Notes to Condensed Consolidated Financial
Statements
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
– FINDEX.cOM, Inc.
Findex.com, Inc.’s headquarters and operations are based in
Lake Park, Florida. The Company is a developer, manufacturer, and marketer of a proprietary line of specialty industrial glass-based
smart surface coatings materials that have a broad range of industrial, commercial, and consumer applications. The Company’s
line of products center around a U.S. patented technology that, either on its own or when coupled with any of an array of available
proprietary formula additives, offers a unique combination of beneficial surface properties that allow for a broad array of multi-surface
and end-product applications. Among others, such applications include:
|
▪
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Heavy machinery, equipment and infrastructure throughout each of the construction, oil and gas, and mining industries
|
|
▪
|
Marine industry, vessels and infrastructure
|
|
▪
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Industrial HVAC equipment, commercial refrigeration systems, and power generators
|
|
▪
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Energy production equipment, including solar and wind
|
|
▪
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Hardscapes
|
On September 14, 2016, the Company became the holder of what
is currently an approximately 25% minority equity stake in a recently formed, closely-held, private limited liability
company, Advanced Nanofibers LLC (“Advanced”). Advanced is comprised of three entity members, including the
Company, Nanotech Fibers LLC, and EnVont, LLC. The Company’s president and chief executive officer currently holds a
18.75% equity interest in Nanotech Fibers LLC through a closely held private Florida limited liability company, August Center
Street Holdings LLC. August Center Street Holdings is owned 75% by the Company’s president and chief executive officer
and 25% by the Company’s general counsel. Advanced is a Florida based nanotechnology firm focused on fundamentally
broadening the industrial utilization of nanofibers and nanoparticles globally throughout a diverse range of mass-market
applications. It’s platform technological contributions and sustainable solutions center around (i) meaningfully
proprietary, and expected-to-be revolutionary, industrially disruptive advances in the custom molecular bonding of nanofibers
to application-specific nanoparticles such that the result in each case is an unparalleled, multifunctional
‘super’-composite exhibiting new and meaningfully superior physical, flexural, chemical and structural
properties, (ii) ultra-cost-efficient production capabilities at scale, and (iii) the application of internally-developed
breakthrough environmental safety advances throughout the handling and production process of its potentially hazardous
materials. Its nanoparticle bonded nanofibers mark a new age in polymeric-based advanced composites. Based on their
fundamental composition, Advanced is able to produce these materials in a virtually limitless array of
industrial application-specific varieties, to be used either alone or in conjunction with other fibers and materials, making
nanoparticle bonded nanofibers an ideal host for a variety of advanced composites.
BASIS
OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with Generally Accepted Accounting Principles for interim financial information and with the instructions
to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
Generally Accepted Accounting Principles for complete financial statements. The accompanying unaudited condensed consolidated financial
statements reflect all adjustments that, in the opinion of management, are considered necessary for a fair presentation of the
financial position, results of operations, and cash flows for the periods presented. The results of operations for such periods
are not necessarily indicative of the results expected for the full year or for any future period. The December 31, 2015 condensed
consolidated balance sheet data was derived from audited financial statements. The accompanying financial statements should be
read in conjunction with the audited consolidated financial statements of Findex.com, Inc. included in the Company’s Form
10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission on April 14, 2016.
Principles
of Consolidation
The condensed consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.
Reclassifications
Certain accounts in the Company’s 2015 financial statements
have been reclassified for comparative purposes to conform with the presentation in 2016 financial statements.
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 reported amounts
of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. The Company bases its estimates and assumptions on current facts, historical experience and various other factors
that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual
results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there
are material differences between the estimates and the actual results, future results of operations will be affected. Significant
estimates include inventory evaluation for slow moving and obsolete items, collectability of accounts receivable, assessing intangibles
for impairment, useful lives of assets, and valuation of stock based compensation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash equivalents.
INVENTORY
The Company’s inventories are recorded at the lower of cost
or market using the first in, first out method. The Company’s inventory consists of raw materials and finished goods. The
Company takes into consideration certain inventory items that are slow moving and obsolete and calculates a provision for these
inventory items.
INTANGIBLE ASSETS OTHER THAN GOODWILL
The Company’s intangible assets consist of patents and patents
pending acquired from third parties, and are recorded at cost. In accordance with Financial Accounting Standards Board Accounting
Standards Codification (“ASC”) 350-30,
General Intangibles Other Than Goodwill
, intangible assets with an indefinite
useful life are not amortized. Intangible assets with a finite useful life are amortized on the straight-line method over the estimated
useful lives, generally three to ten years. All intangible assets are tested for impairment annually during the fourth quarter.
REVENUE
RECOGNITION
The Company recognizes revenues in accordance with the Securities
and Exchange Commission Staff Accounting Bulletin (SAB) number 104,
Revenue Recognition.
SAB 104 clarifies application of
U.S. generally accepted accounting principles to revenue transactions. Under certain circumstances, the Company recognizes revenue
in accordance with the provisions of Statement of Financial Accounting Standards No. 139 and American Institute of Certified Public
Accountants Statement of Position 00-2 (collectively referred to as “SOP 00-2”). The Company recognizes revenue when
the earnings process is complete. That is, when the arrangements of the goods are documented, the pricing becomes final and collectability
is reasonably assured. An allowance for bad debt is provided based on estimated losses.
Revenue is recognized when a product is delivered or shipped to
the customer and all material conditions relating to the sale have been substantially performed.
In addition, within the Company’s operations as a whole, the
Company derives part of its revenues from the sale of downloadable software products. The Company recognizes software revenue for
software products and related services in accordance with ASC 985-605,
Software Revenue Recognition
. The Company recognizes
revenue when persuasive evidence of an arrangement exists (generally a purchase order), the Company has delivered the product,
the fee is fixed or determinable and collectability is probable. In some situations, the Company receives advance payments from
the Company’s customers. The Company defers revenue associated with these advance payments until the Company ships the products
or offers the support.
RESEARCH AND DEVELOPMENT
The Company’s research
and development costs consist of direct production costs, including labor directly associated with the development of projects
and outside consultants, and indirect costs such as those associated with facilities use. For labor costs and costs of outside
consultants, the Company records the research and development costs as a reduction against either personnel costs or professional
fees. For facilities leasing related expenses, the Company records the research and development costs as a reduction against rent.
For the nine months ended September 30, 2016 and 2015, the Company recognized $149,358 and $205,555, respectively, in research
and development costs.
STOCK-BASED COMPENSATION
The Company recognizes share-based compensation in accordance with
ASC 718,
Compensation – Stock Compensation
, using the modified prospective method. ASC 718 requires that the Company
measure the cost of the employee services received in exchange for an award for equity instruments based on the grant-date fair
value and to recognize this cost over the requisite service period. See Note 11.
EARNINGS (LOSS) PER SHARE
The Company follows the guidance of ASC 260,
Earnings Per Share
,
to calculate and report basic and diluted earnings per share (“EPS”). Basic EPS is computed by dividing income available
to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted EPS is computed
by giving effect to all dilutive potential shares of common stock that were outstanding during the period. For the Company, dilutive
potential shares of common stock consist of the incremental shares of common stock issuable upon the exercise of stock options
and warrants for all periods, convertible notes payable and the incremental shares of common stock issuable upon the conversion
of convertible preferred stock.
When discontinued operations, extraordinary items, and/or the cumulative
effect of an accounting change are present, income before any of such items on a per share basis represents the “control
number” in determining whether potential shares of common stock are dilutive or anti-dilutive. Thus, the same number of potential
shares of common stock used in computing diluted EPS for income from continuing operations is used in calculating all other reported
diluted EPS amounts. In the case of a net loss, it is assumed that no incremental shares would be issued because they would be
anti-dilutive. In addition, certain options and warrants are considered anti-dilutive because the exercise prices were above the
average market price during the period. Anti-dilutive shares are not included in the computation of diluted EPS, in accordance
with ASC 260-10-45-17.
The calculations of net loss per share for the nine months ended
September 30, 2016 and 2015 excluded the impact of the following potential common shares as their inclusion would be anti-dilutive.
For the Nine Months Ended September 30
|
|
2016
|
|
2015
|
Shares Issuable Upon Exercise of Outstanding Warrants
|
|
|
100,000
|
|
|
|
4,150,000
|
|
Shares Issuable Upon Conversion of Outstanding Convertible Note Payables
|
|
|
189,554,683
|
|
|
|
24,500,000
|
|
Total weighted average anti-dilutive potential common shares
|
|
|
189,654,683
|
|
|
|
28,650,000
|
|
DISCONTINUED
OPERATIONS
On May 5, 2011, Findex entered into a Software Product Line Purchase
Agreement with WORDsearch Corp., L.L.C. In accordance with the Software Product Line Purchase Agreement, WORDsearch agreed to acquire
from Findex all of the assets associated with the QuickVerse
®
product line which centered around Findex’s
industry-leading Bible-study software program. The specific assets conveyed include, among others, the underlying software source
code, registered trade names, and existing product inventories. As a result, the Company has classified any associated liabilities
as well as all expenses directly related to the QuickVerse
®
product line as discontinued operations for the nine
months ended September 30, 2016 and 2015. See Note 14.
RECENT
ACCOUNTING PRONOUNCEMENTS
At September 30, 2016, there were no recent accounting pronouncements
that the Company believed would have a material impact on its condensed consolidated financial statements.
NOTE 2 – GOING CONCERN
The accompanying condensed consolidated financial statements have
been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates the
Company’s continuation as a going concern. However, as of September 30, 2016, the Company had negative working capital of
$2,750,885 and had an accumulated deficit of $6,178,134. These factors raise substantial doubt about the Company’s ability
to continue as a going concern. Management has taken several actions in an attempt to mitigate this risk. These actions include
capital raising initiatives involving the issuance of equity and/or notes payable to investors, as well as cash
conservation initiatives involving the issuance of equity and/or notes payable to employees and related parties. The accompanying
condensed consolidated financial statements do not include any adjustments related to these uncertainties.
NOTE 3 – INVENTORIES
Inventories consisted of the following:
|
|
September 30, 2016
|
|
December 31, 2015
|
Raw materials
|
|
$
|
24,359
|
|
|
$
|
24,753
|
|
Finished goods
|
|
|
1,778
|
|
|
|
4,364
|
|
Reserve for obsolete inventory
|
|
|
(2,279
|
)
|
|
|
(9,320
|
)
|
Inventories
|
|
$
|
23,858
|
|
|
$
|
19,797
|
|
NOTE 4 – INVESTMENT IN UNCONSOLIDATED INVESTEE
On September 14, 2016, the Company entered into a certain operating
agreement pursuant to which we became the holder of (what currently constitutes) a roughly 25% equity (membership) interest in
a newly formed, closely held private Florida limited liability company joint venture, Advanced Nanofibers LLC (“Advanced”).
The membership interest in Advanced was acquired in exchange for a capital contribution in cash by us to Advanced in the amount
of $1,000 (together with certain going-forward non-cash contributions). Advanced was otherwise capitalized with contributions in
cash totaling $3,000 by two other parties to the operating agreement, Nanotech Fibers LLC and EnVont, LLC, both Florida limited
liability companies. Advanced is comprised of three entity members, including the Company, Nanotech Fibers LLC, and EnVont, LLC.
The Company’s president and chief executive officer currently holds a 18.75% equity interest in Nanotech Fibers LLC through
a closely held private Florida limited liability company, August Center Street Holdings LLC. August Center Street Holdings is owned
75% by the Company’s president and chief executive officer and 25% by the Company’s general counsel. As of September
30, 2016, there was no other material transactional activity associated with this joint venture.
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
|
September 30, 2016
|
|
December 31, 2015
|
Office equipment
|
|
$
|
3,466
|
|
|
$
|
3,466
|
|
Warehouse equipment
|
|
|
76,339
|
|
|
|
76,339
|
|
Computer equipment
|
|
|
8,708
|
|
|
|
8,708
|
|
Research lab
|
|
|
10,334
|
|
|
|
—
|
|
Less: accumulated depreciation
|
|
|
(71,964
|
)
|
|
|
(58,519
|
)
|
Property and equipment
|
|
$
|
26,883
|
|
|
$
|
29,994
|
|
For the nine months ended September 30, 2016 and 2015, the Company
recorded depreciation expense of $13,446 and $13,095, respectively. For the nine months ended September 30, 2016, the Company invested
$10,334 in building out a new research lab within our corporate headquarters located in the Lake Park, Florida. The new research
lab will replace the research lab located in Daytona Beach, Florida which was relocated in July 2016. See Note 12.
NOTE 6 – INTANGIBLE ASSETS
The Company’s intangible assets consist of patents and patents
pending acquired from third parties, and are recorded at cost. The Company amortizes the costs of its intangible assets over their
estimated useful lives unless such lives of approximately 11 years. Patents pending are not amortized until the patents are issued.
Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair
value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are tested for impairment,
at least annually, and written down to fair value as required.
The Company’s intangible assets, net of accumulated amortization
consisted of the following:
Patents and/or software licenses, net
|
|
September 30, 2016
|
|
December 31, 2015
|
Cost
|
|
$
|
697,955
|
|
|
$
|
697,955
|
|
Amortization
|
|
|
(376,715
|
)
|
|
|
(341,081
|
)
|
Net intangible assets
|
|
$
|
321,240
|
|
|
$
|
356,874
|
|
The Surface Modification Technologies assets include a patent, a
patent pending, trade secret technology, instructions, manuals and materials on certain manufacturing processes and know-how. For
the nine months ended September 30, 2016 and 2015, the Company recorded amortization expense of $35,634 and $35,635, respectively.
NOTE 7 – GOODWILL IMPAIRMENT LOSS
For the nine months ended September 30, 2015, the Company recognized
$1,433,465 of goodwill impairment expense related to the Findex legacy software segment which is no longer being actively pursued.
The Company tests goodwill for impairment as required by ASC 350,
Goodwill and Other Intangible Assets
. Goodwill is not
amortized, but instead tested for impairment at the reporting unit level at least annually and more frequently upon occurrence
of certain events.
NOTE 8 – NOTES PAYABLE AND NOTES PAYABLE
- RELATED PARTIES
Notes payable consisted of the following:
|
|
As of September 30, 2016
|
|
As of December 31, 2015
|
Notes payable
|
|
$
|
441,283
|
|
|
$
|
366,283
|
|
Notes payable, related parties
|
|
|
1,993,663
|
|
|
|
709,000
|
|
Total
|
|
$
|
2,434,946
|
|
|
$
|
1,075,283
|
|
Notes payable to non-related parties consisted
of the following:
|
|
As of September 30, 2016
|
|
As of December 31, 2015
|
Note payable to a former shareholder, past due as of January 2012, together with accrued interest at 5% APR and interest on overdue principal accruing at 10% APR.
|
(a)
|
|
|
$
|
28,783
|
|
|
$
|
28,783
|
|
Note payable to a shareholder, past due as of August 1, 2015, together with accrued interest at 10% APR.
|
(b)
|
|
|
|
300,000
|
|
|
|
300,000
|
|
Note payable to a shareholder, payable upon demand, together
with imputed interest only, as applicable.
|
(c)
|
|
|
|
7,500
|
|
|
|
7,500
|
|
Note payable to a shareholder, past due as of October 6, 2015,
together with a fixed interest payment of $2,000, and convertible at $0.01 per share of common stock.
|
(d)
|
|
|
|
20,000
|
|
|
|
20,000
|
|
Note payable to an investor due as of September 2016, together
with accrued interest at 10% APR, and convertible at $0.02 per share of common stock.
|
(e)
|
|
|
|
—
|
|
|
|
10,000
|
|
Note payable to a shareholder, past due as of April 23, 2016, together with a fixed interest payment of $1,000, and convertible at $0.005 per share of common stock.
|
(f)
|
|
|
|
10,000
|
|
|
|
—
|
|
Note payable to an investor due as of January 20, 2017,
together with accrued interest at 10% APR, and convertible at $0.01 per share of common stock.
|
(g)
|
|
|
|
25,000
|
|
|
|
—
|
|
Note payable to an investor due
as of March 4, 2017, together with accrued interest at 10% APR, and convertible at $0.01 per share of common stock.
|
(i)
|
|
|
|
50,000
|
|
|
|
—
|
|
Total
|
|
|
|
|
|
$
|
441,283
|
|
|
$
|
366,283
|
|
As of September 30, 2016, the Company had outstanding a past due
note payable (b) to a shareholder in the amount of $300,000. A previously outstanding note payable to the same party, that had
contained a conversion feature in the amount of $250,000, pre-dated this note. However, in March 2015, the Company entered into
a loan modification agreement which provided that the original note, along with the attendant conversion feature, be cancelled,
and that a replacement note to be issued in its stead at an upwardly adjusted principal amount of $300,000, but without any associated
conversion feature. In accordance with ASC 470-50-40, the Company deemed the transaction for accounting purposes to be a debt extinguishment
due to the substantially different terms, and, as a result, recorded a gain on debt settlement of $200,000. For the nine months
ended September 30, 2016, t
he Company recognized a debt discount of $9,900 associated with two notes
payable as they each carried a beneficial conversion feature. This debt discount has been fully amortized to interest expense for
the nine months ended September 30, 2016. See Note 10.
At September 30, 2016, the Company was in arrears on the unsecured
term note payable (a) to a former shareholder, the unsecured term note payable (b) to a current shareholder, the convertible term
note payable (d) to another current shareholder and the convertible note payable (f) to a third current shareholder. On April 12,
2016, the Company repaid and retired a $10,000 note to a private investor together with $1,000 in then-accrued interest ($11,000
total). On September 9, 2016, a private investor of a convertible note payable (e) opted to convert the note payable plus accrued
interest totaling $10,456 into 2,613,963 shares of common stock. The Company repriced the original conversion of $0.02 per share
to $0.004 per share which resulted in a loss on conversion in the amount of $13,593. See Note 9.
NOTES PAYABLE RELATED PARTIES
Notes payable, related parties consisted of
the following:
|
|
|
|
As of September 30, 2016
|
|
As of December 31, 2015
|
Note payable to a former officer, director and significant shareholder of EcoSmart Surface and Coatings Technology, Inc. prior to the Company’s merger with such firm in July 2014, past due as of August 3, 2016 together with imputed interest only, as applicable.
|
(a)
|
|
|
$
|
239,000
|
|
|
$
|
239,000
|
|
Note payable to a company controlled by an outside director (also a shareholder), due on demand together with accrued interest at 4.5% APR, and convertible at $0.01 per share of common stock.
|
(b)
|
|
|
|
60,000
|
|
|
|
60,000
|
|
Note payable to the Company’s outside general counsel (also a shareholder), due on demand together with accrued interest at 4.5% APR, and convertible at $0.01 per share of common stock.
|
(c)
|
|
|
|
150,000
|
|
|
|
150,000
|
|
Note payable to an outside director (also a shareholder), due on demand together with accrued interest at 4.5% APR, and convertible at $0.01 per share of common stock.
|
(d)
|
|
|
|
30,000
|
|
|
|
30,000
|
|
Note payable to the Company’s outside general counsel (also a shareholder), due on demand together with accrued interest at 4.5% APR, and convertible at $0.007 per share of common stock.
|
(e)
|
|
|
|
120,000
|
|
|
|
120,000
|
|
Note payable to the Company’s outside general counsel (also a shareholder), due on demand together with accrued interest at 12% APR, and convertible at $0.008 per share of common stock.
|
(f)
|
|
|
|
10,000
|
|
|
|
10,000
|
|
Note payable to a related party investor (by virtue of shareholding percentage, both actual and on an as-converted basis), due November 13, 2018 together with accrued interest at 10% APR, and convertible at $0.01 per share of common stock.
|
(g)
|
|
|
|
100,000
|
|
|
|
100,000
|
|
Note payable to a related party investor (by virtue of shareholding percentage, both actual and on an as-converted basis), due March 18, 2019 together with accrued interest at 10% APR, and convertible at $0.01 per share of common stock.
|
(h)
|
|
|
|
100,000
|
|
|
|
—
|
|
Note payable to a related party investor (by virtue of shareholding percentage, both actual and on an as-converted basis), due May 12, 2019 together with accrued interest at 10% APR, and convertible at $0.01 per share of common stock.
|
(i)
|
|
|
|
50,000
|
|
|
|
—
|
|
Note payable to a related party investor (by virtue of shareholding percentage, both actual and on an as-converted basis), due June 7, 2019 together with accrued interest at 10% APR, and convertible at $0.01 per share of common stock.
|
(j)
|
|
|
|
200,000
|
|
|
|
—
|
|
Note payable to a related party investor (by virtue of shareholding percentage, both actual and on an as-converted basis), together with accrued interest at 10% APR on drawn-down-upon funds only ($25,000 as of September 30, 2016).
|
(k)
|
|
|
|
300,000
|
|
|
|
—
|
|
Note payable to an outside director (also a shareholder), due on demand together with accrued interest at 4.5% APR, and convertible at $0.007 per share of common stock.
|
(l)
|
|
|
|
55,500
|
|
|
|
—
|
|
Note payable to an outside director (also a shareholder), due on demand together with accrued interest at 4.5% APR, and convertible at $0.007 per share of common stock.
|
(m)
|
|
|
|
20,500
|
|
|
|
—
|
|
Note payable to the Company’s president and chief executive officer (also a shareholder), due on demand together with accrued interest at 4.5% APR, and convertible at $0.007 per share of common stock.
|
(n)
|
|
|
|
349,329
|
|
|
|
—
|
|
Note payable to the Company’s controller who is also a shareholder, which note is due on demand together with interest at 4.5% APR, and convertible at $0.007 per share of common stock.
|
(o)
|
|
|
|
134,604
|
|
|
|
—
|
|
Note payable to the Company’s vice president of research and development (also a shareholder), due on demand together with accrued interest at 4.5% APR, and convertible at $0.007 per share of common stock.
|
(p)
|
|
|
|
49,000
|
|
|
|
—
|
|
Note payable to an independent contractor (also a shareholder), which note payable is due on demand together with interest at 4.5% APR, and convertible at $0.007 per share of common stock.
|
(q)
|
|
|
|
25,700
|
|
|
|
—
|
|
Total
|
|
|
|
|
|
$
|
1,993,633
|
|
|
$
|
709,000
|
|
As of September 30, 2016, no principal payments had been made on
note (a).
Notes (b), (d) and (l) reflect amounts due to a single outside director
of the Company, who is also a shareholder, based on such director having (i) made certain vendor obligation payments directly on
behalf of and for the benefit of the Company, (ii) having advanced certain funds to the Company at various dates for general working
capital purposes, and (iii) having accrued director’s fees earned through September 15, 2016. In addition, the Company has
recorded accounts payable, related parties, in the amount of $37,521 to the holder of notes (b), (d) and (l).
Notes (c) and (e) reflect payment obligations owed to the Company’s
outside general counsel for legal services incurred by the Company for the years ended December 31, 2015 and 2014.
Note (f) reflects a convertible debt investment made by the Company’s
outside general counsel to the Company.
Notes (g), (h), (i), and (j) reflect repayment obligations to a
significant shareholder for convertible debt investments made from time to time as indicated.
Note (k) reflects an amount owed to the same significant shareholder
to whom the obligations for notes (g), (h), (i), and (j) are owed and who, separately, advanced funds for the benefit of the Company
to be drawn down upon as needed for working capital. Under the terms of the credit arrangement, any use of the proceeds will incur
interest at 10% APR. As of September 30, 2016, the Company had drawn down upon and had outstanding $25,000 of such funds. As of
the date of this filing, the Company had drawn down upon and had outstanding $125,000 of such funds.
Note (m) reflects amounts due to an outside director, who is also
a shareholder, for accrued director’s fees earned through September 15, 2016.
Note (n) reflects amounts due to the Company’s president and
chief executive officer, who is also a shareholder, for previously accrued base salary.
Note (o) reflects amounts due to the Company’s controller,
who is also a shareholder, for previously accrued base salary.
Note (p) reflects amounts due to the Company’s vice president
of research and development, who is also a shareholder, for previously accrued wages.
Note (q) reflects amounts due to an independent contractor who was
President of one of EcoSmart’s divisions prior to the merger with EcoSmart and a current shareholder of the Company, for
past earnings. See Note 13.
For the nine months ended September 30, 2016, the Company received
proceeds from the issuance of convertible notes payable in the amount of $95,000 and an additional $650,000 from the issuance of
convertible notes payable to related parties (total $745,000).
NOTE 9 – LOSS ON CONVERSION OF NOTE PAYABLE
On September 9, 2016, an investor holding a convertible
note elected to convert such note, together with all then-accrued interest, totaling $10,456 into 2,613,963 shares of common stock.
In connection with such election, the Company repriced the original conversion of $0.02 per share to $0.004 per share, which resulted
in an accounting loss upon such conversion. The Company consequently recognized a loss of $13,593 and included it in Loss on conversion
of note payable on our condensed consolidated Statement of Operations for the nine months ended September 30, 2016. See Note 8.
NOTE 10 – GAIN ON DEBT SETTLEMENT
In March 2015, the Company recognized a gain on debt settlement
in the amount of $200,000. This gain is a result of entering into a loan modification agreement with a shareholder that had held
an outstanding convertible note agreement in the amount of $250,000 carrying a conversion feature that had the accounting effect
of increasing the derivative liability associated with the obligation from $250,000 to $500,000. The loan modification called for
the original convertible note payable ($250,000), along with the conversion feature ($250,000), dated July 2014 to be
cancelled. In addition, the loan modification called for a replacement
note payable to be entered into at the adjusted principal amount of $300,000, total, but without any conversion feature exercisable
on the part of the holder. All other terms of the original note agreement remained unchanged. As a result, the Company recognized
a net gain of $200,000, and has treated it as a gain from extinguishment of debt and included it in Gain on debt settlement on
our condensed consolidated Statement of Operations for the nine months ended September 30, 2015. See Note 8.
NOTE 11 – STOCKHOLDERS’ EQUITY (DEFICIT)
In June 2016, an investor purchased from the Company
3,500,000 restricted shares of common stock at a price of $0.006 per share, which resulted in proceeds of $21,000 to the Company.
In September, 2016, a holder of a convertible
note issued by the Company elected to convert such note, together with all then-accrued interest, totaling $10,456 into 2,613,963
shares of common stock. In connection with such election, the Company repriced the original conversion of $0.02 per share to $0.004
per share which resulted in an accounting loss upon such conversion in the amount of $13,593. See Notes 8 and 9.
In September, 2016, the Company entered into an independent
contractor agreement with an individual to provide business development related services. The agreement calls for the
independent contractor to be paid at an hourly rate of $100, half of which is payable in cash and half of which is payable in
restricted shares of Company common stock, such shares to be valued at the closing price of the Company common stock on the
relevant service day(s). During September 2016, the Company committed to issue 71,808 shares of common stock to the
independent contractor for the business development services that were then provided. See Note 15.
COMMON
STOCK WARRANTS
The Company did not issue any warrants for the nine months ended
September 30, 2016. For the nine months ended September 30, 2015, the Company issued warrants to individuals in connection with
certain Company common stock subscriptions. Each such warrant enabled the holder to purchase up to an additional 100,000 (4,150,000
in total) shares of common stock (beyond their otherwise subscribed-for shares) for a period of up to one year at an exercise price
of $0.10 per share. During the nine months ended September 30, 2016 and 2015, none of such warrants were exercised. Thirteen warrants,
exercisable in the aggregate for a total of 4,150,000 shares of common stock, expired prior to exercise during the nine months
ended September 30, 2016. As of September 30, 2016, there were 100,000 warrants outstanding.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims that may
arise in the ordinary course of business. In the opinion of management, the amount of potential liability the Company is likely
to be found liable for otherwise incur as a result of these actions is not so much as would materially affect the Company’s
financial condition.
In July, 2014, the Company entered into an employment agreement
with the Company’s president and chief executive officer. The agreement provides for a base annual salary of $162,500, a
term of three (3) years, and contains a provision for an incentive-based cash bonus equal to one and one half percent (1.5%) of
free cash flow (as calculated pursuant to a stated formula) up to a maximum of $500,000 for any single fiscal year. As of September
30, 2016, and 2015 no amounts for bonuses had been earned or accrued under this provision. In addition to the bonus provision and
the annual base salary, the employment agreement provides for payment of previously accrued base salary in the amount of $27,082
and vested deferred vacation compensation in the amount of $12,501 as of September 30, 2016 and are included in accrued payroll.
The agreement further provides for severance compensation equal to the then base salary until the expiration of the term of the
agreement. There is no severance compensation in the event of voluntary termination or termination for cause.
In March, 2015, the Company entered into an employment
agreement with
our vice president of research and development. Among
other terms and provisions, the employment agreement provides specific executive-level responsibilities for a term of 3
years, unless otherwise extended or terminated by either party, either for cause, without cause, due to disability or death,
or voluntarily. During the term of the employment agreement, and in addition to certain benefits, expense coverage and
severance compensation, our vice president of research and development is entitled to a base annual salary of not less than
$120,000, as well as a royalty of 5% of the gross
revenue, net of returns, for all revenues generated by products
relying on the intellectual property assigned to the Company. For the nine months ended September 30, 2016 and 2015, the
Company has made payments to a company owned by our Vice President of Research and Development under these arrangements. As
of September 30, 2016, the Company has accrued approximately $9,420 in accrued royalties under this agreement. See Notes 8
and 13.
The Company occupies an office building for its corporate headquarters
located in Lake Park, Florida. In January 2015, the Company renewed a lease agreement with a shareholder for this 8,560 square
foot facility under a five year lease agreement ending December 31, 2019 with an option to renew for one successive term of five
years at the then current occupancy rates. The monthly rent, including sales and use taxes, is $7,105. In accordance with the terms
of the leasehold agreement, the Company is responsible for all utilities, repairs and maintenance.
In February 2015, the Company entered into a lease agreement for
a research facility located in Daytona Beach, Florida. The Company leases this 3,200 square foot facility under a month-to-month
lease agreement ending on December 31, 2016. The monthly rent, including sales and use taxes, is $2,929. In accordance with the
terms of the leasehold agreement, we are responsible for all utilities, repairs and maintenance. In June 2016, the Company provided
notice that we were terminating this lease agreement effective July 31, 2016. There were no termination fees incurred due to the
lease being a month to month lease agreement. As of September 30, 2016, the Company has accrued $7,891 for past rent owed less
a deposit of $2,500 (total $5,391). The Company has since relocated all property and equipment as well as all personnel previously
occupying this facility to our corporate headquarters located in Lake Park, Florida. See Note 5.
Total rent expense for the nine months ended September 30, 2016
and 2015 for these facilities, before adjustments of reclassified facilities cost for research and development, totaled $85,416
and $86,963, respectively.
NOTE 13 – RELATED PARTY TRANSACTIONS
The Company’s executive officers and employees, from time
to time, make payments for materials and various expense items (including business related travel) in the ordinary course of business
via their personal credit cards in lieu of checks drawn on Company accounts. The Company does not provide its employees or executive
officers with corporate credit cards.
Amounts due these officers and directors (including one of the
Company’s directors, the president and chief executive officer, and the controller) are included in accounts payable, related
parties
, on the Consolidated Balance Sheets.
As of September 30, 2016, the Company had outstanding a $239,000
note, held by a current shareholder, which note came due on August 3, 2016. As of September 30, 2016, no principal payments
had been made on this note. On October 18, 2016, and pursuant to a negotiated settlement, the Company agreed to and did pay $17,950
to the holder of the note in exchange for a release and discharge in full. See Notes 8 and 15.
As of September 30, 2016, one of the Company’s directors held
three, separate convertible notes issued by the Company. These convertible notes reflect a portion of the aggregate amount that
such outside director is owed by the Company for a combination of (i) certain vendor payments made by him on the Company’s
behalf, (ii) cash previously advanced to the Company for working capital, and (iii) director’s fees earned through September
15, 2016. One of these notes, in the face amount of $60,000, was issued to a company controlled by the director, is due on demand,
together with accrued interest at 4.5% APR, and is convertible at $0.01 per share of common stock. Another of these notes, issued
to the director personally, is in the face amount of $30,000, is similarly due on demand, together with accrued interest at 4.5%
APR, and is convertible at $0.01 per share of common stock. The third of these notes, also issued to the director personally, is
in the face amount of $55,500, is due on demand, together with accrued interest at 4.5% and is convertible at $0.007 per share
of common stock. See Notes 8 and 15.
As of September 30, 2016, the Company’s outside general
counsel held three convertible notes issued by the Company. One such note reflected an amount due for legal services provided
for the year ended December 31, 2014 in the amount of $150,000. This note is payable by the Company on demand, together with
accrued interest at 4.5% APR, and is convertible at $0.01 per share of common stock. Another of these notes reflected an
amount due for legal services provided for the year ended December 31, 2015 in the amount of $120,000. This note is similarly
payable on demand, together with accrued interest at 4.5% APR, and is convertible at $0.007 per share of common stock. A
third note is in the amount of $10,000, reflects funds advanced to the Company for working capital, is due on demand,
together with accrued interest at 12% APR, and is convertible at $0.008 per share of common stock. See Note 8.
As of September 30, 2016, the Company
had issued a total of five (5) convertible notes to a certain related party investor and significant shareholder. The first such
note is in the amount of $100,000, is due on November 13, 2018, together with accrued interest at 10% APR, and is convertible at
$0.01 per share of common stock. The second such note is also in the amount of $100,000, is due on March 18, 2019, together with
accrued interest at 10% APR, and is convertible at $0.01 per share of common stock. The third such note is in the amount of $50,000,
is due on May 12, 2019, together with accrued interest at 10% APR, and is convertible at $0.01 per share of common stock. The fourth
such note is in the amount of $100,000, is due on June 7, 2019, together with accrued interest at 10% APR, and is convertible at
$0.01 per share of common stock. And the fifth such note is in the amount of $300,000
and represents funds deposited as
collateral by the investor for a credit line to be drawn down upon by the Company for working capital, and any such use of which
will incur interest on drawn funds calculated at 10% APR.
See Note 8.
As of September 30, 2016, one of the Company’s directors held
one convertible note issued by the Company in the face amount of $20,500 (for director’s fees earned through September 15,
2016), which note is due on demand, together with accrued interest at 4.5%, and is convertible at $0.007 per share of common stock.
See Note 8.
As of September 30, 2016, the Company’s
president and chief executive officer held one convertible note issued by the Company representing
previously accrued base
salary in the amount of $349,329. The note payable is due on demand, together with accrued interest at 4.5%, and is convertible
at $0.007 per share of common stock. See Note 8.
As of September 30, 2016, the Company’s
controller held one convertible note issued by the Company representing
previously accrued base salary in the amount of
$134,604. The note payable is due on demand, together with accrued interest at 4.5%, and is convertible at $0.007 per share of
common stock. See Note 8.
As of September 30, 2016, the Company’s
vice president of research and development held one convertible note representing
previously accrued base salary in the
amount of $49,000. The note payable is due on demand, together with accrued interest at 4.5%, and is convertible at $0.007 per
share of common stock. See Note 8.
As of September 30, 2016, an independent
contractor
who had been the president of one of EcoSmart’s divisions prior to the merger with the Company, who is
also shareholder of the Company, held one convertible note representing accrued earnings in the amount of $25,700. The note payable
is due on demand, together with accrued interest at 4.5%, and is convertible at $0.007 per share of common stock. See Note 8.
As of September 30, 2016, the Company had entered into an operating
agreement pursuant to which it had become the holder of an approximately 25% equity interest in a closely held private Florida
limited liability company, Advanced Nanofibers LLC (“Advanced”). Advanced is comprised of three entity members, including
the Company, Nanotech Fibers LLC, and EnVont, LLC. The Company’s president and chief executive officer currently holds a
18.75% equity interest in Nanotech Fibers LLC through a closely held private Florida limited liability company, August Center Street
Holdings LLC. August Center Street Holdings is owned 75% by the Company’s president and chief executive officer and 25% by
the Company’s general counsel.
During the nine months ended September 30, 2016 and 2015, the Company
recorded revenue for sales to shareholders in the amount of $60,757 and $14,509, respectively. For the nine months ended September
30, 2016, one shareholder accounted for approximately 16% of Company revenue and, as a group, the sales to shareholders accounted
for approximately 23% of Company revenues. These revenues are recorded as revenue, related party on the Company’s Condensed
Consolidated Statements of Operations.
NOTE 14 – DISCONTINUED OPERATIONS
On May 5, 2011, Findex entered into a certain Software
Product Line Purchase Agreement to sell Findex’s QuickVerse
®
product line to WORDsearch Corp., L.L.C. In
accordance with the Software Product Line Purchase Agreement, WORDsearch agreed to acquire from Findex all of the assets
associated with its QuickVerse
®
product line for
$975,000 in cash at closing and the assumption of up to $140,000 of Findex’s then-existing liabilities at closing.
On June 30, 2011, closing of the asset sale transaction governed
by the Software Product Line Purchase Agreement, which had been transitional in nature and ongoing through approximately the end
of April, 2012, commenced. As one of the initial parts of the closing, on July 1, 2011 WORDsearch assumed possession of the physical
assets conveyed in the transaction as well as control and responsibility of the business operations related to the QuickVerse
®
product line, including, among many other things, the receipt of revenues for sales in exchange for partial payment of the cash
portion of the purchase price being paid to Findex. On April 13, 2012, Findex determined that the final closing conditions under
the Software Product Line Purchase Agreement had been met, which meant that Findex was able to deliver to WORDsearch the last in
a series of officer’s certificates required thereunder. Having delivered such certificate to WORDsearch on April 13, 2012,
the sale of the QuickVerse
®
product line to WORDsearch was complete.
As a result of the decision to sell the QuickVerse
®
product line, the Company has classified the QuickVerse
®
product line as discontinued operations for the six months
ended September 30, 2016 and 2015. The Company has recorded the remaining class of liabilities for the QuickVerse
®
product line as presented below:
Other current liabilities from discontinued operations:
|
|
September 30, 2016
|
|
December 31, 2015
|
Accrued royalties
|
|
$
|
114,368
|
|
|
$
|
114,368
|
|
Other current liabilities from discontinued operations
|
|
$
|
114,368
|
|
|
$
|
114,368
|
|
NOTE 15 – SUBSEQUENT EVENTS
In October 2016, the Company paid $17,950 to a related party note
holder and current shareholder in exchange for the release and discharge in full of a Company note in the amount of $239,000,
which had come due August 3, 2016. As a result of this negotiated settlement with the related party, the Company will recognize
a contribution of capital of $221,050 for the year ended December 31, 2016. See Note 8.
In October 2016, the Company issued a convertible note payable in
the amount of $20,000 to the son of an outside director and shareholder based on such director having advanced funds equal to such
amount to the Company at various dates for general working capital purposes. The note payable is due on demand, together with accrued
interest at 4.5% APR, and is convertible at $0.005 per share of common stock. See Notes 8 and 13.
In October 2016, an investor subscribed for and
purchased from the Company a total of 1,000,000 restricted shares of Company common stock at a price of $0.01 per share, which
sale resulted in proceeds of $10,000 to the Company.
In October 2016, the Company
retired for cash a $10,000 convertible note that had come due April 23, 2016 that had been held by an investor
and shareholder. See Note 8.
In October, 2016, the Company committed to issue
769,383 restricted shares of Company common stock to an independent contractor for certain business development services
previously provided. The agreement with the independent contractor calls for the contractor to be paid at an hourly rate of
$100, half of which is payable in cash and half of which is payable in restricted shares of Company common stock, such shares
to be valued at the closing price of Company common stock on the relevant service day(s). In addition, the Company committed
to issue 596,793 restricted shares of common stock to the independent contractor for business development services that were
provided from November 1, 2016 through the date of this filing, November 21, 2016. See Note 8.
In November 2016, an investor subscribed for and
purchased from the Company a total of 1,000,000 restricted shares of Company common stock at a price of $0.01 per share, which
sale resulted in proceeds of $10,000 to the Company.
In November 2016, the three entity members of Advanced, with unanimous
written consent, resolved to grant a membership interest in Advanced equal to one half percent (0.5%) to an individual in exchange
for introductory and other services to be rendered in connection with the cementitious industry. The individual is also a shareholder
of the Company. As such, the Company’s equity interest in Advanced changed from 25% to 24.875%.