PART
I
Item
1. Business.
Our
Corporate History
We
were incorporated on February 8, 2011, as Anglesea Enterprises, Inc. Initially our activities consisted of providing marketing
and web-related services to small businesses including the design and development of original websites, creative writing and graphics,
virtual tours, audio/visual services, marketing analysis and search engine optimization. On June 16, 2014, Anglesea, Merger Sub,
Sports Field Private Co, and the Majority Shareholders, entered into the Merger Agreement pursuant to which the Merger Sub was
merged with and into Sports Field Private Co, with Sports Field Private Co surviving as a wholly-owned subsidiary of Anglesea.
Anglesea acquired, through a reverse triangular merger, all of the outstanding capital stock of Sports Field Private Co in exchange
for issuing Sports Field Private Co’s shareholders 11,914,275 shares of Anglesea’s common stock.
Upon
completion of the Merger, on June 16, 2014, Anglesea merged with Sports Field Private Co in a short-form merger transaction. Upon
completion of the Short Form Merger, the Company became the parent company of the Sport Field Private Co’s then wholly owned
subsidiaries, Sports Field Contractors LLC, FirstForm, Inc. (formerly SportsField Engineering, Inc.) and Athletic Construction
Enterprises, Inc. In connection with the Short Form Merger, Anglesea changed its name to Sports Field Holdings, Inc. on June 16,
2014.
Overview
Sports
Field, through its wholly owned subsidiary FirstForm, is an innovative product development company engaged in the design, engineering
and construction of athletic fields and facilities and sports complexes and the sale of customized synthetic turf products and
synthetic track systems.
According
to Applied Market Information (AMI), over 2,000 athletic field projects were constructed in the U.S. in 2015, creating a $1.8
billion synthetic turf market. These statistics are supported by the number of square meters of synthetic turf manufactured and
installed in the U.S. in 2015, based on an average size of 80,000 square feet per project. We believe synthetic turf fields have
become the field of choice for public and private schools, municipal parks, and recreation departments, non-profit and for profit
sports venue businesses, residential and commercial landscaping and golf related venues. We believe this is due to the spiraling
costs associated with maintaining natural grass athletic fields and the demand for increased playing time, durability of the playing
surface and the ability to play on that surface in any weather conditions.
Although
synthetic turf athletic fields and synthetic turf have become a viable alternative to natural grass fields over the past several
years, there are a number of technical and environmental issues that have arisen through the evolution of the development of turf
and the systems designed around its installation. Sports Field has focused on addressing the main technical issues that still
remain with synthetic turf athletic fields and synthetic turf, including but not limited to environmental and safety concerns
related to infill used in synthetic turf fields as well the reduction of surface heat, and Gmax levels (the measure of how much
force the surface absorbs and, in return, how much is deflected back to the athlete) as well drainage issues related to the base
construction of turf installation).
In
addition to the increased need for available playing space, collegiate athletic facilities have become an attractive recruiting
tool for many institutions. The competition for athletes and recruiting has resulted in a multitude of projects to build new,
or upgrade existing, facilities. These projects include indoor fields, bleachers, press boxes, lighting, concession stands as
well, as locker rooms and gymnasiums. We believe that our position in the sports facilities design, construction and turf sales
industry allows us to benefit from this increased demand because we are able to compete for the sale of turf as well as the design
and construction on such projects, whereas our competitors can typically only compete for the turf components or the construction,
but not both
.
In fact, according to a current IBIS report, there are no national firms competing in these sectors that
have even 5% market share.
Through
our strategic operations design, we have the ability to operate throughout the U.S., providing high quality synthetic turf systems
focused on player safety and performance and construct those facilities for our clients using local subcontracted labor. Due to
our ability to design, estimate, engineer, general contract and install our solutions, we can spend more of every owner dollar
on product rather than margin and overhead, thereby delivering a premium product at market rates for our customers. Since inception
we have completed a variety of projects from the design, engineering and build of entire football stadiums to the installation
of a specialized turf track systems. Members of our management team have also designed, engineered and installed baseball stadiums,
soccer and lacrosse fields, indoor soccer facilities, softball fields and running tracks for private sports venues, public and
private high schools and public and private universities. In addition, members of our team have designed and engineered and constructed
concession stands with full kitchen facilities, restroom structures, press boxes, baseball dugouts, bleacher seating, ticket booths,
locker room facilities and gymnasium expansion projects.
Lines
of Business
Sports
Field, through its wholly owned subsidiary, FirstForm, has two primary lines of business which are all integral parts of the organization
’
s
overall business model. Our primary revenue generation comes from the sale and installation of our PrimePlay™ line of synthetic
turf products. Our secondary source of revenue is generated as a result of the design, engineering, constructing, and construction
management of athletic facilities and sports complexes. The construction management process is led by John Rombold and Scott Allen.
Mr. Rombold is a licensed General Contractor as well as an experienced Project Manager. Scott Allen is a licensed Architect. Projects
are bid and estimates for those bids are handled by both Mr. Rombold and Mr. Allen taking into consideration the scope of the
work and cost of materials and labor. Once the Company is awarded a project based on a winning bid, Mr. Rombold will manage the
fields being installed. Mr. Allen manages the Field Site Manager that the Company hires for each project. We bid all work done
on each site to at least 3 subcontracted labor companies that meet our high standard of quality. The combination of these two
business units allow for the business to operate as a Turn-Key Athletic Facilities provider for a truly “one-stop-shop”
simplified customer experience.
Historically,
approximately 80% of the Company’s gross revenues are from synthetic turf surfacing products and systems sales. Sports facilities
design, engineering, construction and construction management have represented approximately 20% of the Company’s gross
revenue. Projecting forward in the current year, the percentage of turf systems sales to construction related revenues should
be approximately 70% to 30% respectively. Our goal is to continue to increase construction revenues in order to create a more
even mix between revenue streams in order to insulate the total revenue from fluctuations in the turf sales or construction markets.
Target
Markets
Our
main target market is the more than 60,000 colleges, universities, high schools and primary schools in the United States with
athletic programs, both public and private. Municipal parks and recreations departments, commercial and residential landscaping
as well as golf and golf related activities also represent significant market opportunities for the Company.
Additionally,
we target private club sports associations and independent athletic training facilities inclusive of all major sports, including;
football, soccer, baseball, softball, lacrosse, field hockey, rugby, as well as track and field.
We
also intend to market our unique design-build services to public youth sports leagues and all semi-professional and professional
sports leagues.
Growth
Strategy
Our
primary goal is to be a leading provider of unique turn-key services that combine our strengths in safe and high performance synthetic
turf systems, athletic facilities design, engineering and construction expertise. The key elements of our strategy include:
Expand
our sales organization and increase marketing.
Our sales structure is comprised of four discrete units: direct sales
representatives, distribution group partners, deal finders and sports ambassadors. We currently have six fully staffed sales territories
within the U.S.: the Northeast, Southeast, Northcentral, Southcentral, Northwest and Southwest, with each territory containing
its own dedicated sales professional. Our four distribution group partners represent a total of nine sales people around the U.S.
We are currently contracted with eight commission only deal finders who have extensive contacts in the sports industry and are
making introductions for our direct sales team members to key decision makers around the U.S. Once a project lead is established,
our distribution partners and deal finders bring in the local territory representative and drive the sales to close together as
a team. We intend to continue to expand our highly-trained direct sales organization to secure contracts in every major region
of the United States. By securing contracts and establishing Sports Field in all major regions of the country, the Company intends
to seek to leverage those client relationships and successful projects to aggressively market to all potential clients in these
regions.
Develop
and broaden high profile relationships to increase sales and drive revenues.
In addition to installing a new football/lacrosse
field, we have recently entered into a four-year marketing agreement with IMG Academy in Bradenton, Florida (“IMG”),
a world renowned school and athletic training destination. IMG’s nationally recognized sports programs attract premier athletes
from all over the globe. Our official supplier agreement with IMG allows us to utilize their logo in our marketing materials,
perform site visits with clients to see our products as well as allow space for our 14,000 square foot research and development
installation which we has allowed us to conduct research in an effort to consistently update our product offerings to make sure
we are trying to put out what we believe to be the safest and highest performing products in the market. In addition, we are allowed
to utilize IMG athletes to conduct product testing to ensure performance and safety for up to four times each year.
On
August 3, 2016, we entered into a sponsorship agreement (the “Sponsorship Agreement”) with the National Council of
Youth Sports (the “NCYS”). The Sponsorship Agreement positions the Company as an allied-level member and “Recommended
Provider” of PrimePlay™ Replicated Grass™ turf systems. In addition, NCYS will provide the Company with media/marketing
exposure across its member and affiliate network, cross promotion exposure and opportunities, and reciprocal use of brand trademarks
and tradenames on promotional materials. In exchange, the Company shall pay to NCYS, among other potential fees, an annual non-refundable
sponsorship fee of $20,000. The Sponsorship Agreement commenced upon execution and continues for an initial term of one (1) year,
automatically renewing for successive one (1) year terms unless terminated by either party pursuant to the terms thereunder.
The
NCYS membership includes over 200 member organizations that serve more than 60,000,000 registered youth participants. The NCYS
leads the youth sports industry in offering its members exceptional value, and quality resources and services that are relevant,
reliable, meaningful and purposeful. As NCYS’s preferred synthetic turf provider, we believe we will benefit from improved
access to decision-makers within the national youth sports scene, introductions to fellow members, and unique educational opportunities
regarding the Company’s advanced synthetic turf products.
We
hope to continue to develop high profile strategic relationships that will allow for greater awareness of our products and services
with institutions that are focused on athlete safety and athletic performance.
Drive
adoption and awareness of our eco-friendly turf and infill products among coaches, athletic directors, administrators, and athletes
.
We
intend to educate coaches, athletic directors, administrators and athletes on the compelling case for our two infill products.
The Company currently offers two infill products, Organite and a yet to be named infill product (“New Infill Product”).
Organite is our eco-friendly infill product that consists of Zeolite, Walnut Shell (Non-Allergenic Organic Shells and ethylene
propylene diene monomer (EPDM) rubber. EPDM is a virgin rubber that contains no metals of any kind or known carcinogens in any
color except black. On occasion, Organite contains minimal levels of Black EPDM which is sometimes known to contain carbon black,
a potential inhalation hazard during manufacturing, however, we are not aware of any data showing any health hazards related to
ingestion and therefore we strongly believe that EPDM is a much safer alternative to SBR crumb rubber. Our New Infill Product
is eco-friendly and has absolutely no rubber at all and contains a proprietary mix of materials that are completely inert or biodegradable.
Due to pricing competition we keep Organite available for clients more concerned with cost but we believe that our “rubberless”
product will resonate amongst owners and drive additional demand for our products. Our infills are free from lead, chromium and
all other potential cancer causing agents that are commonly found in fields all across the U.S. Our PrimePlay™ synthetic
turf products are free from the polyurethane backing, which cannot be recycled, that is commonly present in the majority of turf
installations today.
Environmentally
friendly, ecologically-safe, recyclable products and coating materials are available and we are using them in our current products.
We believe our products perform, in all respects, as well or better than the ecologically-challenged products traditionally considered
and currently used by many of our competitors. Due to our turn-key design-build process, we are able to offer our customers fields
with ecologically friendly materials at a price that is competitive with the traditional products that are cheap and contain materials
that are not safe. We believe that increased awareness of the benefits of our eco-friendly infill will favorably impact our sales.
Develop
new technology products and services.
Since inception, we have been in pursuit of developing a turf system that is
comprised of synthetic fiber, turf backing, infill and shock/drainage pad that would allow us to market a product that virtually
eliminates all of the current problems plaguing the industry. To date, we have studied and developed a high performing infill
product that is free from any potential carcinogens and is capable of reducing field temperatures, designed a turf stitch pattern
that will reduce infill migration to prevent injury, removed polyurethane from our backing to allow for recycling, tested and
are provided a shock pad system from a third party supplier, that will allow for high performance while reducing impact injuries
due to lower Gmax and engineered drainage design plans that allow the system to be free from standing water even in the event
of major downpours. All of the improvements to the system are continuously being challenged and tested at our research and development
site located on the campus at IMG in Bradenton, Florida.
Our
next goal is to permanently staff a research and development office with development staff so that we can use everything we have
learned about existing products and continue to create new products that will continue to improve performance while remaining
safe for the players and the environment.
Pursue
opportunities to enhance our product offerings.
We may also opportunistically pursue the licensing or acquisition
of complementary products and technologies to strengthen our market position or improve product margins. We believe that the licensing
or acquisition of products would only strengthen our existing portfolio.
Lessen
our dependency on third party manufacturers.
As part of our long-term plans, we are exploring the possibility of
reducing our reliance on third party manufacturers by bringing certain manufacturing, service and research and development functions
in-house, which could include the acquisition of equipment and other fixed assets or the acquisition or lease of a manufacturing
facility.
Operational
Strengths
Highly
Experienced Management and Key Personnel.
We have assembled a senior management team and key personnel which includes
Jeromy Olson, our CEO, Scott Allen, our Director of Architecture & Engineering, John Rombold, our Director of Project Management,
and Kort Wickenheiser, our Director of Sales. This current leadership team is comprised of individuals with significant experience
in sales, design, architecture, engineering and construction industry.
Diversified
Project Classes.
The diversity of project types that are within our capabilities is a strength that we can exploit
if there is an economic slowdown on any one particular sector. Our architectural design, engineering and construction expertise
along with our surfacing product sales can support the company revenue streams in two discrete ways.
Specialized
Market Approach.
We are currently winning project bids at prices above our competitors that use crumb rubber, due
to customer demand for safer products. When other companies are forced to offer solutions similar to ours, we are already competitively
priced. Much of the reason for that is that we save money by employing our own project management, architecture and engineering
which ultimately lowers our overhead as compared to other companies that are not turn-key. We believe that by targeting and maintaining
this type of expertise in athletic facilities the Company is more insulated from general economic downturn than general construction
companies otherwise would be. This specialization is less susceptible to customers driving normal price points lower through mass
competition.
Infrastructure
built for growth.
Current staffing levels have positioned the Company with excess operational capacity capable of
doubling project execution without a significant impact on overhead.
Featured
Products and Services
PrimePlay™
Synthetic Turf Systems.
All synthetic turf systems and products are marketed as our PrimePlay™ line of products
to service the athletic facilities market. Within this line are the synthetic turf and track products, infill materials and shock/drainage
pads.
*
|
Represents our turf system from the stone base under
the field, shockpad, turf, and infill
|
PrimePlay™
Replicated Grass™.
Our flagship synthetic turf system, Replicated Grass™, is designed with a shorter
tuft-height and higher face-weight which combine to produce a surface with almost three times the blade-density of leading competitors.
The result is a surface with increased infill stability because if the infill can be displaced, there is no way to maintain consistent
performance characteristics. Because our infill is so stable and does not displace under normal use, there is no change in performance
characteristics over time and the infill does not require replacement on a regular basis as some of our competitor’s products
that use crumb rubber. This increased density also offers athletes natural “ball-action”, or “ball roll”,
and “natural foot-feel”, or “foot action” so it feels like they are playing on a real, lush grass surface.
Replicated Grass™ also contains our “rubberless” New Infill Product which is composed primarily of organic shell
husk and zeolite. These infill materials offer no risk of cancer or other related health risks as well as many other valuable
characteristics.
Product
Features
Safe
Alternative to Crumb Rubber.
In February of 2016, three federal agencies — the U.S. Environmental Protection
Agency (EPA), the Centers for Disease Control and Prevention (CDC) /Agency for Toxic Substances and Disease Registry (ATSDR),
and the U.S. Consumer Product Safety Commission (CPSC) — launched a joint initiative to study key safety and environmental
human health questions related to the use of SBR crumb rubber in synthetic turf athletic fields, and any potential link to cancer.
Sports Field has never used crumb rubber since its inception. The Company currently offers two infill products, Organite and our
New Infill Product. Organite is our eco-friendly infill product that consists of Zeolite, Walnut Shell (Non-Allergenic Organic
Shells and ethylene propylene diene monomer (EPDM) rubber. EPDM is a virgin rubber that contains no metals of any kind or known
carcinogens in any color except black. On occasion, Organite contains minimal levels of Black EPDM which is sometimes known to
contain carbon black, a potential inhalation hazard during manufacturing, however, we are not aware of any data showing any health
hazards related to ingestion and therefore we strongly believe that EPDM is a much safer alternative to SBR crumb rubber. Our
New Infill Product is eco-friendly and has absolutely no rubber at all and contains a proprietary mix of materials that are completely
inert or biodegradable. Due to pricing competition we keep Organite available for clients more concerned with cost but we believe
that our “rubberless” product will resonate amongst owners and drive additional demand for our products.
Heat
Reduction
. An often overlooked health risk associate with artificial turf is the extremely high temperatures that
can exist above the playing surface due to absorption of heat from the sun. When using rubber infills, the reflectivity of an
artificial turf system is generally lower than natural grass (darker colors absorb more electromagnetic radiation) due to the
exposure of dark infill. Further, artificial turf and rubber infill do not naturally contain and hold moisture, to provide evaporative
cooling, as natural grass and soils do. Our product uses zeolite, which is light in color to absorb less heat and is a porous
material that is capable of holding up to 55% of its weight in water. This moisture is released as temperatures rise to create
an evaporative cooling effect on the field. Our internal data and testing has shown that our surfaces on average are 18.6 degrees
cooler than that of most competitors.
Shock
Attenuation
. Rubber infills all have the same inherent problem, they break down and compact after prolonged exposure
to UV light. As this happens over time the surfaces get harder and harder as the rubber loses its elasticity. This process increases
the risk of impact injuries for athletes.
The
National Football League’s (the “NFL”) recent attention to head injuries is reflected in its adoption of new
standards for impact forces. New NFL guidelines require that NFL fields have a G-Max (G-Max is a measurement of how much force
the surface will absorb, the higher the G-Max rating the less absorption of force by the surface) value that is not greater than
100 (based on the “Clegg” method of calculating G-Max). We believe that this criterion will eventually trickle-down
and apply to all sports surfaces, and all artificial turf fields will have to maintain a G-Max below 115 (indoor) and 125 (outdoor)
(Clegg) for the life of the product.
Therefore,
we developed a system and a New Infill Product with no rubber and integrated the use of a third-party manufactured proprietary
shock/drainage pad to be utilized under the playing surface. This pad allows for our system to produce Gmax scores under 80(need
units) for the life of the product, which is well below the NFL minimum and the average new installation of sand and crumb rubber
fields which average around Gmax of 110.
Base
Construction.
One of the key elements of any reliable turf athletic facility is the base construction. Conventional
free-draining stone bases incorporate an inherent engineering conflict – drainage capacity vs. grade stability. In addition,
the infiltration rate of the stone base cannot be accurately measured or predicted and degrades over time. To help eliminate these
issues, we customize our drainage methodologies to meet specific project requirements and then we lay down our Replicated Grass
products over the customized base. Our drainage methodology virtually eliminates engineering conflicts, practically eliminates
invasive excavation, greatly reducing material import and export.
Below
is an illustration of a typical installation design:
Warranty
The
Company generally provides a warranty on products installed for up to 8 years with certain limitations and exclusions based upon
the manufacturer’s product warranty.
Sales
and Marketing
Our
current sales structure is comprised of four (4) discrete units, our direct sales representatives, distribution group partners,
deal finders and our sports ambassadors. We currently have six (6) fully staffed sales territories; the Northeast, Southeast,
Northcentral, Southcentral, Northwest and Southwest with each territory containing its own dedicated sales professional. Our four
(4) distribution group partners representing a total of nice (9) sales people around the U.S. are also representing the Company
every single day. We are currently contracted with eight (8) commission only deal finders who have extensive contacts in the sports
industry and are making introductions for our direct sales team members to key decision makers around the U.S. Once a project
lead is established, our distribution partners and deal finders bring in the local territory rep and drive the sales to close
together as a team. We intend to continue to expand our direct sales organization in an effort to secure contracts in every major
region of the United States. By securing contracts and establishing Sports Field in all major regions of the country, the Company
will seek to leverage those client relationships and successful projects to aggressively market to all potential clients in these
regions.
We
have initiated an ambassador program that includes current and former professional athletes from the sports in which they played.
We currently have agreements with Ray Lewis, a future Hall of Fame retired NFL player, Rick Honeycutt, former MLB pitcher and
current pitching coach of the Los Angeles Dodgers and Chris Wingert, current 12-year veteran Major League Soccer player who is
currently playing with the Salt Lake City Real (collectively our “Sports Ambassadors”). These professionals maintain
high level contacts with the NFL, Major League Baseball, professional soccer leagues, and major universities and colleges. These
contacts have introduced the Company to NFL owners, professional athletes, college presidents and athletic directors, head coaches
and other important industry contacts.
Our
complete sales team, including our Sports Ambassadors, are active through the United States and will continue to call on relationships
with their contacts. The efforts of this group of twenty-seven (27) professionals comprise a major component of the Company’s
sales and marketing initiatives and these contacts in the professional and collegiate sports industries represent a significant
asset as the Company looks to continue its growth.
The
Company has also engaged in targeted and innovative direct marketing to athletic directors, school business managers, college
and high school athletic programs, high school football coaches, landscape architects, engineering firms, and municipal parks
and recreation departments. This plan has its focus on our innovative products and construction methodologies.
Over
a year ago, in advance of a full scale marketing campaign, we began an effort to completely rebrand the company. This rebranding
included a renaming that would allow us to market to our strengths in the industry and speak more directly to the values we represent.
Effective April 4, 2016, Sports Field Engineering, Inc., our wholly-owned subsidiary, changed its name to FirstForm, Inc. This
name change along with a new iconic logo and branding campaign includes a new brand development phase and roll out through every
form of market communication.
Since
April 4, 2016, we have created new tools as part of a comprehensive marketing plan that includes a brand new website with a focused
SEO plan, creation of our new trade show booth exhibit materials, professional collateral sales literature and Power Point. It
also includes the automation of our sales process through the adoption of a new customer relationship management software and
mobile sales tools, engaging the market with the use of technology in concert with our high level professional sales team.
We
intend continued expansion of our highly-trained direct sales organization to secure contracts in every major region of the United
States. By securing contracts and establishing Sports Field in all major regions of the country, the Company will seek to leverage
those client relationships and successful projects to aggressively market to all potential clients in these regions.
Competition
The
competitive landscape with respect to manufacturing is very well-established, with seven companies selling the majority of synthetic
turf products. Based on management’s experience and knowledge of the synthetic turf industry, Field Turf is the leading
manufacturer of synthetic turf athletic fields and synthetic turf products, with what we believe is roughly 45% of the overall
market and is one of the only companies operating in this space that we characterize as a true manufacturer. Shaw Sports, Astroturf,
LLC, Sprint Turf, Pro Grass, A-Turf, and Hellas Construction are all purveyors of synthetic turf athletic fields with varying
degrees of manufacturing and assembly. We estimate that these six companies account for approximately 20% of synthetic turf athletic
field sales. There remains over 20 other distributors, and to varying degrees manufacturers and assemblers, of synthetic turf
products that account for the remaining 35% of the synthetic turf athletic fields market. These applications run the entire gamut
of synthetic turf from residential and commercial landscaping, to golf applications, parks and recreation, private parks, airports,
highway medians, downhill skiing, and other applications.
The
competitive landscape from an installation and construction perspective looks very different when compared to the landscape of
the manufacturing side of the industry. In regard to installation and construction of artificial turf fields and athletic facilities,
the industry is very much fragmented. There are no clear national leaders from the perspective of facilities construction. The
bulk of the construction is provided by local or regional general contracting firms that specialize in certain phases of synthetic
turf athletic fields and facility construction, but, to our knowledge, no competitors with significant market share offer a true
turn-key operation, to include their own in-house engineering staff. Sports Field offers full service design and engineering services,
with forensic studies of athletic facilities to properly prepare and recommend custom specifications based on specific circumstances
unique to every facility. In addition, the Company will provide full service turn-key construction services for the facility depending
on a client’s needs, or simply provide project management services for a particular project.
Trademarks
We
currently have one registered trademark and two pending trademarks with the United States Patent and Trademark Office, which include
FirstForm
®
, a second unnamed trademark under FirstForm (“Unnamed Infill Trademark”) and PrimePlay
®
,
respectively. The application for PrimePlay is still pending and has been allowed by the USPTO and we anticipate that registration
for this mark should issue in due course following our filing of evidence of use with the USPTO. The Unnamed Infill Trademark
was filed as a second trademark under FirstForm® to serve as a placeholder until we decide on a name for our New Infill Product.
At such time as the Company decides on a proper name for this product we will amend the Unnamed Infill Trademark accordingly.
We
also believe we have certain common law rights with respect to the prior and continued usage of the names “Replicated Grass”
and “Organite”.
Replicated
Grass is our signature synthetic turf product.
Service
Mark
The
Company’s service mark is “Building the Best Comes First” which stands for the Company’s commitment to
research and development. We have not yet applied to register this mark, but plan to do so.
Employees
We
have 6 full time employees. Additionally, the Company employs 23 independent contractors, including 21 contract employees
for sales and two for accounting and investor relations services. None of our employees are represented by a labor
union.
Properties
Our
principal office is located at 4320 Winfield Road, Suite 200, Warrenville, IL 60555. This office has approximately 500 sq. ft.
office space rented at a rate of $1,100 per month. This space is utilized for office purposes and it is our belief that the space
is adequate for our immediate needs. Additional space may be required as we expand our business activities. We do not foresee
any significant difficulties in obtaining additional facilities if deemed necessary.
Where
You Can Find More Information
Our
website address is
www.firstform.com
. We do not intend our website address to be an active link or to otherwise incorporate
by reference the contents of the website into this Report. The public may read and copy any materials the Company files with the
U.S. Securities and Exchange Commission (the “SEC”) at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030.
The SEC maintains an Internet website (http://www.sec.gov) that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC.
Item
1A. Risk Factors.
RISK
FACTORS
RISKS
RELATED TO OUR COMPANY
WE
ARE NOT YET PROFITABLE AND MAY NEVER BE PROFITABLE.
Since inception through December 31,
2016, Sports Field has raised approximately $8,300,000 in capital. During this same period, we have recorded net accumulated losses
totaling $13,957,580. As of December 31, 2016, we had a working capital deficit of $3,569,741. Our net losses for the three most
recent fiscal years ended December 31, 2016, 2015 and 2014 have been $3,688,062, $3,338,157 and $3,832,856, respectively. Our ability
to achieve profitability depends upon many factors, including the ability to develop and commercialize products. There can be no
assurance that we will ever achieve profitable operations.
WE
HAVE RECEIVED A GOING CONCERN OPINION FROM OUR AUDITORS.
As reflected in the financial statements
we have received a going concern opinion from our auditors. As of December 31, 2016, the Company has cash of $15,388 and a working
capital deficit of $3,569,741. Furthermore, the Company had a net loss and net cash used in operations of $3,688,062 and $2,266,721,
respectively, for the year ended December 31, 2016 and an accumulated deficit totaling $13,957,580. Accordingly, 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
term notes, until such time that funds provided by operations are sufficient to fund working capital requirements.
WE
HAVE A LIMITED OPERATING HISTORY.
We
have been in existence for approximately four years. Our limited operating history means that there is a high degree of uncertainty
in our ability to: (i) develop and commercialize our products; (ii) achieve market acceptance of our products; or (iii) respond
to competition. Additionally, even if we do implement our business plan, we may not be successful. No assurances can be given
as to exactly when, if at all, we will be able to recognize profits high enough to sustain our business. We face all the risks
inherent in a new business, including the expenses, difficulties, complications, and delays frequently encountered in connection
with conducting operations, including capital requirements. Given our limited operating history, we may be unable to effectively
implement our business plan which could materially harm our business or cause us to cease operations.
WE
MAY SUFFER LOSSES IF OUR REPUTATION IS HARMED.
Our
ability to attract and retain customers and employees may be adversely affected to the extent our reputation is damaged. If we
fail, or appear to fail, to deal with various issues that may give rise to reputational risk, we could harm our business prospects.
These issues include, but are not limited to, appropriately dealing with potential conflicts of interest, legal and regulatory
requirements, ethical issues, money-laundering, privacy, record-keeping, sales and trading practices, and the proper identification
of the legal, reputational, credit, liquidity, and market risks inherent in our business. Failure to appropriately address these
issues could also give rise to additional legal risk to us, which could, in turn, increase the size and number of claims and damages
asserted against us or subject us to regulatory enforcement actions, fines, and penalties.
WE
DEPEND ON OUR CHIEF EXECUTIVE OFFICER AND THE LOSS OF HIS SERVICES COULD ADVERSELY AFFECT OUR BUSINESS.
We
place substantial reliance upon the efforts and abilities of Jeromy Olson, our Chief Executive Officer. Though no individual is
indispensable, the loss of the services of Mr. Olson could have a material adverse effect on our business, operations, revenues
or prospects. We do not maintain key man life insurance on the life of Mr. Olson.
Our
success depends on attracting and retaining qualified personnel and subcontractors in a competitive environment.
The
success of our business is dependent on our ability to attract, develop and retain qualified personnel advisors and subcontractors.
Changes in general or local economic conditions and the resulting impact on the labor market may make it difficult to attract
or retain qualified individuals in the geographic areas where we perform our work. If we are unable to provide competitive compensation
packages, high-quality training programs and attractive work environments or to establish and maintain successful partnerships,
our ability to profitably execute our work could be adversely impacted.
Accounting
for our revenues and costs involves significant estimates.
Accounting
for our contract-related revenues and costs, as well as other expenses, requires management to make a variety of significant estimates
and assumptions. Although we believe we have sufficient experience and processes to enable us to formulate appropriate assumptions
and produce reasonably dependable estimates, these assumptions and estimates may change significantly in the future and could
result in the reversal of previously recognized revenue and profit. Such changes could have a material adverse effect on our financial
position and results of operations.
AS
AN “EMERGING GROWTH COMPANY” UNDER APPLICABLE LAW, WE WILL BE SUBJECT TO LESSENED DISCLOSURE REQUIREMENTS, WHICH COULD
LEAVE OUR STOCKHOLDERS WITHOUT INFORMATION OR RIGHTS AVAILABLE TO STOCKHOLDERS OF MORE MATURE COMPANIES.
We
are an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our
Business Startups Act of 2012, or the JOBS Act. As such, we are eligible to take advantage of certain exemptions from various
reporting requirements applicable to other public companies that are not “emerging growth companies” including, but
not limited to:
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only two years of audited financial statements in addition
to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” disclosure;
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not being required to comply with the auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act of 2002; and
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reduced disclosure regarding certain executive compensation
related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation
to median employee compensation.
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We
may take advantage of these and other exemptions available to “emerging growth companies” or “smaller reporting
companies”. We could remain an “emerging growth company” until the last day of the fiscal year following the
fifth anniversary of this offering, or until the earliest of (a) the last day of the first fiscal year in which our annual gross
revenue exceeds $1 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under
the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million
as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more
than $1 billion in nonconvertible debt during the preceding three-year period.
Because
of these lessened regulatory requirements, our stockholders may be left without information or rights available to stockholders
of more mature companies.
WE
RECENTLY COMPLETED A DEBT FINANCING WHICH IS secured by the grant of a security interest in all of our assets and upon a default
the lender may foreclose on all of our assets.
As
further described in “Recent Developments” above, in July 2016, we entered into the Loan Agreement with Genlink, pursuant
to which Genlink made available to the Company a Revolving Loan. Pursuant to the Loan Agreement, the Company issued the Genlink
Note up to an aggregate principal amount of One Million Dollars ($1,000,000), of which the Company has borrowed $1,000,000 to
date, which is payable on December 20, 2017. Additionally, pursuant to the Loan Agreement, the Company and Genlink entered into
the Security Agreement, pursuant to which the Company granted Genlink a senior security interest in substantially all of the Company’s
assets as security for repayment of the Revolving Loan. In the event of the Company’s failure to make payments or to otherwise
comply with the terms of the Revolving Loan under the Security Agreement or the Genlink Note, Genlink can declare a default and
seek to foreclose on the Company’s assets. If the Company is unable to repay or refinance such indebtedness it may be forced
to cease operations and the holders of the Company’s securities may lose their entire investment.
Our
contract backlog is subject to unexpected adjustments and cancellations and could be an uncertain indicator of our future earnings.
We
cannot guarantee that the revenues projected in our contract backlog will be realized or, if realized, will be profitable. Projects
reflected in our contract backlog may be affected by project cancellations, scope adjustments, time extensions or other changes.
Such changes may adversely affect the revenue and profit we ultimately realize on these projects.
IF
WE FAIL TO ESTABLISH AND MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROL, WE MAY NOT BE ABLE TO REPORT OUR FINANCIAL RESULTS
ACCURATELY OR TO PREVENT FRAUD. ANY INABILITY TO REPORT AND FILE OUR FINANCIAL RESULTS ACCURATELY AND TIMELY COULD HARM OUR REPUTATION
AND ADVERSELY IMPACT THE TRADING PRICE OF OUR SECURITIES.
Effective
internal controls are necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable
financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control
environment existed, and our business and reputation with investors may be harmed. As a result of our small size, any current
internal control deficiencies may adversely affect our financial condition, results of operation and access to capital.
We
currently have insufficient written policies and procedures for accounting and financial reporting with respect to the requirements
and application of US GAAP and SEC disclosure requirements. Additionally, there is a lack of formal process and timeline for closing
the books and records at the end of each reporting period and such weaknesses restrict the Company’s ability to timely gather,
analyze and report information relative to the financial statements. As a result, our management has concluded that as of December
31, 2016, we have material weaknesses in our internal control procedures and our internal control over financial reporting was
ineffective.
Because
of the Company’s limited resources, there are limited controls over information processing. There is inadequate segregation
of duties consistent with control objectives. Our Company’s management is composed of a small number of individuals resulting
in a situation where limitations on segregation of duties exist. In order to remedy this situation, we would need to hire additional
staff. Currently, the Company has begun to hire additional staff to facilitate greater segregation of duties. Management intends
to begin documenting and formalizing controls and procedures.
RISKS
RELATING TO OUR INDUSTRY
THE
INSTALLATION OF SYNTHETIC TURF IS A HIGHLY COMPETITIVE INDUSTRY.
The
installation of synthetic turf is a highly competitive and highly fragmented industry. Competing companies may be able to beat
our bids for the more desirable projects. As a result, we may be forced to lower bids on projects to compete effectively, which
would then lower the fees we can generate. We may compete for the management and installation of synthetic turf with many entities,
including nationally recognized companies. Many competitors may have substantially greater financial resources than we do. In
addition, certain competitors may be willing to accept lower fees for their services.
THE
SUCCESS OF OUR BUSINESS IS SIGNIFICANTLY RELATED TO GENERAL ECONOMIC CONDITIONS AND, ACCORDINGLY, OUR BUSINESS COULD BE HARMED
BY THE ECONOMIC SLOWDOWN AND DOWNTURN IN FINANCING OF PUBLIC WORKS CONTRACTS.
Our
business is closely tied to general economic conditions. As a result, our economic performance and the ability to implement our
business strategies may be affected by changes in national and local economic conditions. During an economic downturn funding
for public contracts tends to decrease significantly thereby limiting the growth and opportunities available for new and established
businesses in the synthetic turf industry. An economic downturn may limit the number of projects that we are able to bid on and
limit the opportunities we have to penetrate the synthetic turf industry, stunting the Company’s growth prospects and having
a material adverse effect on our business.
THE
COMPANY’S BUSINESS MAY BE SUBJECT TO THE EFFECTS OF ADVERSE PUBLICITY AND NEGATIVE PUBLIC PERCEPTION RELATED TO SYNTHETIC
TURF PRODUCTS.
Negative
public perception regarding our industry resulting from, among other things, concerns raised by advocacy groups or the public
in general about synthetic turf fields and the potential impact on human health related to certain chemical compounds found in
the infill of such fields may negatively impact the sales of synthetic turf products. Despite not using any toxic or known harmful
materials in our products, there can be no assurance that the Company will not be subject to adverse publicity or negative public
perception surrounding the impact on human health of synthetic turf and related products in the future or that such negative public
perception would not have an adverse or material negative impact on its financial position, results of operations or cash flows.
IF
WE ARE UNABLE TO OBTAIN RAW MATERIALS IN A TIMELY MANNER OR IF THE PRICE OF RAW MATERIALS INCREASES SIGNIFICANTLY, PRODUCTION
TIME AND PRODUCT COSTS COULD INCREASE, WHICH MAY ADVERSELY AFFECT OUR BUSINESS.
Synthetic
turf made to our specifications can be purchased from a variety of manufacturers, there are several sources of all of our infill
products and two manufacturers from which we can purchase expanded polypropylene shock and drainage pads. We do not anticipate
any supply issues due to the fact that the raw materials to develop these products are readily available and currently not scarce.
We do not have any exclusive supplier contracts for our products. We buy our pad, infill components and turf from manufacturers
at the best price we can negotiate based on volume discounts but if the prices of the raw materials necessary to make these products,
including the yarn, backing and infill in our products, rise significantly, we may be unable to pass on the increased cost to
our customers. Our results of operations could be adversely affected if we are unable to obtain adequate supplies of raw materials
in a timely manner or at reasonable cost. In addition, from time to time, we may need to reject raw materials that do not meet
our specifications, resulting in potential delays or declines in output. Furthermore, problems with our raw materials may give
rise to compatibility or performance issues in our products, which could lead to an increase in customer returns or product warranty
claims. Errors or defects may arise from raw materials supplied by third parties that are beyond our detection or control, which
could lead to additional customer returns or product warranty claims that may adversely affect our business and results of operations.
Failure
to maintain safe work sites could result in significant losses.
Construction
and maintenance sites are potentially dangerous workplaces and often put our employees and others in close proximity with mechanized
equipment, moving vehicles, chemical and manufacturing processes, and highly regulated materials. On many sites, we are responsible
for safety and, accordingly, must implement safety procedures. If we fail to implement these procedures or if the procedures we
implement are ineffective, we may suffer the loss of or injury to our employees, as well as expose ourselves to possible litigation.
Our failure to maintain adequate safety standards could result in reduced profitability or the loss of projects or clients, and
could have a material adverse impact on our financial position, results of operations, cash flows and liquidity.
An
inability to obtain bonding could have a negative impact on our operations and results.
We
may be required to provide surety bonds securing our performance for some of our public and private sector contracts. Our inability
to obtain reasonably priced surety bonds in the future could significantly affect our ability to be awarded new contracts, which
could have a material adverse effect on our financial position, results of operations, cash flows and liquidity.
Design-build
contracts subject us to the risk of design errors and omissions.
Design-build
is increasingly being used as a method of project delivery as it provides the owner with a single point of responsibility for
both design and construction. We generally do not subcontract design responsibility as we have our own architects and engineers
in-house. In the event of a design error or omission causing damages, there is risk that the subcontractor or their errors and
omissions insurance would not be able to absorb the liability. In this case we may be responsible, resulting in a potentially
material adverse effect on our financial position, results of operations, cash flows and liquidity.
Many
of our contracts have penalties for late completion.
In
some instances, including many of our fixed price contracts, we guarantee that we will complete a project by a certain date. If
we subsequently fail to complete the project as scheduled we may be held responsible for costs resulting from the delay, generally
in the form of contractually agreed-upon liquidated damages. To the extent these events occur, the total cost of the project could
exceed our original estimate and we could experience reduced profits or a loss on that project.
Strikes
or work stoppages could have a negative impact on our operations and results.
Some
of our projects require union labor and although we have not experienced strikes or work stoppages in the past, such labor actions
could have a significant impact on our operations and results if they occur in the future.
Failure
of our subcontractors to perform as anticipated could have a negative impact on our results.
We
subcontract portions of many of our contracts to specialty subcontractors, but we are ultimately responsible for the successful
completion of their work. Although we seek to require bonding or other forms of guarantees, we are not always successful in obtaining
those bonds or guarantees from our higher-risk subcontractors. In this case we may be responsible for the failures on the part
of our subcontractors to perform as anticipated, resulting in a potentially adverse impact on our cash flows and liquidity. In
addition, the total costs of a project could exceed our original estimates and we could experience reduced profits or a loss for
that project, which could have an adverse impact on our financial position, results of operations, cash flows and liquidity.
WE
MUST ANTICIPATE AND RESPOND TO RAPID TECHNOLOGICAL CHANGE.
The
market for our products and services is characterized by technological developments and evolving industry standards. These factors
will require us to continually improve the performance and features of our products and services and to introduce new products
and services, particularly in response to offerings from our competitors, as quickly as possible. As a result, we might be required
to expend substantial funds for and commit significant resources to the conduct of continuing product development. We may not
be successful in developing and marketing new products and services that respond to competitive and technological developments,
customer requirements, or new design and production techniques. Any significant delays in product development or introduction
could have a material adverse effect on our operations.
FAILURE
TO PROTECT OUR INTELLECTUAL PROPERTY OR TECHNOLOGY OR OBTAIN RIGHTS TO USE OTHERS’ INTELLECTUAL PROPERTY OR TECHNOLOGY COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We
take steps to protect our intellectual property rights such as filing for patent protection where we deem appropriate. However,
there is no guarantee that any technology we seek to protect will, in fact, be granted patent protection or any other form of
intellectual property protection. Consequently, if we are unable to secure exclusive rights in such technology, our competitors
may be free to use such technology as well. We may at times also be subject to the risks of claims and litigation alleging infringement
of the intellectual property rights of others. There is no guarantee that we will be able to resolve such claims or litigations
favorably, and may, as a result, be exposed to adverse decisions in such litigations which may require us to pay damages, cease
using certain technologies or products, or license certain technology, which licenses may not be available to us on commercially
reasonable terms or at all. Moreover, intellectual property litigation, regardless of the ultimate outcomes, is time-consuming
and expensive and can result in the distraction of management personnel and expenditure of consider resources in defending against
any such infringement claims.
WE
RELY UPON THIRD-PARTY MANUFACTURERS AND SUPPLIERS, WHICH PUTS US AT RISK FOR THIRD-PARTY BUSINESS INTERRUPTIONS.
We
rely on third-party manufactures and suppliers for the individual products that we use to create our system which we then sell
to owners. We have dozens of tufting companies to choose from in manufacturing our specific design for turf and bid them out often.
We also have multiple suppliers for all of our infill contents as well as several shock pad suppliers of which we have used two
to three of each historically. The success for our business depends in part on our ability to retain such third-party manufacturers
and suppliers to provide subparts for our products and materials for the services we provide. If manufacturers and suppliers fail
to perform, our ability to market products and to generate revenue would be adversely affected. Our failure to deliver products
and services in a timely manner could lead to customer dissatisfaction and damage to our reputation, cause customers to cancel
contracts and to stop doing business with us.
LOWER
THAN EXPECTED DEMAND FOR OUR PRODUCTS AND SERVICES WILL IMPAIR OUR BUSINESS AND COULD MATERIALLY ADVERSELY AFFECT OUR RESULTS
OF OPERATIONS AND FINANCIAL CONDITION.
Currently
there are approximately 11,000 synthetic turf fields installed in the U.S. and approximately 1,000 new fields installed every
year, according to the Synthetic Turf Council. Given that there are approximately 50,000 colleges and high schools in the U.S.
with athletic programs, in so far as athletic fields are concerned, at some point in the future saturation will slow the growth
of the industry. If we meet a lower demand for our products and services than we are expecting, our business, results of operations
and financial condition are likely to be materially adversely affected. Moreover, overall demand for synthetic turf products and
services in general may grow slowly or decrease in upcoming quarters and years because of unfavorable general economic conditions,
decreased spending by schools and municipalities in need of synthetic turf products or otherwise. This may reflect a saturation
of the market for synthetic turf. To the extent that there is a slowdown in the overall market for synthetic turf, our business,
results of operations and financial condition are likely to be materially adversely affected.
WE
MAY BE SUBJECT TO THE RISK OF SUBSTANTIAL ENVIRONMENTAL LIABILITY AND LIMITATIONS ON OUR OPERATIONS BROUGHT ABOUT BY THE REQUIREMENTS
OF ENVIRONMENTAL LAWS AND REGULATIONS.
We
may be subject to various federal, state and local environmental, health and safety laws and regulations concerning issues such
as, wastewater discharges, solid and hazardous materials and waste handling and disposal, landfill operation and closure. While
Sports Field believes that it is and will continue to manufacture products in compliance with all applicable environmental laws
and regulations, the risks of substantial additional costs and liabilities related to compliance with such laws and regulations
are an inherent part of our business.
Risks
Relating to Ownership of our SECURITIES
WE
CURRENTLY DO NOT INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK. AS A RESULT, YOUR ONLY OPPORTUNITY TO ACHIEVE A RETURN ON YOUR INVESTMENT
IS IF THE PRICE OF OUR COMMON STOCK APPRECIATES.
We
currently do not expect to declare or pay dividends on our common stock. In addition, our Revolving Loan with Genlink restricts
our ability to declare or pay dividends on our common stock so long as it remains outstanding. As a result, your only opportunity
to achieve a return on your investment will be if the market price of our common stock appreciates and you sell your shares and
shares underlying your warrants at a profit.
YOU
MAY EXPERIENCE DILUTION OF YOUR OWNERSHIP INTEREST DUE TO THE FUTURE ISSUANCE OF ADDITIONAL SHARES OF OUR COMMON STOCK.
We
are in a capital intensive business and we do not have sufficient funds to finance the growth of our business or to support our
projected capital expenditures. As a result, we will require additional funds from future equity or debt financings, including
potential sales of preferred shares or convertible debt, to complete the development of new projects and pay the general and administrative
costs of our business. We may in the future issue our previously authorized and unissued securities, resulting in the dilution
of the ownership interests of holders of our common stock. We are currently authorized to issue 250,000,000 shares of common stock
and 20,000,000 shares of preferred stock. We may also issue additional shares of common stock or other securities that are convertible
into or exercisable for common stock in future public offerings or private placements for capital raising purposes or for other
business purposes. The future issuance of a substantial number of common stock into the public market, or the perception that
such issuance could occur, could adversely affect the prevailing market price of our common shares. A decline in the price of
our common stock could make it more difficult to raise funds through future offerings of our common stock or securities convertible
into common stock.
Our
Certificate of Incorporation allows for our board of directors to create new series of preferred stock without further approval
by our stockholders, which could have an anti-takeover effect and could adversely affect holders of our common stock.
Our
authorized capital includes preferred stock issuable in one or more series. Our board of directors has the authority to issue
preferred stock and determine the price, designation, rights, preferences, privileges, restrictions and conditions, including
voting and dividend rights, of those shares without any further vote or action by stockholders. The rights of the holders of common
stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in
the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible financings and
acquisitions and other corporate purposes, could make it more difficult for a third party to acquire a majority of the voting
power of our outstanding voting securities, which could deprive our holders of common stock to purchase common stock at a premium
that they might otherwise realize in connection with a proposed acquisition of our company.
IF
AND WHEN A LARGER TRADING MARKET FOR OUR SECURITIES DEVELOPS, THE MARKET PRICE OF SUCH SECURITIES IS STILL LIKELY TO BE HIGHLY
VOLATILE AND SUBJECT TO WIDE FLUCTUATIONS, AND YOU MAY BE UNABLE TO RESELL YOUR SECURITIES AT OR ABOVE THE PRICE AT WHICH YOU
ACQUIRED THEM.
The
stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular
companies. As a result of this volatility, you may not be able to sell your securities that you purchase in this offering at or
above the price you paid for such securities. The market price for our securities may be influenced by many factors that are beyond
our control, including, but not limited to:
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variations in our revenue and operating expenses;
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market conditions in our industry and the economy as
a whole;
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actual or expected changes in our growth rates or our
competitors’ growth rates;
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developments in the financial markets and worldwide
or regional economies;
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variations in our financial results or those of companies
that are perceived to be similar to us;
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announcements by the government relating to regulations
that govern our industry;
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sales of our common stock or other securities by us
or in the open market;
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changes in the market valuations of other comparable
companies;
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general economic, industry and market conditions; and
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the other factors described in this “Risk Factors”
section.
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The
trading price of our shares might also decline in reaction to events that affect other companies in our industry, even if these
events do not directly affect us. Each of these factors, among others, could harm the value of your investment in our securities.
In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against
companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention
and resources, which could materially and adversely affect our business, operating results and financial condition.
If
securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or
if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The
trading market for our common stock and warrants will be influenced by the research and reports that industry or securities analysts
may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation
regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our securities price
would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports
on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Item
1B. Unresolved Staff Comments.
Not
applicable.
Item
2. Properties.
Our
principal office is located at 4320 Winfield Road, Suite 200, Warrenville, IL 60555. This office has approximately 500 sq. ft.
office space rented at a rate of $1,100 per month. This space is utilized for office purposes and it is our belief that the space
is adequate for our immediate needs. Additional space may be required as we expand our business activities. We do not foresee
any significant difficulties in obtaining additional facilities if deemed necessary.
Item
3. Legal Proceedings.
Except
as set forth below, there are no material proceedings to which any director or officer, or any associate of any such director
or officer, is a party that is adverse to our Company or any of our subsidiaries or has a material interest adverse to our Company
or any of our subsidiaries. No director or executive officer has been a director or executive officer of any business which has
filed a bankruptcy petition or had a bankruptcy petition filed against it during the past ten years.
During
the year the Company was 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 claimed he was due between $24,000 and $48,000 in unpaid wages
(the “Claim”).
On December 30, 2016, the Company entered into
a mutual general release and settlement agreement (the "Settlement Agreement") with the former employee. Pursuant to
the Settlement Agreement, the Company agreed to pay the former employee $45,000, payable in six equal installments of $7,500 on
the first day of each month, beginning January 1, 2017 (the “Settlement Amount”). The Settlement Agreement also contains
a general release by the former employee of the Company relating to the Claim, such release however is predicated on the Company
making payments pursuant to the Settlement Agreement.
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. In February 2017, the Company was informed by NexxField that it had settled its dispute
with Brock. The Company was never named as a defendant in Brock’s patent infringement action and believes this matter to
be resolved with no adverse effects to its business.
Item
4. Mine Safety Disclosures.
Not
applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
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 Company is headquartered at 4320 Winfield Road, Suite 200, Warrenville, IL 60555.
NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements and related notes have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”).
Principles
of Consolidation
The
accompanying 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 consolidated financial statements in conformity with U.S. GAAP 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 consolidated
financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ
from those estimates. The Company’s significant estimates and assumptions include the accounts receivable allowance for
doubtful accounts, warranty reserve, percentage of completion revenue recognition method, the useful life of fixed assets, assumptions
used in the fair value of stock-based compensation, valuation of derivative liabilities and the valuation allowance relating to
the Company’s deferred tax assets.
Revenues
and Cost Recognition
Revenues
from construction contracts are included in contract revenue in the 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.
Inventory
Inventory is stated at the lower
of cost (first-in, first out) or market and consists primarily of construction materials.
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.
Income
Taxes
Deferred
income tax assets and liabilities are determined based on the estimated future tax effects of net operating loss and credit carry-forwards
and temporary differences between the tax basis of assets and liabilities and their respective financial reporting amounts measured
at the current enacted tax rates. The differences relate primarily to net operating loss carryforward from date of acquisition
and to the use of the cash basis of accounting for income tax purposes. The Company records an estimated valuation allowance on
its deferred income tax assets if it is more likely than not that these deferred income tax assets will not be realized.
The
Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will
be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized
in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than
50% likelihood of being realized upon ultimate settlement. The Company has not recorded any unrecognized tax benefits.
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 December 31, 2016 and 2015, the
Company’s accounts receivable balance was $354,159 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 year ended December 31, 2016 and 2015, the Company incurred
research and development expenses of $90,897 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. The Company’s subcontractors provide a 1 year warranty to the Company against
defects in material or workmanship. The Company has accrued a warranty reserve of $50,000 and $0 as of December 31, 2016 and 2015,
respectively which is included in accounts payable and accrued expenses on the consolidated balance sheets. See Note 6 for warranty
expenses incurred during the year ended December 31, 2016 and 2015.
Fair
Value of Financial Instruments
The
Company follows ASC 820-10 of the FASB Accounting Standards Codification to measure the fair value of its financial instruments
and disclosures about fair value of its financial instruments. ASC 820-10 establishes a framework for measuring fair value in
accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value
measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820-10 establishes
a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.
The three (3) levels of fair value hierarchy defined by ASC 820-10 are described below:
Level
1
|
|
Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
|
|
Level
2
|
|
Pricing
inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
|
|
|
|
Level
3
|
|
Pricing
inputs that are generally unobservable inputs and not corroborated by market data.
|
Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is unobservable.
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within
more than one level described above, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
The
carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, inventory, prepaid
expenses and other current assets, accounts payable and accrued expenses approximate their fair values because of the short maturity
of these instruments.
We
have determined that it is not practical to estimate the fair value of our notes payable because of their unique nature and the
costs that would be incurred to obtain an independent valuation. We do not have comparable outstanding debt on which to base an
estimated current borrowing rate or other discount rate for purposes of estimating the fair value of the notes payable and we
have not been able to develop a valuation model that can be applied consistently in a cost efficient manner. These factors all
contribute to the impracticability of estimating the fair value of the notes payable. At December 31, 2016 and December 31, 2015,
the carrying value of the notes payable and accrued interest was $1,815,442 and $891,330. Accrued interest is included on the
Balance Sheets in the accounts payable and accrued expenses line item.
Transactions
involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of
competitive, free-market dealings may not exist.
The
Company’s Level 3 financial liabilities consist of the derivative conversion features issued in 2016. The Company valued
the conversion features using a black scholes model. These models incorporate transaction details such as the Company’s
stock price, contractual terms, maturity, risk free rates, and volatility as of the date of issuance and each balance sheet date.
The
Company utilized the following management assumptions in valuing the derivative conversion feature during the year ended December
31, 2016:
Exercise price
|
|
$
|
0.19
|
|
Expected dividends
|
|
|
0
|
%
|
Expected volatility
|
|
|
44.24
|
%
|
Risk fee interest rate
|
|
|
0.85
|
%
|
Term
|
|
|
1.0 year
|
|
Fair
Value of Financial Assets and Liabilities Measured on a Recurring Basis
The
Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative
liability at every reporting period and recognizes gains or losses in the statements of operations that are attributable to the
change in the fair value of the derivative liability.
Financial
assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the balance sheets as
follows:
December 31, 2016
|
|
|
|
|
Fair Value Measurement Using
|
|
|
|
Carrying Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative conversion features
|
|
$
|
204,300
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
204,300
|
|
|
$
|
204,300
|
|
The
unobservable level 3 inputs used by the Company was the expected volatility assumption used in the option pricing model. Expected
volatility is based on the historical stock price volatility of comparable companies’ common stock, as our stock does not
have sufficient historical trading activity.
The
table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and
liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period December
31, 2015 through December 31, 2016:
|
|
Fair Value
Measurement Using
Level 3 Inputs
|
|
|
|
Derivative
conversion
features
|
|
|
Total
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
$
|
-
|
|
|
$
|
-
|
|
Purchases, issuances, reassessments and settlements
|
|
|
204,300
|
|
|
|
204,300
|
|
Change in fair value
|
|
|
-
|
|
|
|
-
|
|
Balance, December 31, 2016
|
|
$
|
204,300
|
|
|
$
|
204,300
|
|
Changes
in the unobservable input values could potentially cause material changes in the fair value of the Company’s Level 3 financial
instruments. The significant unobservable inputs used in the fair value measurements is the expected volatility assumption. A
significant increase (decrease) in the expected volatility assumption could potentially result in a higher (lower) fair value
measurement.
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 intrinsic 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
Loss Per Common Share
The
Company computes basic net loss per share by dividing net 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 years ended December 31, 2016 and 2015,
respectively, are as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock
|
|
|
679,588
|
|
|
|
508,068
|
|
Options to purchase common stock
|
|
|
972,500
|
|
|
|
430,000
|
|
Unvested restricted common shares
|
|
|
75,000
|
|
|
|
-
|
|
Convertible Notes
|
|
|
2,716,006
|
|
|
|
626,775
|
|
Totals
|
|
|
4,443,094
|
|
|
|
1,564,843
|
|
Shares
outstanding
Shares
outstanding include shares of unvested restricted stock. Unvested restricted stock included in reportable shares outstanding was
75,000 and 0 shares as of December 31, 2016 and 2015, respectively. Shares of unvested restricted stock are excluded from our
calculation of basic weighted average shares outstanding. Their dilutive impact was not added back in the calculation of diluted
weighted average shares outstanding since the Company had a net loss during both years.
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
December 31, 2016, the Company had one customer representing 91% 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 year ended December 31, 2016, the Company had three customers that represented 22%, 18%, and 45% of the total revenue and
for the year ended December 31, 2015, the Company had four customers that represented 16%, 25%, 41%, and 15% 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 consolidated balance sheet from current assets to convertible notes payable, net of discounts.
The adoption of ASU 2015-03 did not materially impact our 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 consolidated financial position, results of operations or cash flows.
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 did not impact our 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 adoption of ASU 2014-09 is not
expected to have a material impact on our consolidated 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 on
our consolidated financial statements.
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 on our consolidated
financial statements.
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 on our consolidated financial statements.
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 on our consolidated financial statements.
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 on our consolidated financial statements.
In
November 2016, the FASB issued ASU No. 2016-18 “Statement of Cash Flows (Topic 230), Restricted Cash” which provides
guidance on the presentation of restricted cash and restricted cash equivalents in the statements of cash flows. The new guidance
requires restricted cash and restricted cash equivalents to be included within the cash and cash equivalents balances when reconciling
the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The ASU is effective for reporting periods
beginning after December 15, 2017 with early adoption permitted. The Company is currently evaluating the impact of the new standard
on our consolidated financial statements.
In
January 2017, the FASB issued ASU No. 2017-04 “Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for
Goodwill Impairment” which eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill
under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and
liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the
fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this ASU an
entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its
carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting
unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting
unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the
reporting unit when measuring the goodwill impairment loss, if applicable. The ASU also eliminated the requirements for any reporting
unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform
Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is
required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets.
An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment
test is necessary. The ASU is effective for reporting periods beginning after December 15, 2019 with early adoption permitted
for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating
the impact of the new standard on our consolidated financial statements.
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 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 consolidated financial statements, except as disclosed.
NOTE
3 – GOING CONCERN
As reflected in the accompanying consolidated
financial statements, as of December 31, 2016 the Company had a working capital deficit of $3,569,741 and net cash used in operations
during the year ended December 31, 2016 of $2,266,721. Furthermore, the Company incurred net losses of approximately $3.7 million
for the year ended December 31, 2016 and $3.3 million and $3.8 million for years ended December 31, 2015 and 2014, respectively,
and had an accumulated deficit of $13.9 million at December 31, 2016. Substantially all of our accumulated deficit has resulted
from losses incurred on construction projects, costs incurred in connection with our research and development and general and administrative
costs associated with our operations. These factors raise substantial doubt about the Company’s ability to continue as a
going concern through March 31, 2018.
We
expect that for the next 12 months, our operating cash burn will be approximately $2.5 million, excluding repayments of existing
debts in the aggregate amount of $1.78 million. Our cash requirements relate primarily to working capital needed to operate and
grow our business, including funding operating expenses and continued development and expansion of our products/services. Our
ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including
the timing and size of awarded contracts; the timing and amount of our operating expenses; the timing and costs of working capital
needs; the timing and costs of expanding our sales team and business development opportunities; the timing and costs of developing
a marketing program; the timing and costs of warranty and other post-implementation services; the timing and costs of hiring and
training construction and administrative staff; the extent to which our brand and construction services gain market acceptance;
the extent of our ongoing and any new research and development programs; and changes in our strategy or our planned activities.
We
have experienced and continue to experience negative cash flows from operations and we expect to continue to incur net losses
in the foreseeable future.
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. If we are not able to obtain financing when needed, we may be unable to carry out our business plan.
As a result, we may have to significantly limit our operations and our business, financial condition and results of operations
would be materially harmed.
To
date, we have funded our operational short-fall primarily through private offerings of common stock, convertible notes and promissory
notes, our line of credit and factoring of receivables.
The
accompanying 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 December 31, 2016 and December 31, 2015:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Costs incurred on contracts in progress
|
|
$
|
6,299,675
|
|
|
$
|
5,395,046
|
|
Estimated earnings (losses)
|
|
|
(320,450
|
)
|
|
|
(863,259
|
)
|
|
|
|
5,979,225
|
|
|
|
4,531,787
|
|
Less billings to date
|
|
|
(6,344,596
|
)
|
|
|
(4,524,817
|
)
|
|
|
$
|
(365,371
|
)
|
|
$
|
6,970
|
|
The
above accounts are shown in the accompanying consolidated balance sheet under these captions at December 31, 2016 and December
31, 2015:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Costs and estimated earnings in excess of billings
|
|
$
|
75,624
|
|
|
$
|
137,016
|
|
Billings in excess of costs and estimated earnings
|
|
|
(374,916
|
)
|
|
|
-
|
|
Provision for estimated losses on uncompleted contracts
|
|
|
(66,079
|
)
|
|
|
(130,046
|
|
|
|
$
|
(365,371
|
)
|
|
$
|
6,970
|
|
Warranty
Costs
During
the year ended December 31, 2016 the Company incurred costs of approximately $178,100. A substantial amount of the warranty costs
incurred during the year ended December 31, 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 year ended December 31, 2015 the Company incurred costs
of approximately $231,400 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. The Company’s subcontractors provide a 1 year warranty to the Company against defects in material or workmanship.
The Company has accrued a warranty reserve of $50,000 and $0 as of December 31, 2016 and 2015, respectively which is included
in accounts payable and accrued expenses on the consolidated balance sheets.
NOTE
5 – PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consists of the following:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Furniture and equipment
|
|
$
|
20,278
|
|
|
$
|
20,278
|
|
Total
|
|
|
20,278
|
|
|
|
20,278
|
|
Less: accumulated depreciation
|
|
|
(10,085
|
)
|
|
|
(6,029
|
)
|
|
|
$
|
10,193
|
|
|
$
|
14,249
|
|
Depreciation
expense for the years ended December 31, 2016 and 2015 was $4,056 and $28,044, respectively.
On
October 21, 2015, the Company and East Point Crossing, LLC (the “Landlord”) entered into a settlement and release
agreement (the “East Point Settlement Agreement”). Pursuant to the East Point Settlement Agreement, the Company agreed
to the transfer of all right, title and interest in and to the furniture, fixtures and equipment in the premises to the Landlord.
(See Note 11 - Litigation) As a result, the Company recorded an abandonment of furniture, fixtures and equipment having a net
book value of $11,826, resulting in a loss on abandonment of furniture, fixtures and equipment of $11,826.
On
December 17, 2015, the Company and 308, LLC entered into a settlement and release agreement (the “Settlement Agreement”).
As mutual consideration for entering into the Settlement Agreement with 308, LLC the Company assigned title and ownership of various
fabrication molds held by the Company to 308,LLC and 308, LLC wrote down to $0 all past due royalties and/or any other amounts
owed pursuant to the License Agreement. (See Note 11 - Litigation) As a result, the Company recorded a disposal of fabrication
molds having a net book value of $59,983 and a termination of royalties due on the License Agreement totaling $104,815, resulting
in a gain on disposition of fabrication molds of $44,832.
NOTE
6 – DEPOSITS
Deposits
at December 31, 2016 and 2015 were comprised of a $2,090 security deposit on an Illinois office lease (See Note 11).
NOTE
7 – 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, 2016 and 2015 was $522,668 and $450,000, respectively.
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 $170,858 of principal as of December 31, 2016 of the aforementioned Notes.
As
of July 1, 2016, the Company was not compliant with the repayment terms of one of the Notes. As of December 31, 2016, the outstanding
principal balance on the Note was $109,000.
As
of January 1, 2017, the Company was not compliant with the repayment terms of all of the Notes but no defaults under the Note
have been called by the Note Holders. As of January 1, 2017, the outstanding principal balance on the Notes was $522,668. The
Company is currently conducting good faith negotiations with the Note Holders 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 Notes 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 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 $45,000 in the
consolidated statement of operations.
The
Company assessed the conversion feature of the Note in default at the end of the reporting period and concluded that the conversion
feature of the Note did not qualify as a derivative because the settlement terms indicate that the Note is indexed to the entity’s
underlying stock. 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
through the repayment date and concluded the conversion feature of the Debentures do not qualify as a derivative because there
was no market mechanism for net settlement and it was not readily convertible to cash..
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) 65% 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 through September 30, 2016 and concluded the conversion feature of the note did not qualify as a derivative because
there was no market mechanism for net settlement and it was not readily convertible to cash.
The
Company reassessed the conversion feature of the note for derivative treatment on December 31, 2016. Due to the fact that
these convertible notes have an option to convert at a variable amount, they are subject to derivative liability treatment.
The Company has applied ASC No. 815, due to the potential for settlement in a variable quantity of shares. The conversion
feature has been measured at fair value using a black scholes model at period end. The conversion feature, when reassessed,
gave rise to a derivative liability of $204,300. In accordance with ASC 815 the $204,300 was charged to paid in-capital due
to the fact a beneficial conversion feature was recorded on the original issue date. Gains and losses in future reporting
periods from the change in fair value of the derivative liability will be recognized on the statements
of operations.
The
outstanding principal balance on the convertible note at December 31, 2016 was $170,000.
As
of August 19, 2016, the Company was 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 year ended December 31, 2016 as a result of the default. Accrued interest on this note is $23,667
as of December 31, 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 was payable upon the Company raising $500,000 in a qualified offering (as defined therein).
The remaining balance was 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 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 December 31, 2016 and 2015 was $82,500 and $200,000, respectively.
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 year ended December 31, 2016, the Company paid the remaining
note principal of $113,993 in full.
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 December 31, 2016, the loan was paid
in full.
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, including interest starting on January 3, 2016. As of December 31, 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 December 31, 2016 was $1,000,000.
The principal balance on the note as of the date of this filing was $1,000,000.
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 December 31, 2016 and
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 December 31, 2016 and
2015, the Company has 17,074,470 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 August 19, 2015, we agreed to issue an investor 25,000 shares of our common
stock for certain due diligence and other transaction related costs.
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 cashless exercise of warrants
On
June 17, 2015, a warrant holder elected their cash-less exercise provision and exercised 3,750 warrants. Accordingly, the Company
issued 1,874 shares of common stock in connection with such exercise.
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.
As
part of a debt modification entered into on October 21, 2016, the Company agreed to issue an investor 30,000 shares of our common
stock.
Common
stock issued for services
On
April 1, 2015, 20,000 restricted shares were granted to a certain employee with a fair value of $20,000. The restricted shares
vest over a one year period - 25% three months from the date of issue and the remaining shares vesting quarterly until the end
of the term. The Company has recorded $15,000 in stock-based compensation expense for the year ended December 31, 2015 for the
shares that have vested, which is a component of general and administrative expenses in the Consolidated Statement of Operations.
During
the year ended December 31, 2015, 210,000 shares of common stock valued at $211,000 were issued for professional services provided
to the Company.
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.
On
December 31, 2016, 1,500 shares of common stock were granted to a certain employee with a fair value of $585.
During
the year ended December 31, 2016, 1,038,444 shares of common stock valued at $646,385 were issued to various consultants for professional
services provided to the Company.
As
discussed in Note 11, 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 year ended December 31, 2015, the Company sold 118,182 shares of common stock to investors in exchange for $130,000 in gross
proceeds in connection with the private placement of the Company’s stock.
In connection with the private placement
the Company incurred placement agent fees of $16,900. In addition, 11,818 five year warrants with an exercise price of $1.10 were
issued to the placement agent. The Company valued the warrants at $5,257 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.
During
the year ended December 31, 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 placement agent fees of $245,305 and legal fees of $50,000. 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.
2016
Incentive Stock Option Plan
On
October 4, 2016, the Board approved the Sports Field 2016 Incentive Stock Option Plan (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.
The
2016 Plan shall be administered by a committee consisting of two or more independent, non-employee and outside directors (the
“Committee”). In the absence of such a Committee, the Board shall administer the 2016 Plan. The 2016 Plan is currently
being administered by the Board.
Options
are subject to the following conditions:
(i)
The Committee determines the strike price of Incentive Options at the time the Incentive Options are granted. The assigned strike
price must be no less than 100% of the Fair Market Value (as defined in the Plan) of the Company’s Common Stock. In the
event that the recipient is a Ten Percent Owner (as defined in the Plan), the strike price must be no less than 110% of the Fair
Market Value of the Company.
(ii)
The strike price of each Non-qualified Option will be at least 100% of the Fair Market Value of such share of the Company’s
Common Stock on the date the Non-qualified Option is granted.
(iii)
The Committee fixes the term of Options, provided that Options may not be exercisable more than ten years from the date the Option
is granted, and provided further that Incentive Options granted to a Ten Percent Owner may not be exercisable more than five years
from the date the Incentive Option is granted.
(iv)
The Committee may designate the vesting period of Options. In the event that the Committee does not designate a vesting period
for Options, the Options will vest in equal amounts on each fiscal quarter of the Company through the five (5) year anniversary
of the date on which the Options were granted. The vesting period accelerates upon the consummation of a Sale Event (as defined
in the Plan).
(v)
Options are not transferable and Options are exercisable only by the Options’ recipient, except upon the recipient’s
death.
(vi)
Incentive Options may not be issued in an amount or manner where the amount of Incentive Options exercisable in one year entitles
the holder to Common Stock of the Company with an aggregate Fair Market value of greater than $100,000.
Awards
of Restricted Stock are subject to the following conditions:
(i)
The Committee grants Restricted Stock Options and determines the restrictions on each Restricted Stock Award (as defined in the
Plan). Upon the grant of a Restricted Stock Award and the payment of any applicable purchase price, grantee is considered the
record owner of the Restricted Stock and entitled to vote the Restricted Stock if such Restricted Stock is entitled to voting
rights.
(ii)
Restricted Stock may not be delivered to the grantee until the Restricted Stock has vested.
(iii)
Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of except as provided in
the Plan or in the Award Agreement (as defined in the Plan).
Stock
options issued for services
During
the year ended December 31, 2015, the Company's board of directors authorized the grant of 430,000 stock options, having a total
fair value of approximately $171,881, with a vesting period ranging from 1.00 year to 1.84 years. These options expire between
January 29, 2020 and August 27, 2020.
On
January 4, 2016, the Company issued a board member 200,000 common stock options for services, having a total fair value of approximately
$97,500, with a vesting period of 2.00 years. These options expire on January 4, 2021.
On
November 3, 2016, the Company issued our CEO 175,000 common stock options for services, having a total fair value of approximately
$30. 100,000 of the options vested immediately and 75,000 of the options vest on December 31, 2016. These options expire on November
3, 2021.
On
November 3, 2016, the Company issued Nexphase Global 175,000 common stock options for services, having a total fair value of approximately
$613. 100,000 of the options vested immediately and 75,000 of the options vest on December 31, 2016. These options expire on November
3, 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 Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Risk free interest rate
|
|
|
1.26-1.73
|
%
|
|
|
1.47-1.83
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
40%
- 45
|
%
|
|
|
44%
- 45
|
%
|
Expected life in years
|
|
|
2.5
- 5
|
|
|
|
5
|
|
Forfeiture Rate
|
|
|
0.00
|
%
|
|
|
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 years ended December 31, 2016 and 2015:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
Outstanding - December 31, 2014
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Granted
|
|
|
430,000
|
|
|
|
1.03
|
|
|
|
5.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding - December 31, 2015
|
|
|
430,000
|
|
|
$
|
1.03
|
|
|
|
4.36
|
|
Exercisable - December 31, 2015
|
|
|
172,500
|
|
|
$
|
1.07
|
|
|
|
4.26
|
|
Granted
|
|
|
550,000
|
|
|
|
1.39
|
|
|
|
4.95
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
(7,500
|
)
|
|
|
1.50
|
|
|
|
-
|
|
Outstanding - December 31, 2016
|
|
|
972,500
|
|
|
$
|
1.23
|
|
|
|
4.00
|
|
Exercisable - December 31, 2016
|
|
|
847,500
|
|
|
$
|
1.26
|
|
|
|
4.02
|
|
At
December 31, 2016 and 2015, the total intrinsic value of options outstanding was $0 and $40,000, respectively.
At
December 31, 2016 and 2015, the total intrinsic value of options exercisable was $0 and $15,000, respectively.
Stock-based
compensation for stock options has been recorded in the consolidated statements of operations and totaled $141,204 for the year
ended December 31, 2016 and $63,084 for the year ended December 31, 2015. As of December 31, 2016, the remaining balance of unamortized
expense is $63,724 and is expected to be amortized over a remaining period of 0.75 years.
Stock
Warrants
The
following is a summary of the Company’s stock warrant activity during the years ended December 31, 2016 and 2015:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
Outstanding - December 31, 2014
|
|
|
500,000
|
|
|
$
|
1.00
|
|
|
|
4.09
|
|
Granted
|
|
|
11,818
|
|
|
|
1.10
|
|
|
|
5.00
|
|
Exercised
|
|
|
(3,750
|
)
|
|
|
-
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding - December 31, 2015
|
|
|
508,068
|
|
|
$
|
1.00
|
|
|
|
3.13
|
|
Exercisable - December 31, 2015
|
|
|
508,068
|
|
|
$
|
1.00
|
|
|
|
3.13
|
|
Granted
|
|
|
171,520
|
|
|
|
1.10
|
|
|
|
5.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding - December 31, 2015
|
|
|
679,588
|
|
|
$
|
1.03
|
|
|
|
2.66
|
|
Exercisable - December 31, 2015
|
|
|
679,588
|
|
|
$
|
1.03
|
|
|
|
2.66
|
|
At
December 31, 2016 and 2015, the total intrinsic value of warrants outstanding and exercisable was $0 and $49,625, respectively.
NOTE
9 – RELATED PARTY TRANSACTIONS
Sports
Field Contractors LLC, a subsidiary of the Company, is a grantor under a commercial security agreement issued in favor of Illini
Bank, as lender, by The AllSynthetic Group, Inc., as borrower, on November 26, 2012, in connection with a loan made
by Illini Bank to The AllSynthetic Group, Inc. in the amount of $249,314 (the “Illini Loan”). Jeremy Strawn,
a former officer of the Company, executed the Illini Loan on behalf of The AllSynthetic Group, Inc. in his capacity as such company’s
President/CEO. The Illini Loan appears to have matured on November 26, 2013 and appears to currently be in default.
The Illini Loan is collateralized by all of the assets of Sports Field Contractors LLC; however, because Sports Field Contractors
LLC is an inactive subsidiary of the Company and had no assets at December 31, 2016, the Company believes that it does not have
any financial exposure in connection with the Illini Loan.
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 $248,413
for the year ended December 31, 2016. Included in consulting expense for the year ended December 31, 2016 were 40,000 shares of
common stock valued at $27,800, and 175,000 common stock options valued at $613 issued to Nexphase Global.
Consulting
expenses pertaining to the firm’s services were $161,000 for the year ended December 31, 2015. Included in consulting expense
for the year ended December 31, 2015 were 40,000 shares of common stock valued at $41,000 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. Mr. Tilley was issued an additional 30,000 shares of our common stock as part of a Second Waiver entered into
with Mr. Tilley on October 21, 2016.(See Note 7 - Convertible Notes - May 7, 2015 Notes).
NOTE
10 – EMPLOYEE SEPARATION
During
the year the Company was 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 claimed he was due between $24,000 and $48,000 in unpaid wages
(the “Claim”).
On
December 30, 2016, the Company entered into a mutual general release and settlement agreement (the "Settlement Agreement")
with the former employee. Pursuant to the Settlement Agreement, the Company agreed to pay the former employee $45,000, payable
in six equal installments of $7,500 on the first day of each month, beginning January 1, 2017 (the “Settlement Amount”).
The Settlement Agreement also contains a general release by the former employee of the Company relating to the Claim, such release
however is predicated on the Company making payments pursuant to the Settlement Agreement. As of December 31, 2016 the Company
had accrued a liability of $45,000 related to the Settlement Agreement which has been included in accounts payable and accrued
expenses at December 31, 2016 in the accompanying consolidated Balance Sheet.
NOTE
11 – 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 issued an additional 100,000 shares of the Company’s
common stock as per the terms of the agreement. Unvested shares are revalued at the end of each reporting period until they vest
and are expensed on a straight-line basis over the term of the agreement. The Company has recorded compensation expense relating
to the agreement of $28,361 and $61,639 during the years ended December 31, 2016 and 2015, 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 issued 62,500 shares of the Company
common stock on August 16, 2015. The contract was terminated during the second quarter of 2016. Unvested shares are revalued at
the end of each reporting period until they vest and are expensed on a straight-line basis over the term of the agreement. The
Company has recorded compensation expense relating to the agreement of $9,068 and $53,432 during the years ended December 31,
2016 and 2015, 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. The contract was terminated during the fourth quarter of 2016. Unvested shares are revalued at the end of each
reporting period until they vest and are 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 $98,506 during the year ended December 31, 2016.
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 $8,397 during the year ended December 31, 2016.
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. The contract was terminated during
the fourth quarter of 2016. Unvested shares are revalued at the end of each reporting period until they vest and are 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 $45,371 during the year ended December 31, 2016.
On
December 20, 2016, the Company entered into a Services Agreement with a consulting firm. The consulting firm agreed to provide
investor relations services to the Company for a period of 6 months. As compensation for the services, the Company shall pay the
consultant $6,500 per month and is obligated to issue 100,000 fully vested shares of the Company common stock to be issued within
30 days of execution of the agreement. The Company may terminate the agreement during the first 2 months of the term with or without
reason by providing 7 days written notice. The Company has recorded compensation expense relating to the equity portion of the
agreement of $8,379 during the year ended December 31, 2016.
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
|
On
November 3, 2016, the Board, pursuant to the consulting agreement, 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. 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.
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 stock based compensation relating to this agreement of $36,300 and $120,000 during the years ended December
31, 2016 and 2015, 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 are revalued at the end of each reporting period until they vest and are 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 $13,209 and $32,246 during the years ended December 31, 2016 and 2015, 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 $8,333 and $16,667 during the years ended December 31, 2016 and 2015, 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 are revalued at the end of each reporting period until they vest and are 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 $13,945
and $2,785 during the year ended December 31, 2016 and 2015, 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 are revalued at the end of each reporting period until they
vest and are 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 $73,434 and $602 during the years ended December 31, 2016 and 2015, 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 are revalued
at the end of each reporting period until they vest and are 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 $14,032 during the year ended
December 31, 2016.
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 are revalued at the end of each reporting period until they vest
and are 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 $12,687 during the year ended December 31, 2016.
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 “Olson Employment Agreement”). 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 received 250,000 shares of common
stock on January 1, 2016. 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
|
On
November 3, 2016, the Board, pursuant to the Olson Employment Agreement (as defined above), 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 the Olson 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.
Director
Agreements
On
January 29, 2015, the Company entered into a director agreement (“Director Agreement”) with Tracy Burzycki, concurrent
with Ms. Burzycki’s appointment to the Board of Directors of the Company (the “Board”) effective January 29,
2015. The Director Agreement may, at the option of the Board, be automatically renewed on such date that Ms. Burzycki is re-elected
to the Board. Pursuant to the Director Agreement, Ms. Burzycki is to be paid a stipend of $1,000 per meeting of the Board, which
shall be contingent upon her attendance at the meetings being in person, rather than via telephone or some other electronic medium.
Additionally, Ms. Burzycki received non-qualified stock options to purchase 200,000 common shares at an exercise price of $1.00
per share. The options shall vest in equal amounts over a period of two years at the rate of 25,000 shares per quarter on the
last day of each such quarter, commencing in the first quarter of 2015. The total grant date value of the options was $82,140
which shall be expensed over the vesting period.
On
August 27, 2015, the Company entered into a director agreement with Glenn Appel, concurrent with Mr. Appel’s appointment
to the Board of Directors of the Company effective August 27, 2015. The Director Agreement may, at the option of the Board, be
automatically renewed on such date that Mr. Appel is re-elected to the Board. Pursuant to the Director Agreement, Mr. Appel
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. Appel receive non-qualified
stock 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 in the
third fiscal quarter of 2015. The total grant date value of the options was $80,932 which shall be expensed over the vesting
period.
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 $28,157 during
the year ended December 31, 2016.
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 December 31, 2016
the company has recorded $156,502 of expense related to the agreement.
Placement
Agent and Finders Agreements
The
Company entered into an exclusive Financial Advisory and Investment Banking Agreement with Spartan Capital Securities, LLC (“Spartan”)
effective November 20, 2013 (the “2013 Spartan Advisory Agreement”). Pursuant to the 2013 Spartan Advisory Agreement,
Spartan will act as the Company’s exclusive financial advisor and placement agent to assist the Company in connection with
a best efforts private placement (the “2013 Financing”) of up to $5 million of the Company’s equity securities
(the “Securities”) and a reverse merger.
The
Company, upon closing of the 2013 Financing, shall pay consideration to Spartan, in cash, a fee in an amount equal to 10% of the
aggregate gross proceeds raised in the 2013 Financing. The Company shall grant and deliver to Spartan at the closing of the 2013
Financing, for nominal consideration, five year warrants (the “Warrants”) to purchase a number of shares of the Company’s
Common Stock equal to 10% of the number of shares of Common Stock (and/or shares of Common Stock issuable upon exercise of securities
or upon conversion or exchange of convertible or exchangeable securities) sold at such closing. The Warrants shall be exercisable
at any time during the five year period commencing on the closing to which they relate at an exercise price equal to the purchase
price per share of Common Stock paid by investors in the 2013 Financing or, in the case of exercisable, convertible, or exchangeable
securities, the exercise, conversion or exchange price thereof. If the Financing is consummated by means of more than one closing,
Spartan shall be entitled to the fees provided herein with respect to each such closing.
Along
with the above fees, the Company shall pay (i) a $10,000 engagement fees upon execution of the agreement, (ii) 3% of the gross
proceeds raised for expenses incurred by Spartan in connection with this 2013 Financing, together with cost of background checks
on the officers and directors of the Company and (iii) a monthly fee of $10,000 for 24 months contingent upon Spartan successfully
raising $3.5 million under the 2013 Financing.
The
Company entered into a second exclusive Financial Advisory and Investment Banking Agreement with Spartan Capital Securities, LLC
(“Spartan”) effective October 1, 2015 (the “2015 Spartan Advisory Agreement”). Pursuant to the 2015 Spartan
Advisory Agreement, Spartan will act as the Company’s exclusive financial advisor and placement agent to assist the Company
in connection with a best efforts private placement (the “2015 Financing”) of up to $3.5 million or 3,181,819 shares
(the “Shares”) of the common stock of the Company at $1.10 per Share. Spartan shall have the right to place up to
an additional $700,000 or 636,364 Shares in the 2015 Financing to cover over-allotments at the same price and on the same terms
as the other Shares sold in the 2015 Financing. The 2015 Spartan Advisory Agreement expires on January 1, 2019.
The
Company, upon closing of the 2015 Financing, shall pay consideration to Spartan, in cash, a fee in an amount equal to 10% of the
aggregate gross proceeds raised in the 2015 Financing. The Company shall grant and deliver to Spartan at the closing of the 2015
Financing, for nominal consideration, five year warrants (the “Warrants”) to purchase a number of shares of the Company’s
Common Stock equal to 10% of the number of shares of Common Stock (and/or shares of Common Stock issuable upon exercise of securities
or upon conversion or exchange of convertible or exchangeable securities) sold at such closing. The Warrants shall be exercisable
at any time during the five year period commencing on the closing to which they relate at an exercise price equal to the purchase
price per share of Common Stock paid by investors in the 2015 Financing or, in the case of exercisable, convertible, or exchangeable
securities, the exercise, conversion or exchange price thereof. If the 2015 Financing is consummated by means of more than one
closing, Spartan shall be entitled to the fees provided herein with respect to each such closing. (See Note 8 sale of common stock).
Along
with the above fees, the Company shall pay (i) $15,000 engagement fees upon execution of the agreement, (ii) 3% of the gross proceeds
raised for expenses incurred by Spartan in connection with this Financing, together with cost of background checks on the officers
and directors of the Company, (iii) a monthly fee of $10,000 for 4 months for the period commencing October 1, 2015 through January
1, 2016; and contingent upon Spartan successfully raising $2.0 million under the 2015 Financing (iv) a monthly fee of $5,000 for
6 months for the period commencing February 1, 2016 through July 1, 2016; (v) a monthly fee of $7,500 for 6 months for the period
commencing August 1, 2016 through January 1, 2017; (vi) a monthly fee of $10,000 for 12 months for the period commencing February
1, 2017 through January 1, 2018; (vii) a monthly fee of $13,700 for 12 months for the period commencing February 1, 2018 through
January 1, 2019. The obligation to pay the monthly fee shall survive any termination of this agreement.
As
of December 31, 2016 and 2015, Spartan was owed fees of $0 and $17,500, respectively.
Litigation
On
May 5, 2014, Sports Field was named as a defendant in a civil lawsuit in the Circuit Court of the Seventh Judicial Circuit in
Sangamon County, Illinois (“the Court”). Sallenger Incorporated, as plaintiff, is making certain claims against the
Company in connection with a mechanics lien and for unjust enrichment. The matter was settled on December 18, 2014. The Company
agreed to pay Sallenger a total of $210,000, with $50,000 upfront and $16,000 per month for ten months thereafter. As of December
31, 2015, the settlement was paid in full.
On
October 21, 2015, the Company and East Point Crossing, LLC (the “Landlord”) entered into a settlement and release
agreement (the “East Point Settlement Agreement”). Whereas, on April 15, 2013, the Company and the Landlord entered
into a lease agreement for office space in Massachusetts (the “Lease Agreement”). In October 2014, the Company vacated
the office space and on August 24, 2015 the Landlord filed a complaint against the Company for non-payment of rent and breach
of other covenants, conditions and obligations of the Lease Agreement (the “Lease Litigation”). Pursuant to the East
Point Settlement Agreement, the Company and the Landlord agreed to the following: a settlement payment in the amount of $12,943
to be paid in 2 payments within 60 days (the “Settlement Amount”); transfer of all right, title and interest in and
to the furniture, fixtures and equipment in the premises to Landlord; and forfeiture of the last month’s rent and security
deposit held by the Landlord. Upon performance of the obligations set forth in the East Point Settlement Agreement, the Landlord
releases and forever discharges the Company from any and all claims and causes of action, excepting only claims arising out of
third-party liability claims. The Settlement Amount was paid in full as of December 31, 2015.
On
December 17, 2015, the Company and 308, LLC (the “Parties”) entered into a settlement and release agreement (the “Settlement
Agreement”). Whereas, on April 15, 2013, the Parties entered into a non-exclusive patent license agreement for use of 308,
LLC’s patented design synthetic turf base (the “License Agreement”). A dispute arose between the parties concerning
the License Agreement and on September 25, 2015 308, LLC filed a complaint against the Company for breach of the License Agreement
(the “Litigation”). Pursuant to the Settlement Agreement, the Parties wish to mutually terminate the License Agreement
and to dismiss the Litigation. As mutual consideration for entering into the Settlement Agreement the Company assigned title and
ownership of various fabrication molds held by the Company to 308,LLC and 308, LLC wrote down to $0 all past due royalties and/or
any other amounts owed pursuant to the License Agreement. As a result, the Company recorded a disposal of fabrication molds having
a net book value of $59,983 and a termination of royalties due on the License Agreement totaling $104,815, resulting in a gain
on disposition of fabrication molds of $44,832.
During the year the Company was 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
claimed he was due between $24,000 and $48,000 in unpaid wages (the “Claim”).
On December 30, 2016, the Company entered
into a mutual general release and settlement agreement (the "Settlement Agreement") with the former employee. Pursuant
to the Settlement Agreement, the Company agreed to pay the former employee $45,000, payable in six equal installments of $7,500
on the first day of each month, beginning January 1, 2017 (the “Settlement Amount”). The Settlement Agreement also
contains a general release by the former employee of the Company relating to the Claim, such release however is predicated on
the Company making payments pursuant to the Settlement Agreement. As of December 31, 2016 the Company had accrued a liability
of $45,000 related to the Settlement Agreement which has been included in accounts payable and accrued expenses at December 31,
2016 in the accompanying consolidated Balance Sheet.
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. In February 2017, the Company was informed by NexxField that it had settled its dispute
with Brock. The Company was never named as a defendant in Brock’s patent infringement action and believes this matter to
be resolved with no adverse effects to its business.
Operating
Leases
On
April 1, 2014, the Company entered into a new lease agreement for its office space in Massachusetts. The lease commenced on that
date and expires on March 31, 2017. The lease has minimum monthly payments of $2,115, $2,151 and $2,188 for year one, two and
three, respectively. The Company was required to pay a security deposit to the lessor totaling $6,417. In October 2014, the Company
vacated the office space and subsequently defaulted on the lease. (See Litigation above).
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 three months 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
December 31, 2016 was immaterial.
Rent
expense was $14,908 and $33,215 for the years ended December 31, 2016 and 2015, respectively.
NOTE
12 – INCOME TAXES
Per
FASB ASC 740-10, disclosure is not required of an uncertain tax position unless it is considered probable that a claim will be
asserted and there is a more-likely-than-not possibility that the outcome will be unfavorable. Using this guidance, as of December
31, 2016, the Company has no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.
The Company's 2016, 2015, 2014, 2013 and 2012 Federal and State tax returns remain subject to examination by their respective
taxing authorities. Neither of the Company's Federal or State tax returns are currently under examination.
Components
of deferred tax assets are as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current deferred tax asset:
|
|
|
|
|
|
|
Stock based compensation
|
|
$
|
496,900
|
|
|
$
|
97,000
|
|
Accrual to cash method accounting items
|
|
|
1,135,700
|
|
|
|
525,100
|
|
Less valuation allowance
|
|
|
(1,632,600
|
)
|
|
|
(622,100
|
)
|
Net current deferred tax asset
|
|
|
-
|
|
|
|
-
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
Expected income tax benefit from NOL carry-forwards
|
|
|
2,332,300
|
|
|
|
2,077,100
|
|
Less valuation allowance
|
|
|
(2,332,300
|
)
|
|
|
(2,077,100
|
)
|
Net non-current deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Income
Tax Provision in the Consolidated Statements of Operations
A
reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income
taxes is as follows:
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
U.S. statutory federal tax rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal tax benefit
|
|
|
(2.6
|
)%
|
|
|
(3.5
|
)%
|
|
|
|
|
|
|
|
|
|
Shares issued for services
|
|
|
9.4
|
%
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
Shares issued in a separation agreement
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
Tax rate change
|
|
|
(0.9
|
)%
|
|
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
Deferred tax true-up
|
|
|
(8.1
|
)%
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
Other permanent differences
|
|
|
1.9
|
%
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
34.3
|
%
|
|
|
19.0
|
%
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Income
Tax Provision in the Consolidated Statements of Operations
A
reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income
taxes is as follows:
Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
reverse. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in the Consolidated Statement
of Operations in the period that includes the enactment date.
The Company has
available at December 31, 2016 unused federal and state net operating loss carry forwards totaling approximately $6.16 million
that may be applied against future taxable income that expire through 2025. Management believes it is more likely than not that
all of the deferred tax asset will not be realized. A valuation allowance has been provided for the entire deferred tax asset.
The valuation allowance increased approximately $1,265,700 and $643,500 for the years ended December 31, 2016 and 2015, respectively.
NOTE
13 – SUBSEQUENT EVENTS
Subsequent
to December 31, 2016, 20,613 shares of common stock were issued to consultants for professional services provided to the Company.
F-29