ITEM 1. BUSINESS

Overview

We were originally formed in the State of Florida on October 6, 2009 as a limited liability company. On April 24, 2014 we reorganized as a Florida corporation. Since inception we have been engaged in the design, development, marketing and sales of energy-efficient lighting systems and solutions. Our business currently involves direct sales of Light Emitting Diode (“LED”) products, including customized resolution of client lighting issues, which is where we have been generating our revenues to date.

In January 2016, we filed our initial registration statement on Form S-1 with the Securities and Exchange Commission, registering 2,485,432 shares of our Common Stock. Our registration statement became effective April 7, 2016. In September 2016, our application to trade our Common Stock on the OTCQB was approved by FINRA. However, since obtaining this approval we have experienced difficulty in getting our Common Stock to trade because of issues with the entity that filed the application with FINRA, Glendale Securities, Inc. See “Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” below.

Purchase of the Assets of Catalyst LED’s LLC

In order to expand our sales efforts, on May 5, 2016, we purchased certain intangible assets including the tradename “Catalyst LED” (“Catalyst”), its client list, its website domain, list of leads, current pending orders, current bid proposals, and all future orders made under the Catalyst name, as well as its other unregistered trademarks, and goodwill.

Under the terms agreement we agreed to pay ForceField Energy Inc., a Nevada corporation, the owner of the assets, $50,000, which was payable in three equal monthly increments of $16,666, commencing on May 15, 2016. As of the date of this Report, we have made partial payments of $42,934 and currently owe $7,066 to ForceField, who has agreed to wait to receive the remaining balance until we have enough cash to do so.

During 2016, the purchase of Catalyst helped to significantly increase our sales over prior year levels, however, the Catalyst products were not profitable. Based on an impairment analysis we performed at year end, we determined that the $50,000 in intangible assets we recorded when we purchased Catalyst was fully impaired. As a result we incurred a $50,000 impairment charge for 2016 and wrote off the intangible assets on our balance sheet as of December 31, 2016. The impairment was primarily attributable due to increased competition in the LED industry which made the selling of our products more difficult. Given the level of competition in our industry which is expected to increase in future years, we will more closely examine the prices we pay for future purchases of LED assets should an opportunity materialize. See “Part II, Item 8, Financial Statements.”

Business Summary

In order to address market trends in the LED industry and increase our revenue, in 2016 we expanded the markets we offered our products to new customers. Our current business includes the following:

Target Markets

Prior to 2016 we focused on five target markets. In 2016 we reduced our efforts in the museum and gallery market and in the large/super retailers category due to our lack of success in generating significant revenues in these markets. As a result,, we have identified three separate markets where we have, or intend to direct our sales efforts, including:

Key Strategic Business and Marketing Objectives

The LED market during the past few years has become highly competitive in terms of pricing, the number of entities and concerns offering services, and the variety of high quality LED products available from numerous manufacturers. We had hoped to differentiate ourselves from our competition by producing new products and designs, however, our lack of available funding has caused us to change our strategy.

We have experience in submitting patent applications so we are familiar with what new designs have merit and which are “patentable.” As of the date of this Report we have created the packaging and secured the products for 100 samples of one product currently in beta testing which we believe could be manufactured and marketed in 2017. It is a proprietary portable light source that we called the “Multitasker-LED” with several applications. The cost to market and manufacture enough of this product to determine whether it is commercially viable and profitable, is approximately $25,000 per year. There can be no assurance that this product will be successfully marketed or generate any material revenues.

Product Fulfillment

We purchase all our products from US manufacturers including Orion Energy System, MSI, Deep Roof, Green Giant Lighting LLC, AMAX, Cireon, Deco Lighting, PlanLED and Sunpark to supply products to our targeted market. Due to the competitiveness of the LED industry, we do not believe the loss of any one or several of these suppliers would have a material impact on our business. As we believe is traditional in our industry, we do not have contracts with these companies but submit purchase orders on an individual basis for each product order we submit. Generally, turn around delivery takes between 4 to 12 weeks from the date we submit the purchase order, depending upon the complexity of the order product, as many of these products are custom solutions. We have analyzed delivery and financing needs and believe that we have a logical and achievable plan for satisfying larger orders in this manner. We work with the aforesaid contract manufacturers from design to completion insuring the desired results. By partnering with manufacturers we take advantage of their ability to bring our designs quickly to market thereby relieving ourselves of the heavy investment in machinery.

Sales and Revenue/ Strategy

During 2016, we increased our sales to $731,657, compared to 206,733 in 2015. In 2016, approximately 48% of our revenue was generated from a sale of $348,000 in lighting to an electrical contractor, Marathon Electric, who completed a very large installation at an office warehouse facility. Additionally in 2016, we completed one project for an arena at a cost of $85,000, an office warehouse at a cost of $73,000, a hospital for $57,000, a correctional facility for $38,000 and two projects for REITS with revenue of $41,000. The seven projects described above account for 92% of our revenue in 2016. The remaining 8% of our business was comprised of approximately 30 smaller projects in a variety of industries, averaging approximately $2,000 in size.

We are a contract business whose product mix changes from year to year because once LED lighting is installed, there is very little, if any, opportunity for repeat business due to the efficacy of LED lighting.

Currently our sales efforts and growth are directed towards larger projects in excess of $30,000. Through their network of contacts and their relationship with suppliers, our salespeople have identified potential large corporate customers who control large property portfolios in the millions of square feet. As a result, as of the date of this Report we have submitted a bid with a large auto manufacturer covering hundreds of thousands of square feet of factory space. There can be no assurances we will be successful in winning this bid.

We either develop and sell LED lights, or sell existing product lines, fixtures and components, or partner with innovative manufacturers to provide commercial and institutional users with state-of-the-art technology. Ultimately, we believe that the performance in terms of payback and longevity will enable us to penetrate the highest levels of institutional decision makers and achieve high volume sales to prestigious clients. In turn, this will enable us to establish large scale brand recognition that will be vital to future success in this rapidly emerging industry. There are no assurances that our efforts in this regard will be successful.

Sales revenue is currently generated through the efforts of our management and through our two salesmen, each of whom operates from their respective home offices located in Florida and Idaho, and who travel to client locations when needed. They each have exclusive accounts and territories and are paid on a commission basis. Sales made by our management are not subject to any commission payment. For the periods ended December 31, 2016 and 2015, we paid $45,501 and $-0- in sales commissions, respectively.

Seasonality

Our lighting solutions are sold to customers primarily in the retrofit markets. Additionally, our business exhibits some seasonality, with net sales being affected by the impact of weather and seasonal demand on construction, availability of rebate programs and retrofit and installation programs, particularly during the winter months in the northeast. Because of these seasonal factors, we have experienced, and generally expect to experience inconsistent quarterly revenue.

Advantages of LED Lights

An LED is a semiconductor device which converts electricity into light. LED lighting has been around since the 1960’s, but is just now becoming integral in the lighting industry. At the end of 2007, Congress enacted the Energy Independence and Security Act, which gave the directive to end production of most incandescent bulbs between 2012 and 2014. The United States Department of Energy estimates that the adoption of LED lighting across the US would reduce greenhouse emissions by 246 metric tons, reduce electric consumption by 25% percent, and save the energy equivalent to 24 large power plants. While LEDs make up only about 2 to 3% of the $80 Billion lighting market today, analysts estimate that by 2020 they will comprise over 85%.

LED lighting has been used in low-tech items for over ten years in everyday appliances, digital equipment that requires continual lighted read-outs, traffic lights, mining lights, automobile dashboards and other applications, but it has only been recently that the LED lighting industry has been able to make the advances in technology that is transforming the lighting industry. We now have powerful every day lamps that use as little as 15% to 20% of the electric power needed for existing light bulbs.

LED’s are highly energy efficient, contain no mercury and have a longer (up to 80%) life span than their incandescent light bulb counterparts. Although diodes come in different sizes most are about ¼ inch in diameter and uses about 10 milliamps to operate at about a tenth of a watt. LED’s are small in size and provide higher intensity.

LEDs are better at placing light in a single direction than incandescent or fluorescent bulbs. They are more rugged and damage-resistant than compact fluorescents and incandescent bulbs. LEDs are durable, and resistant to thermal and vibration shock. They turn on instantly from -40C to 185C, making them ideal for multiple applications in “every walk of life.” LEDs don’t flicker and are consistent, as opposed to the pulsating image from florescent lighting.

LED lighting is also a function of the “greener” style of living. The conversion to LED lighting continues to gain momentum and traction, and we believe LEDs are emerging as the #1 lighting option because they use a fraction of the energy used in today’s incandescent light bulbs and last 10 times longer . They are also considered environmentally safer than florescent lights, which contain mercury. LEDs have many energy efficient advantages over traditional lighting methods. These include: low energy consumption, long service life, and no infrared or ultraviolet radiation which degrades fine art. LEDs also have more consistent color temperatures making it ideal for museums, galleries and retail applications. The adoption of LEDs and global energy conservation are new ways of managing energy efficiency. LED lighting is a perfect example of low cost, consumer friendly technology that has a real impact on the amount of energy consumed.

The latest analysis “2017 Global Lighting Market Outlook” published on November 2, 2016 by LEDinside, a division of TrendForce, finds that the LED lighting market was worth US $29.6 billion in 2016 and is to rise to US $ 33.1 billion in 2017. Meanwhile, the penetration rate of LED lighting is expected to reach 52%. Thanks to regional lighting development, LED lighting is expected to account for 23% of total lightings in Europe by 2016, which is the highest across the world. The second and third highest region are to be found in North America and China. However, the Asia-Pacific region is experiencing the fastest growth rate in LED lighting.

This has created a massive window of opportunity that must be met due to eight primary reasons for replacement and new installation applications:

The transition from conventional lighting to LED has raised several issues and brought forth tremendous opportunity. For those seeking to market to the residential community the issues are minor and therefore lends itself to high volume producers and mass merchandisers. For those like us, who have chosen to concentrate on industrial and commercial applications; the issues are more complex and require true expertise. It is this expertise that we believe will enable us to build long lasting relationships. By promoting our solution-based approach in one area, clients tend to ask us to look at other areas of need rather than sourcing products through general supply based companies.

To facilitate our business of providing state of-the-art and custom solutions, we have assembled a network of strategic partners that include professional sales representatives, manufacturers and distributors. Our vision is to use our expertise and knowledge in the area of commercial lighting to identify and bring together opportunities for our advanced LED lighting products. Our goal is to avoid having to compete strictly on price.

disadvantages of LED Lights

Numerous high profile companies both domestically and internationally have recently transitioned, or are in process of changing the lighting in their offices, warehouses, hospitals, municipal buildings, schools, outdoor lighting venues and other locations, to LED lighting from conventional lighting. Nevertheless, the LED lighting market is a relatively new market compared to conventional non-LED lighting market and as such has certain disadvantages.

The disadvantages of LED lighting include the following:

Emerging Growth Company

We qualify as an “emerging growth company” under the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

We will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

Forward Split

In December 2015, prior to our becoming a trading, reporting company, we undertook a forward split of our issued and outstanding Common Stock whereby each share of Common Stock was exchanged for 1.2847603145 shares, with fractional shares rounded to the nearest round number. All references in this Report to our outstanding Common Shares is presented on a post-forward split basis, unless indicated otherwise.

Subsequent Event

Grom Letter of Intent

On January 11, 2017, we executed a non-binding Letter of Intent (“LOI”) with Grom Holdings, Inc., a Delaware corporation (“Grom”), whereby we reached an agreement in principle to acquire all of Grom’s issued and outstanding common stock. Darren Marks, Melvin Leiner and Dr. Thomas Rutherford are directors of both Grom and our company and Messrs. Marks and Leiner are the principal shareholders of both companies. Under the terms of the LOI we will issue an aggregate of approximately 105,000,000 shares of our Common Stock (4.17 shares of our common stock in exchange for every share of Grom common stock issued and outstanding) at closing. Grom is expected to have approximately 25 million of its common shares issued and outstanding immediately prior to the closing date.

The proposed transaction is subject to various conditions, including but not limited to execution of applicable Exchange Agreements, approval of the same by both company’s shareholders, completion of independent financial audits of Grom for the years ended December 31, 2016 and 2015, the issuance of an order of effectiveness to a registration statement we intend to file with the SEC and various other matters.

If and when this proposed transaction closes, of which there can be no assurance, our current LED business will be transferred to a new wholly owned subsidiary. In addition, Messrs. Llera and Andrews will resign as officers and directors of our Company and become the officers and directors of this new subsidiary company. Management of Grom shall assume the positions of management of the resulting holding company, including the appointment of Darren Marks as Chief Executive Officer and Melvin Leiner as Executive Vice President, Secretary, Treasurer and Chief Financial Officer.

Grom Holdings, Inc. is a holding company, incorporated in Delaware in March 2015, that conducts all of its operations through its three wholly owned subsidiaries, Grom Social, Inc., Grom Educational Services Inc.(“GES”) and TD Holdings Limited. Grom Social, Inc. is a Florida corporation, incorporated in March 2012, which operates a social media network for children. TD Holdings Limited, which Grom acquired in July 2016, is a Hong Kong corporation and the parent company of Top Draw Animation, Inc., a corporation formed and operating in Manila, Philippines, which operates an animation business. GES is a newly formed educational subsidiary that was formed concurrent with Grom’s acquisition of the assets and business of an entity that provides web filtering services to children (described below).

Grom’s consolidated revenues in 2016 including 6 months revenues attributable to Top Drawer, were approximately $4 million.

Grom’s core business is its social media website for children, “Grom Social.” The Grom Social website is located at www.gromsocial.com. As of January 2017, Grom Social had approximately 4.3 million users in over 200 countries and territories. A "user" is defined as any child between the ages of 5 and 16 who sign up for a Grom Social account. Each child must receive parental approval to gain full access to the Grom Social platform. Grom communicates with its database both actively, through email and a parent/guardian portal and passively, through messaging on the child’s profile page and through seventeen Grom characters.

Top Draw Animation produces digital animation and provides pre-production and production services to a variety of international producers. Top Draw Animation was established in 1999 by Wayne Dearing, who, along with Stella Dearing, his spouse, continues to be responsible for its day to day operations. Eventually, it is Grom’s intention to utilize the animation expertise of Top Draw Animation to provide animated content to Grom Social.

In addition, on January 11, 2017, Grom acquired the assets of Norcross, Georgia based TeleMate.Net Software’s NetSpective Webfilter Division an entity that provides web filtering services to approximately 400 school districts which encompasses an estimated 2.0 million children from the ages from 5-17. This Webfilter division operates within our GES subsidiary

Growth by Acquisitions

We are also looking to work with and/or acquire other lighting companies that target specific end-users in need of cost saving LED solutions opening up what may be new product opportunities for us. If we are successful, the acquisition of related, complimentary businesses is expected to increase revenues and profits by providing a broader range of services in vertical markets which are consolidated under one parent, thus reducing overhead costs by streamlining operations and eliminating duplicitous efforts and costs. There are no assurances that we will reduce our operating losses or reach profitability if we are successful in acquiring other synergistic companies.

Management will seek out and evaluate related, complimentary businesses for acquisition. The integrity and reputation of any potential acquisition candidate will first be thoroughly reviewed to ensure it meets with management’s standards. Once targeted as a potential acquisition candidate, we will enter into negotiations with the potential candidate and commence due diligence evaluation of each business, including its financial statements, cash flow, debt, location and other material aspects of the candidate’s business. If we are successful in our attempts to acquire synergistic companies utilizing our securities as part or all of the consideration to be paid, our current shareholders will incur dilution.

In implementing a structure for a particular acquisition, we may become a party to a merger, consolidation, reorganization, joint venture, or licensing agreement with another corporation or entity. We may also acquire stock or assets of an existing business. On the consummation of a transaction, we do not intend that our present management and shareholders will no longer be in control of our Company.

As part of our investigation, our officers and directors will meet personally with management and key personnel, may visit and inspect material facilities, obtain independent analysis of verification of certain information provided, check references of management and key personnel, and take other reasonable investigative measures, to the extent of our limited financial resources and management expertise. The manner in which we participate in an acquisition will depend on the nature of the opportunity, the respective needs and desires of us and other parties, the management of the acquisition candidate and our relative negotiation strength.

We will participate in an acquisition only after the negotiation and execution of appropriate written agreements. Although the terms of such agreements cannot be predicted, generally such agreements will require some specific representations and warranties by all of the parties thereto, will specify certain events of default, will detail the terms of closing and the conditions which must be satisfied by each of the parties prior to and after such closing, will outline the manner of bearing costs, including costs associated with our attorneys and accountants, will set forth remedies on default, and will include miscellaneous other terms.

Depending upon the nature of the acquisition, including the financial condition of the acquisition company, as a reporting company under the Securities Exchange Act of 1934 (the “34 Act”), it may be necessary for such acquisition candidate to provide independent audited financial statements. If so required, we will not acquire any entity which cannot provide independent audited financial statements within a reasonable period of time after closing of the proposed transaction. If such audited financial statements are not available at closing, or within time parameters necessary to insure our compliance with the requirements of the 34 Act, or if the audited financial statements provided do not conform to the representations made by the candidate to be acquired in the closing documents, the closing documents will provide that the proposed transaction will be voidable, at the discretion of our present management. If such transaction is voided, the agreement will also contain a provision providing for the acquisition entity to reimburse us for all costs associated with the proposed transaction.

Further, the aforesaid disclosure is not intended to indicate that we have any immediate intention to engage in a merger or acquisition with any unidentified company or companies, entity or person, nor is it intended to convey any such intention. Rather, we believe that there are many small independent LED companies that may be interested in being acquired as part of a consolidation of the LED industry. Neither we nor any member of our management or other of our affiliates intend for our company to be used as a vehicle for a private company to become a reporting company.

Competition

We currently face competition from both traditional lighting companies that provide general lighting products, such as incandescent, fluorescent and neon lighting, and from specialized lighting companies that are engaged in providing LED products. In general, we compete with both groups on the basis of design, innovation, quality of light, maintenance costs, safety issues, energy consumption, price, product quality and brightness.

We compete with traditional lighting companies, including Acuity Brands Lighting, Inc., Cooper Lighting (a division of Cooper Industries, Inc.), Hubbell Lighting, Inc. (a division of Hubbell Incorporated), Juno Lighting Group (a division of Schneider Electric SA), Osram Sylvania, and Royal Philips Lighting (a division of Koninklijke Philips Electronics N.V.) in the general illumination market. Our LED products tend to be alternatives to traditional lighting sources for applications within the commercial market. In these markets, we compete on the basis of energy savings, lamp life and durability.

We also compete with providers of LED replacement lamps and other energy efficient lighting products and fixtures. These companies include traditional lighting companies such as Sylvania and Philips; specialized lighting companies such as Lighting Science Group Corporation; certain packaged LED suppliers such as Cree, which is primarily a manufacturer of LEDs; as well as multiple low cost offshore providers. In the market for LED lighting products, we compete on the basis of design, innovation, light quality, maintenance costs, safety issues, energy consumption, price, product quality, Energy Star, ETL and UL certifications.

We have identified several other companies with whom we compete in the commercial LED lighting market, including:

Lighting Science Group . Lighting Science Group has focused much of their efforts on the manufacture of replacement bulbs for conventional residential and commercial fixtures. They also work on specialty design lighting for architects. However, within their catalog there are a few fixtures that are direct competition to our product line, including:

Acuity Brands . Acuity has a similar catalog and approach to LSG. They have a considerable amount of architectural and bulb replacement products. They also have done considerable work on high hat fixtures to help in the performance of their replacement bulbs. They also have a few products which serve as competition to our product line, including their RTLED and TLED Series. These are Acuity’s Lithonia fixture that serves as an indoor fluorescent replacement which competes directly with our panel series. These products are designed to look more like a fluorescent replacement and less like a clean panel. We believe that our comparable replacements achieve a much higher efficiency than anything in this series, are easier to install, and much more economical.

Lunera . Like us, Lunera has directed their efforts to the commercial space. They do not have a large number of product lines but what they have is competitive in certain applications with our fixtures. Lunera’s fluorescent replacement series include “The Grid” and “The Suspended Family” which are comparable in cost and appearance to standard replacements, but not our fixture-free patent pending alternative. We believe that our product line is slightly brighter but it is fair to describe these products as direct competition to our standard series.

Albeo Lighting . Albeo has focused their attention to warehouse and industrial applications. They market their “High Bay and Low Bay” series. Our suppliers have gone up against Albeo over a dozen times in lighting shootouts and the comparison supports our products. We believe our DL Series is superior in both brightness and at 1/4 ^th the size of the Albeo fixture, it also has lower wattage consumption, kelvin temperature and price.

Government Regulation

We are not subject to any extraordinary governmental regulations.

Employees

As of the date of this Report we have three employees, Mr. Llera and Mr. Williams, both members of our management, one fulltime salesman and one commission only sales representatives. We have consulted with and expect to continue to use the services of independent consultants and contractors with whom our management has a pre-existing relationship to perform various professional services. We expect that we will continue to use contractors to assist us with our clients.

Our employees work at will and are not represented by a collective bargaining unit. We believe our relationship with our employees is excellent. None of our employees are members of any union. 

Trademarks/Trade names/Intellectual Property  

We are in the process of submitting a patent application, including a priority fixture patent that, unlike conventional fluorescent tube fixtures, holds the LED tube in what we consider to be a more advantageous way, directing the LED light to achieve a broader and more even beam spread covering from fixture to fixture. The product is intended for continuous lighting such as hallways, where fixtures are mounted perpendicular to the direction of the hallway.

There are no assurances that these non-disclosure agreements will prevent a third party from infringing upon our rights.

LED Lighting Industry Trends

LED’s are semiconductor-based devices that generate light. As the cost of LEDs decreases and their performance improves, we expect that they will continue to compete more effectively in the general illumination market versus traditional lighting. High-brightness LEDs are the core, light-producing components within an LED lighting system. We believe the LED lighting industry is experiencing the following trends: