015, the Company paid $50,000 of principal on the note. The outstanding principal
balance on the note at December 31, 2015 was $113,993. During the six months ended June 30, 2016, the Company paid the remaining
note principal of $113,993 in full. As of September 30, 2016, accrued interest due was $2,486.
On
January 26, 2016, the Company entered into a finance agreement with IPFS Corporation (“IPFS”). Pursuant to the terms
of the agreement, IPFS loaned the Company the principal amount of $65,006, which would accrue interest at 3.5% per annum, to partially
fund the payment of the premium of the Company’s general liability insurance. The agreement requires the Company to make
nine monthly payments of $7,328, including interest starting on February 27, 2016.
As
of September 30, 2016, the outstanding balance related to this finance agreement was $7,328.
On
November 30, 2015, the Company entered into a finance agreement with First Insurance Funding (“FIF”). Pursuant
to the terms of the agreement, FIF loaned the Company the principal amount of $29,700, which would accrue interest at 3.8%
per annum, to partially fund the payment of the premium of the Company’s directors and officers insurance. The
agreement requires the Company to make nine monthly payments of $3,352.47, including interest starting on January 3, 2016.
As
of September 30, 2016, the loan was paid in full.
On
July 14, 2016, the Company closed a Credit Agreement (the “Credit Agreement”) by and among the Company and First Form,
Inc. (the “Borrowers”) and Genlink Capital, LLC, as lender (“Genlink”). Pursuant to the Credit Agreement,
Genlink agreed to loan the Company up to a maximum of $1 million for general operating expenses. An initial amount of $670,000
was funded by Genlink at the closing of the Credit Agreement. Any increase in the amount extended to the Borrowers shall be at
the discretion of Genlink.
The
amounts borrowed pursuant to the Credit Agreement are evidenced by a Revolving Note (the “Revolving Note”) and the
repayment of the Revolving Note is secured by a first position security interest in substantially all of the Company’s assets
in favor of Genlink, as evidenced by a Security Agreement by and among the Borrowers and Genlink (the “Security Agreement”).
The Revolving Note is due and payable, along with interest thereon, on December 20, 2017, and bears interest at the rate of 15%
per annum, increasing to 19% upon the occurrence of an event of default. The Company incurred loan fees of $44,500 for entering
into the Credit Agreement. The loan fees shall be amortized to interest expense over the life of the notes. The Company must pay
a minimum of $75,000 in interest over the life of the loan. The principal balance on the note as of September 30, 2016 was $750,000.
The principal balance on the note as of the date of this filing was $925,000.
Debt
under promissory notes is as follows:
|
|
September 30, 2015
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Promissory notes payable
|
|
$
|
877,500
|
|
|
$
|
313,993
|
|
|
|
|
|
|
|
|
|
|
Less: Current maturities
|
|
|
(127,500
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Less: Debt issuance costs
|
|
|
(37,889
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Promissory notes payable, net of Current maturities and debt issuance costs
|
|
$
|
712,111
|
|
|
$
|
313,993
|
|
Future
minimum principal payments under promissory notes are as follows:
Year ending December 31:
|
|
|
|
|
|
|
|
2016 – (Remainder of year)
|
|
$
|
45,000
|
|
|
|
|
|
|
2017
|
|
|
832,500
|
|
|
|
|
|
|
2018 and thereafter
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
877,500
|
|
NOTE
7- FACTOR AGREEMENT
On
March 28, 2016, the Company entered into an agreement with a financial services company (the “Factor”) for the purchase
and sale of accounts receivables. The financial services company advances up to 80% of qualified customer invoices and holds the
remaining 20% as a reserve until the customer pays the financial services company. The released reserves are returned to the Company,
less applicable discount fees. The Company is initially charged 2.0% on the face value of each invoice purchased and 0.008% for
every 30 days the invoice remains outstanding. Uncollectable customer invoices are charged back to the Company after 90 days.
During the nine months ended September 30, 2016, accounts receivable purchased by the Factor amounted to $353,648 and advances
from the Factor amounted to $282,917. At September 30, 2016 no amounts were due to the Factor. Advances from the Factor are collateralized
by all accounts receivable of the Company.
NOTE
8- STOCKHOLDERS EQUITY (DEFICIT)
Preferred
Stock
The
Company has authorized 20,000,000 shares of preferred stock, with a par value of $0.00001 per share. As of September 30, 2016
and December 31, 2015, the Company has -0- shares of preferred stock issued and outstanding.
Common
Stock
The
Company has authorized 250,000,000 shares of common stock, with a par value of $0.00001 per share. As of September 30, 2016 and
December 31, 2015, the Company has 16,886,653 and 13,915,331 shares of common stock issued and outstanding, respectively.
Common
stock issued in placement of debt
As
part of a securities purchase agreement entered into on February 19, 2016, we agreed to issue an investor 35,000 shares of our
common stock.
Common
stock issued in debt modification
As
part of a debt modification entered into on March 31, 2016, we agreed to issue three investors an aggregate of 45,000 shares of
our common stock.
As
part of a debt modification entered into on September 7, 2016, the Company agreed to issue an investor 40,000 shares of
our common stock.
Common
stock issued for services
On
March 31, 2016, 1,000 shares of common stock were granted to a certain employee with a fair value of $1,100.
On
June 30, 2016, 1,500 shares of common stock were granted to a certain employee with a fair value of $1,650.
On
September 30, 2016, 1,500 shares of common stock were granted to a certain employee with a fair value of $495.
During
the nine months ended September 30, 2016, 882,127 shares of common stock valued at $648,839 were issued to various consultants
for professional services provided to the Company.
As
discussed in Note 10, Jeromy Olson was issued 250,000 shares of common stock valued at $275,000 as per the terms of his employment
agreement with the company as Chief Executive Officer.
Sale
of common stock
During
the nine months ended September 30, 2016, the Company sold 1,715,195 shares of common stock to investors in exchange for $1,886,712
in gross proceeds in connection with the private placement of the Company’s common stock.
In
connection with the private placement the Company incurred fees of $245,305. In addition, 171,520 five year warrants with an exercise
price of $1.10 were issued to the placement agent. The Company valued the warrants at $76,927 on the commitment date using a Black-Scholes-Merton
option pricing model. The value of the warrants was a direct cost of the private placement and has been recorded as a reduction
in additional paid in capital.
Stock
options issued for services
During
the nine months ended September 30, 2016, the Company's board of directors authorized the grant of 200,000 stock options, having
a total fair value of approximately $97,500, with a vesting period of 2.00 years. These options expire on January 4, 2021.
The
Company uses the Black-Scholes option pricing model to determine the fair value of the options granted. In applying the Black-Scholes
option pricing model to options granted, the Company used the following weighted average assumptions:
|
|
For the Nine Months Ended September 30,
|
|
|
|
2016
|
|
Risk free interest rate
|
|
|
1.73
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
45.25
|
%
|
Expected life in years
|
|
|
5
|
|
Forfeiture Rate
|
|
|
0.00
|
%
|
Since
the Company has limited trading history, volatility was determined by averaging volatilities of comparable companies.
The
expected term of the option, taking into account both the contractual term of the option and the effects of employees’ expected
exercise and post-vesting employment termination behavior: The expected life of options and similar instruments represents the
period of time the option and/or warrant are expected to be outstanding. Pursuant to paragraph 718-10-S99-1, it may be appropriate
to use the
simplified method
,
i.e., expected term = ((vesting term + original contractual term) / 2)
, if (i) A
company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due
to the limited period of time its equity shares have been publicly traded; (ii) A company significantly changes the terms of its
share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer
provide a reasonable basis upon which to estimate expected term; or (iii) A company has or expects to have significant structural
changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate
expected term. The Company uses the simplified method to calculate expected term of share options and similar instruments as the
Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The
contractual term is used as the expected term for share options and similar instruments that do not qualify to use the simplified
method.
The
following is a summary of the Company’s stock option activity during the nine months ended September 30, 2016:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
Outstanding - January 31, 2016
|
|
|
430,000
|
|
|
$
|
1.03
|
|
|
|
5.00
|
|
Granted
|
|
|
200,000
|
|
|
|
1.00
|
|
|
|
5.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
(7,500
|
)
|
|
|
1.50
|
|
|
|
-
|
|
Outstanding - September 30, 2016
|
|
|
622,500
|
|
|
$
|
1.02
|
|
|
|
3.82
|
|
Exercisable - September 30, 2016
|
|
|
422,500
|
|
|
$
|
1.03
|
|
|
|
3.73
|
|
At
September 30, 2016 and 2015, the total intrinsic value of options outstanding was $0 and $0, respectively.
At
September 30, 2016 and 2015, the total intrinsic value of options exercisable was $0 and $0, respectively.
Stock-based
compensation for stock options has been recorded in the condensed consolidated statements of operations and totaled $35,422 and
$105,143 for the three and nine months ended September 30, 2016, respectively, and $16,519 and $39,720 for the three and nine
months ended September 30, 2015, respectively. As of September 30, 2016, the remaining balance of unamortized expense is $99,142
and is expected to be amortized over a remaining period of 1.00 year.
Stock
Warrants
The
following is a summary of the Company’s stock warrant activity during the nine months ended September 30, 2016:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
Outstanding - January 1, 2016
|
|
|
508,068
|
|
|
$
|
1.00
|
|
|
|
3.13
|
|
Granted
|
|
|
171,520
|
|
|
|
1.10
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding - September 30, 2016
|
|
|
679,588
|
|
|
$
|
1.03
|
|
|
|
2.91
|
|
Exercisable - September 30, 2016
|
|
|
679,588
|
|
|
$
|
1.03
|
|
|
|
2.91
|
|
At
September 30, 2016 and 2015, the total intrinsic value of warrants outstanding and exercisable was $0 and $0, respectively.
NOTE
9 - RELATED PARTY TRANSACTIONS
Jeromy Olson, the Chief Executive Officer
of the Company, owns 50.0% of a sales management and consulting firm, NexPhase Global that provides sales services to the Company.
These services include the retention of two full-time senior sales representatives including the current National Sales Director
of the Company. Consulting expenses pertaining to the firm’s services were $78,300 and $200,300 for the three and nine months
ended September 30, 2016, respectively. Included in consulting expense for the three and nine months ended September 30, 2016
were 10,000 and 30,000 shares of common stock valued at $3,300 and $25,300, respectively, issued to Nexphase Global.
Consulting
expenses pertaining to the firm’s services were $60,000 and $110,000 for the three and nine months ended September 30, 2015.
Included in consulting expense for the three and nine months ended September 30, 2015 were 10,000 and 30,000 shares of common
stock valued at $10,000 and $30,000, respectively, issued to Nexphase Global.
Glenn
Tilley, a director of the Company, was issued 15,000 shares of our common stock as part of a Waiver entered into with Mr. Tilley
on March 31, 2016. (See Note 6 - Convertible Notes - May 7, 2015 Notes).
NOTE
10 – COMMITMENTS AND CONTINGENCIES
Services
Agreements
On
August 12, 2015, the Company entered into a Services Agreement with Aranea Partners. Aranea Partners agreed to provide investor
relations services to the Company for a period of 12 months. As compensation for the services, the Company issued 50,000 shares
of the Company common stock on August 12, 2015. On August 12, 2016, the Company is obligated to issue an additional 100,000 shares
of the Company’s common stock. Unvested shares will be revalued at the end of each reporting period until they vest and
will be expensed on a straight-line basis over the term of the agreement. The Company has recorded compensation expense relating
to the agreement of $(51,202) and $28,361 during the three and nine months ended September 30, 2016, respectively.
On
August 4, 2015, the Company entered into a Services Agreement with a consultant. The consultant agreed to provide investor relations
services to the Company for a period of 12 months. As compensation for the services, the Company was obligated to issue 62,500
shares of the Company common stock on August 16, 2015. On November 15, 2016, the Company is obligated to issue an additional 62,500
shares of the Company’s common stock. Unvested shares will be revalued at the end of each reporting period until they vest
and will be expensed on a straight-line basis over the term of the agreement. The Company has recorded compensation expense relating
to the agreement of $(12,449) and $52,818 during the three and nine months ended September 30, 2016, respectively.
On
February 19, 2016 (the “Effective Date”), the Company entered into a Services Agreement with a consultant. The consultant
agreed to provide investor relations services to the Company for a period of 12 months. As compensation for the services, the
Company shall pay the consultant $12,000 per month and is obligated to issue 62,500 shares of the Company common stock upon the
90-day anniversary of the Effective Date and on the 180-day, 270-day and 360-day anniversary of the Effective Date, if the agreement
is renewed as outline in the terms of the service. The Company may terminate this agreement by providing 5 days advance written
notice in the first 60 days of entering into this agreement and with 30 days advance written notice thereafter for the duration
of the agreement. Unvested shares will be revalued at the end of each reporting period until they vest and will be expensed on
a straight-line basis over the term of the agreement. The Company has recorded compensation expense relating to the equity portion
of the agreement of $13,646 and $85,534 during the three and nine months ended September 30, 2016, respectively.
On
April 14, 2016 (the “Effective Date”), the Company entered into a Services Agreement with a consultant. The consultant
agreed to provide financial and operational services to the Company. The agreement terminates on March 31, 2017. As compensation
for the services, the Company shall pay the consultant $2,400 per month and is obligated to issue $1,000 in shares of the Company
common stock to be issued quarterly in arrears based on a share price equal to the 30-day moving average share price. The Company
may terminate this agreement by providing 21 days advance written notice for the duration of the agreement. The Company has recorded
compensation expense relating to the equity portion of the agreement of $4,482 and $6,982 during the three and nine months ended
September 30, 2016, respectively.
On
August 9, 2016, the Company entered into a Services Agreement with RedChip Companies Inc. (“RedChip”). RedChip agreed
to provide investor relations services to the Company for a period of 12 months. As compensation for the services, the Company
shall pay the consultant $5,000 per month and is obligated to issue $50,000 in shares of the Company common stock to be issued
upon execution of the agreement based on a share price equal to the average closing price of the preceding 10 trading days. On
February 9, 2017, the Company is obligated to issue an additional $50,000 in shares of the Company common stock based on a share
price equal to the average closing price of the preceding 10 trading days. The Company may terminate the agreement during the
month of February 2017 by providing written notice. The first tranche of shares vest on February 8, 2017 and the second tranche
of shares vest on August 8, 2017. The Company agrees to increase the monthly consulting fee to $10,000 per month for the remaining
months under the current term upon the closing of a capital raise in excess of $3,000,000. Unvested shares will be revalued at
the end of each reporting period until they vest and will be expensed on a straight-line basis over the term of the agreement.
The Company has recorded compensation expense relating to the equity portion of the agreement of $11,508 during the three and
nine months ended September 30, 2016, respectively.
Consulting
Agreements
In
March 2014, the Company reached an agreement with a consulting firm owned by the CEO of the Company to provide non-exclusive sales
services. The consulting firm will receive between 3.5% and 5% commissions on sales referred to the Company. In addition, the
consulting firm will receive a monthly fee of $6,000, 50,000 shares of common stock upon execution of the agreement, and 10,000
shares of common stock at the beginning of each three month period for the term of the agreement and any renewal periods thereafter.
The agreement is for 18 months, and is renewable for successive 18 month terms. On December 10, 2014, the consulting agreement
was amended. The monthly fee was increased to $10,000 per month retroactive to September 1, 2014 and 50,000 additional shares
of common stock were issued. In addition, the consulting firm will be issued qualified stock options as follows:
|
●
|
100,000
stock options at an exercise price of $1.50 per share that vest on December 31, 2015
|
|
●
|
100,000
stock options at an exercise price of $1.75 per share that vest on December 31, 2016
|
|
●
|
100,000
stock options at an exercise price of $2.50 per share that vest on December 31, 2017
|
The
options are to be issued after the Company adopts a formal option plan that is approved by the Board of Directors. (See Note
11)
On
March 14, 2016, the consulting agreement was further amended. The monthly fee was increased to $20,000 per month for a period
of twelve months. At the end of the twelve month period the monthly payment reverts back to $10,000.
In
March 2014, the Company reached an agreement with a consulting firm to provide non-exclusive sales services. The consulting firm
will receive up to 5% commissions on sales referred to the Company. The term of the agreement is for one year, and automatically
renews for successive one year terms unless either party notifies the other, in writing, of its intention not to renew at least
60 days before the end of the initial term of this agreement or any renewal term. As compensation for the services, the Company
shall pay the consultant $2,500 per month and is obligated to issue 50,000 shares of the Company common stock upon execution of
the agreement and 10,000 shares of the Company common stock at the beginning of each three month period for the term of the agreement
and any renewal periods thereafter. The Company may terminate this agreement by providing 5 days advance written notice in the
first 60 days of entering into this agreement and with 30 days advance written notice thereafter for the duration of the agreement.
The Company has recorded compensation expense relating to the equity portion of the agreement of $11,000 and $33,000 during the
three and nine months ended September 30, 2016, respectively.
In
February 2015, the Company reached an agreement with a consulting firm to provide non-exclusive sales services with an effective
date of February 10, 2015 (the “Effective Date”). The agreement expires on December 31, 2017 and automatically renews
for successive one year terms unless either party notifies the other, in writing, of its intention not to renew at least 15 days
before the end of the initial term of this agreement or any renewal term. As compensation for the services, the consultant will
receive (i) 5% commissions on sales of products or services other than turf referred to the Company; (ii) commission based on
square footage of turf sold to certain parties as outlined in the agreement; (iii) 100,000 shares of the Company common stock
(the “Payment Shares”) upon execution of the agreement, which shall be subject to certain Clawback provisions. “Clawback”
means (i) if this agreement is terminated by the Company prior to December 31, 2016, then 50,000 of the Payment Shares shall be
forfeited, and cancelled by the Company; and (i) if this Agreement is terminated by the Company prior to December 31, 2017, then
25,000 of the Payment Shares shall be forfeited, and cancelled by the Company. No equity compensation will be owed in connection
with any renewal term. Unvested shares will be revalued at the end of each reporting period until they vest and will be expensed
on a straight-line basis over the term of the agreement. The Company has recorded compensation expense relating to the equity
portion of the agreement of $(12,666) and $5,447 during the three and nine months ended September 30, 2016, respectively.
In
February 2015, the Company reached an agreement with an individual to provide non-exclusive sales services with an effective date
of January 1, 2015 (the “Effective Date”). The individual will receive up to 5% commissions on sales referred to the
Company. The term of the agreement is for 18 months from the date of execution, and automatically renews for successive one year
terms unless either party notifies the other, in writing, of its intention not to renew at least 90 days before the end of the
initial term of this agreement or any renewal term. As compensation for the services, the Company shall pay the consultant $5,000
per month and is obligated to issue 25,000 shares of the Company common stock within 30 days of execution of the agreement, 25,000
shares of the Company common stock within 15 days of the date of execution and delivery of a certain synthetic turf contract and
20,000 shares of the Company common stock upon reaching certain sales milestones. The Company has recorded compensation expense
relating to the equity portion of the agreement of $0 and $8,333 during the three and nine months ended September 30, 2016, respectively.
In
November 2015, the Company reached an agreement with an individual to provide non-exclusive sales services with an effective date
of January 1, 2015 (the “Effective Date”). The term of the agreement is for 3 years from the date of execution, and
automatically renews for successive one year terms unless either party notifies the other, in writing, of its intention not to
renew at least 90 days before the end of the initial term of this agreement or any renewal term. As compensation for the services,
the Company is obligated to issue 75,000 shares of the Company common stock (the “Payment Shares”) within 30 days
of execution of the agreement, which shall be subject to certain Clawback provisions. “Clawback” means (i) if this
agreement is terminated by the Company prior to September 30, 2016, then 50,000 of the Payment Shares shall be forfeited, and
cancelled by the Company; and (i) if this Agreement is terminated by the Company prior to June 30, 2017, then 25,000 of the Payment
Shares shall be forfeited, and cancelled by the Company. No equity compensation will be owed in connection with any renewal term.
Unvested shares will be revalued at the end of each reporting period until they vest and will be expensed on a straight-line basis
over the term of the agreement. The Company has recorded compensation expense relating to the equity portion of the agreement
of $(4,000) and $9,700 during the three and nine months ended September 30, 2016, respectively.
In
December 2015, the Company reached an agreement with an individual to provide non-exclusive sales services. The individual will
receive up to 5% commissions on sales referred to the Company. The term of the agreement is for 18 months from the date of execution,
and automatically renews for successive one year terms unless either party notifies the other, in writing, of its intention not
to renew at least 90 days before the end of the initial term of this agreement or any renewal term. As compensation for the services,
the Company is obligated to issue 25,000 shares of the Company common stock within 30 days of execution of the agreement, 125,000
shares of the Company common stock which shall vest at the rate of 25,000 shares per quarter, effective beginning as of the quarter
ending March 31, 2016 and 20,000 shares of the Company common stock upon reaching certain sales milestones. No equity compensation
will be owed in connection with any renewal term. Unvested shares will be revalued at the end of each reporting period until they
vest and will be expensed on a straight-line basis over the term of the agreement. The Company has recorded compensation expense
relating to the equity portion of the agreement of $(1,385) and $53,414 during the three and nine months ended September 30, 2016,
respectively.
In
March 2016, the Company reached an agreement with an individual to provide non-exclusive sales services with an effective date
of March 15, 2016 (the “Effective Date”). The individual will receive up to 1% commissions on sales referred to the
Company. The term of the agreement is for one year, and automatically renews for successive one year terms unless either party
notifies the other, in writing, of its intention not to renew at least 60 days before the end of the initial term of this agreement
or any renewal term. As compensation for the services, the Company is obligated to issue 4,000 shares of the Company common stock
on the 15
th
day of each month for the first 4 months of this agreement; and (ii) 10,000 shares of the Company common
stock for every $1 million in gross revenue earned by the Company attributable to projects sold by the individual. Unvested shares
will be revalued at the end of each reporting period until they vest and will be expensed on a straight-line basis over the term
of the agreement. The Company has recorded compensation expense relating to the equity portion of the agreement of $4,436 and
$9,596 during the three and nine months ended September 30, 2016, respectively.
In
April 2016, the Company reached an agreement with an individual to provide non-exclusive sales services with an effective date
of April 20, 2016 (the “Effective Date”). The individual will receive up to 4% commissions on sales referred to the
Company. The term of the agreement is for one year, and automatically renews for successive one year terms. The Company may terminate
this agreement by providing 60 days advance written notice for the duration of the agreement. As compensation for the services,
the Company is obligated to issue 4,000 shares of the Company common stock on the 15
th
day of each month for the first
6 months of this agreement; and (ii) 10,000 shares of the Company common stock for every $1 million in gross revenue earned by
the Company attributable to projects sold by the individual. Unvested shares will be revalued at the end of each reporting period
until they vest and will be expensed on a straight-line basis over the term of the agreement. The Company has recorded compensation
expense relating to the equity portion of the agreement of $2,689 and $7,824 during the three and nine months ended September
30, 2016, respectively.
Employment
Agreements
In
September 2014, Jeromy Olson entered into a 40 month employment agreement to serve in the capacity of CEO, with subsequent one
year renewal periods. The CEO will receive a monthly salary of $10,000 that (1) will increase to $13,000 upon the Company achieving
gross revenues of at least $10,000,000, as amended, and an operating margin of at least 15%, and (2) will increase to $16,000
per month upon the Company achieving gross revenues of at least $15,000,000 and an operating margin of at least 15%. The agreement
provides for cash bonuses of 15% of the annual Adjusted EBITDA between $1 and $1,000,000, 10% of the annual Adjusted EBITDA between
$1,000,001 and $2,000,000 and 5% of the annual Adjusted EBITDA greater than $2,000,000. For purposes of the agreement, Adjusted
EBITDA is defined as earnings before interest, taxes, depreciation and amortization less share based payments, gains or losses
on derivative instruments and other non-cash items approved by the Board of Directors. The CEO was issued 250,000 shares of common
stock on the date of the agreement and will receive 250,000 shares of common stock on January 1, 2016 provided the agreement is
still in effect. Lastly, the CEO will be issued qualified stock options as follows:
|
●
|
100,000
stock options at an exercise price of $1.50 per share that vest on December 31, 2015
|
|
●
|
100,000
stock options at an exercise price of $1.75 per share that vest on December 31, 2016
|
|
|
|
|
●
|
100,000
stock options at an exercise price of $2.50 per share that vest on December 31, 2017
|
The
options are to be issued after the Company adopts a formal option plan that is approved by the Board of Directors. (See Note
11)
Director
Agreements
On
January 4, 2016, the Company entered into a director agreement with Glenn Tilley, concurrent with Mr. Tilley’s appointment
to the Board of Directors of the Company (the “Board”) effective January 4, 2016. The director agreement may, at the
option of the Board, be automatically renewed on such date that Mr. Tilley is re-elected to the Board. Pursuant to the director
agreement, Mr. Tilley is to be paid a stipend of One Thousand Dollars ($1,000) per meeting of the Board, which shall be contingent
upon his attendance at the meetings being in person, rather than via telephone or some other electronic medium. Additionally,
Mr. Tilley shall receive non-qualified stock options (the “Options”) to purchase Two Hundred Thousand (200,000) shares
of the Company’s common stock. The exercise price of the Options shall be One Dollar ($1.00) per share. The Options shall
vest in equal amounts over a period of two (2) years at the rate of Twenty Five Thousand (25,000) shares per fiscal quarter on
the last day of each such quarter, commencing January 4, 2016. The total grant date value of the options was $97,535 which shall
be expensed over the vesting period.
Advisory
Board Agreements
On
February 11, 2016, the Company entered into an advisory board agreement with John Brenkus, effective June 1, 2016 (the (“Effective
Date”). The term of the agreement is for a period of 24 months commencing on the Effective Date. Pursuant to the agreement,
Mr. Brenkus is to be issued 25,000 shares of the Company common stock at the beginning of each quarter starting on the Effective
Date through the term of the agreement. The Company has recorded compensation expense relating to the agreement of $6,137 and
$14,876 during the three and nine months ended September 30, 2016, respectively.
Supply
Agreement
On December 2, 2015, IMG Academy LLC
(“IMG”) and the Company entered into an Official Supplier Agreement (the “Agreement”). The term of the
Agreement is January 1, 2016 through December 31, 2019 (the “Term”). Under the Agreement, The Company is to be the
“Official Supplier” of IMG in connection with certain of the Company’s products and related services during
the Term. Additionally, the Agreement provides the Company with certain promotional opportunities and supplier benefits
including but not limited to (i) on-site signage and Company brand exposure (ii) the opportunity to install up to 4 test turf
plots (the “Test Plots”) in order for the Company to conduct research on its turf products and the ability to use
IMG athletes as participants in such testing (ii) opportunity to schedule site visits of test plots for potential Company customers
and (iv) access to IMG’s personnel to include Head Coaches, Athletic Director and Administrators, subject to clearances
and applicable rules of governing bodies such as NCAA. As consideration for its designation as IMG’s “Official
Supplier” the Company must pay IMG three installments of $208,000 during the Term as specified
in the Agreement. As
of September 30, 2016 the company has recorded $117,376 of expense related to the agreement which is included in accounts payable
and accrued expenses.
Litigation
The Company is engaged
in an administrative proceeding against a former employee who was terminated from his positions with the Company for cause on May
12, 2014. The former employee has claimed he is due between $24,000 and $48,000 in unpaid wages. The Company is in the process
of settling the matter while continuing to vigorously defend itself.
The Company has
been put on notice by Brock USA, LLC d/b/a Brock International LLC (“Brock”) of patent infringement relating to certain
products acquired by the Company from NexxField, Inc. (“NexxField”), namely, NexxField’s NexxPad turf underlayment
panels. In July 2016, Brock commenced a patent infringement lawsuit against NexxField alleging that NexxField’s NexxPad panels
infringe certain patents owned by Brock. The Company has not been named as a defendant in Brock’s patent infringement action.
The Company believes it will be able to resolve this matter without being named as a defendant in the lawsuit and will be able
to find alternative products if necessary.
Operating
Leases
On
September 23, 2015, the Company entered into a new lease agreement for its office space in Illinois. The lease commences on January
1, 2016 and expires on December 31, 2016. The lease has minimum monthly payments of $1,045. The rents for the first and seventh
months of 2016 are free. The lease automatically renews for periods of 12 months unless a three month notice is provided by either
the Company or the landlord. The Company was required to pay a security deposit to the lessor totaling $2,090. Deferred rent at
September 30, 2016 and December 31, 2015 was immaterial.
For
the three months ended September 30, 2016 and 2015, the Company incurred rent expense of $4,021 and $2,600, respectively. For
the nine months ended September 30, 2016 and 2015, the Company incurred rent expense of $10,492 and $14,617, respectively.
NOTE
11 – SUBSEQUENT EVENTS
Glenn Tilley, a director of the Company,
was issued 30,000 shares of our common stock in consideration for extending the maturity date of the note issued in his favor.
Subsequent
to September 30, 2016, 7,317 shares of common stock were issued to a consultant for professional services provided to the Company.
On
October 4, 2016, the Board approved the Sports Field 2016 Incentive Stock Option (the “2016 Plan”). The Plan provides
for the issuance of up to 2,500,000 shares of common stock of the Company through the grant of non-qualified options (the “Non-qualified
Options”), incentive options (the “Incentive Options” and together with the Non-qualified Options, the “Options”)
and restricted stock (the “Restricted Stock”) and unrestricted stock (the “Unrestricted Stock”) to directors,
officers, consultants, attorneys, advisors and employees. The 2,500,000 shares available under the 2016 Plan represent approximately
15% of the Company’s issued and outstanding common stock as of October 4, 2016. The Board believes the 2,500,000 shares
that may be awarded under the 2016 Plan should be sufficient to cover grants through at least the end of the fiscal year 2018.
On
November 3, 2016, the Board, pursuant to the employment agreement with our CEO (See Note 10), approved the issuance of (i) qualified
options to purchase 100,000 shares of the Company’s Common Stock at a price of $1.50 vesting immediately with a grant date
of November 3, 2016 and (ii) qualified options to purchase 75,000 shares of the Company’s Common Stock at a price of $1.75
vesting on December 31, 2016. Mr. Olson is due additional option grants pursuant to his employment agreement, however, those grants
are being deferred until 2017 to comply with the terms of the issuance of incentive options in the 2016 Plan.
On
November 3, 2016, the Board, pursuant to a consulting agreement with a consulting firm owned by the CEO of the Company (See Note
10), approved the issuance of (i) non-qualified options to purchase 100,000 shares of the Company’s Common Stock at a price
of $1.50 vesting immediately with a grant date of November 3, 2016 and (ii) non-qualified options to purchase 75,000 shares of
the Company’s common stock at a price of $1.75 vesting on December 31, 2016. The consultant is due additional option grants
pursuant to the consulting agreement, however, those grants are being deferred until 2017 to comply with the terms of the issuance
of incentive options in the 2016 Plan.