PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K, press releases and certain information
provided periodically in writing or verbally by our officers or our agents contain statements which constitute forward-looking
statements. The words “may”, “would”, “could”, “will”, “expect”, “estimate”,
“anticipate”, “believe”, “intend”, “plan”, “goal”, and similar expressions
and variations thereof are intended to specifically identify forward-looking statements. These statements appear in a number of
places in this Form 10-K and include all statements that are not statements of historical fact regarding the intent, belief or
current expectations of us, our directors or our officers, with respect to, among other things: (i) our liquidity and capital resources,
(ii) our financing opportunities and plans, (iii) our ability to attract customers to generate revenues, (iv) competition in our
business segment, (v) market and other trends affecting our future financial condition or results of operations, (vi) our growth
strategy and operating strategy, and (vii) the declaration and/or payment of dividends.
Investors and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results
may differ materially from those projected in the forward-looking statements as a result of various factors. Factors that might
cause such differences include, among others, those set forth in Part II, Item 7 of this annual report on Form 10-K, entitled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”, and including without limitation the “Risk
Factors” section contained in Part I, Item 1A. Except as required by law, we undertake no obligation to update any of the
forward-looking statements in this annual report on Form 10-K after the date hereof.
Readers of this annual report on Form 10-K should note that, in
order to provide materially relevant disclosure regarding certain of Findex’s historical, operational expenses not otherwise
appropriately accounted for in our consolidated financial statements given the applied accounting treatment described elsewhere
in this annual report on Form 10-K, certain disclosure is contained in the text of this report relating to such expenses, including
e.g.
executive compensation, director compensation, and audit fees, that does not numerically align with the corresponding
figures contained in our consolidated financial statements.
ITEM 1. BUSINESS.
OVERVIEW
Findex.com,
Inc. is headquartered in Lake Park, Florida with its base of business operations co-located in the same facility. The Company is
currently comprised of EcoSmart and a consolidated variable interest entity, Advanced Nanofibers, LLC. EcoSmart has historically
been the driver of both operating overhead and revenue. EcoSmart, was acquired by us in a merger in 2014 and centers around a proprietary
line of specialty materials coatings that have a broad range of value-adding industrial, commercial, residential and consumer applications.
Advanced Nanofibers, LLC is a variable interest entity. During the fourth quarter of 2016 management determined the Company was
the primary beneficiary of Advanced, and consolidated those operations in accordance with U.S. GAAP. The Company currently owns
a minority 23.88% interest in Advanced, which is a Florida-based, nano-technology firm founded in mid-2016 by the Company and two
other technology firms. This collaborative joint venture is focused on globally broadening the industrial utilization of nanoparticle-enhanced
nanofibers across a diverse range of mass-market industrial and consumer applications. Despite our lack of corporate control over
Advanced Nanofibers, and its lack of revenue to date, it is a venture that our management has been and continues to be very actively
involved in developing, and that is increasingly consuming a greater percentage of our financial and human resources, a trend management
expects to continue into the foreseeable future.
ECOSMART
Our core business is centered around a line of specialty industrial
glass-based “smart surface” coatings that have a wide range of uses across each of the industrial, commercial, and
household market segments and that are centered around a U.S. patented technology that, either on its own or when coupled with
any of an array of available proprietary formula additives, offers a unique combination of beneficial surface properties that allow
for a broad array of multi-surface and end-product applications. Among others, such applications include:
|
▪
|
Heavy Construction Equipment/Vehicles
|
|
▪
|
Oil and Gas Drilling and Related Heavy Equipment
|
|
▪
|
Industrial and Residential HVAC Equipment, Commercial Refrigeration Systems, and Power Generators
|
|
▪
|
Interior and Exterior Flooring and Tiling, Pavers and Hardscapes
|
Over time, EcoSmart intends to develop itself in the strategic direction
of becoming a leading research-oriented high-tech specialty “smart-surface” materials development and licensing company
centered around a highly-qualified research team and state-of-the-art research lab and applying a combination of organic and inorganic
chemistries, materials science engineering, and nanotechnology. EcoSmart currently has expertise and capabilities in each of these
areas.
Products
Broadly viewed, the surface is an integral aspect of virtually every
physical object and often plays a fundamental role in many of the processes, beyond mere connectivity and structural support, that
govern chemical and biological interactions involving the product. In some instances, the surface serves to protect the internal
elements of the object that it surrounds; in others, it provides an entry point into those chemical or biological systems. In most,
combinations of these attributes are present, and the potential variations are both vast in number and complex in structure.
Our
specialty coatings business produces, markets, and distributes a line of effectively invisible glass-based specialty coatings –
“smart surfaces” – that have a wide range of industrial, commercial, and household applications that add a competitive
advantage to a given product or surface through a variety of protective and other features. Conventional coatings, which are bonded
by mechanical means to whatever surface they are applied to, tend to fail, ultimately, in the bonding to the substrate, typically
due to poor surface preparation or variation of temperature exposures. Uniquely, EcoSmart’s products consist of inorganic
and organic combinatorial chemistry that causes them to bond chemically with the substrate, whether metal, cement-based, or organic
(e.g. plastics). By utilizing covalent bonding that penetrates into the substrate and reacts directly with the free ion within,
the otherwise resulting disbondment is avoided. The result is a much longer lasting and stronger coating, and, in turn, a longer
life for the substrate that has been treated.
With an addition of only 50 millionths to 2 thousandths of an inch
in surface thickness (depending on which product is used), no loss of either hardness, on the one hand, or pliability, on the other,
and no reduction in photon (light) penetration, the patented platform technology, either on its own or when coupled with any of
an array of available proprietary formula additives, offers the following unique combination of beneficial protective, maintenance-reducing,
performance-enhancing and cosmetically-enhancing properties to most surfaces, including metals, plastics, paints, fabrics, vinyl,
wood, masonry, or concrete, in each case without regard to temperature, climate or most other environmental conditions, without
hazard to either human, animal or plant health/life, and for a period of up to as many as approximately 15-20 years:
Protective Benefits
|
|
Against Physical Surface Damage
|
|
Against Surface Appearance / Cosmetic Degradation
|
|
▪
|
Resistant to Abrasion / Scratching
|
|
▪
|
Resistant to Dust / Dirt / Grime
|
|
▪
|
Resistance to Corrosion
|
|
▪
|
Resistant to Staining
|
|
▪
|
Resistant to Oxidation
|
|
▪
|
Resistant to Color Fading
|
|
▪
|
Resistant to (Effects of) Weather / Elements
|
|
▪
|
Resistant to Fingerprints
|
|
▪
|
Resistant to (Effects of) UV
|
|
▪
|
Resistant to Marking / Graffiti
|
|
▪
|
Resistant to (Effects of) All But Most Extreme Alkaline or Acidic Chemicals
|
|
▪
|
Oleophobic (Oil-Repellent)
|
|
▪
|
Resistance to (Effects of) Acid Rain
|
|
|
|
|
▪
|
Resistance to (Effects of) Guano (excrement of birds, bats, seals, etc.)
|
|
|
|
|
▪
|
Resistance to Termite Infestation
|
|
|
|
|
|
|
|
|
|
|
Against Human Health Risks / Contagion
|
|
Against Human Physical / Safety Risks
|
|
▪
|
Resistant to Bacterial Growth / Germs (sometimes referred to as “Self-Sterilizing”)
|
|
▪
|
Slip-Resistant When Wet
|
|
▪
|
Resistant to Mold / Fungal Spore Growth
|
|
|
|
|
▪
|
Resistant to Small and Large Viruses
|
|
|
|
Maintenance-Reducing (So-Called “Self-Cleaning”)
Benefits
|
▪
|
Hydrophobic (Water-Repellent)
|
|
▪
|
Oleophobic (Oil-Repellent)
|
|
▪
|
Resistant to Dust / Dirt / Grime
|
|
▪
|
Rinses Cleans with Only Water and/or Mild Detergent
|
Performance-Enhancing Benefits
|
▪
|
Improved Hydrodynamics / Drag Reduction / Fuel Efficiency
|
|
▪
|
Improved Aerodynamics / Drag Reduction / Fuel Efficiency
|
|
▪
|
Energy Efficiency
|
Cosmetically-Enhancing Benefits
|
▪
|
Enhanced Color Clarity
|
|
▪
|
Enhanced Gloss / Sheen
|
|
▪
|
Enhanced Reflection
|
Applications
and Markets
With the extraordinary array of beneficial properties identified
above, certain but not all of which have been independently lab-tested and verified, the range of potential applications of our
specialty coatings is notably far-reaching, spanning across numerous industrial, commercial, and household segments. While we are
currently focusing our pursuit on only several of these potential applications, and there can be no assurance that we will ever
pursue any one or more of the others, we have identified the following as potential markets, among others, to be explored and possibly
pursued over time:
|
▪
|
Heavy Construction Equipment/Vehicles
|
|
▪
|
Oil and Gas Drilling and Related Heavy Equipment
|
|
▪
|
Marine Vessels and Fixtures/Infrastructure
|
|
▪
|
Industrial and Residential HVAC Equipment, Commercial Refrigeration Systems and Power Generators
|
|
▪
|
Interior and Exterior Flooring and Tiling, Pavers and Hardscapes
|
|
▪
|
Residential, Commercial, and Industrial Building/Construction
|
|
▪
|
Sewage and Highway Infrastructure, Bridges
|
|
▪
|
Solar Panels, Reflectors and Heliostats
|
|
▪
|
Wind Turbines
|
|
▪
|
Desalination and Potable Water Systems
|
To date, we have not commissioned or otherwise undertaken or obtained
any comprehensive market study in respect of any one or more of the above-listed potential product applications. Our immediate-
and near-term focus is on the following four, unrelated applications, each of which has been selected based on management’s
combined assessment of (i) the relative size, age and projected growth trend of the subject market, (ii) experience, observational/anecdotal
intelligence, and testing results previously obtained in relation to the application, (iii) the relative strength of the value
proposition to prospective customers, (iv) the comparative time-to-market, (v) the comparative cost-to-market coupled with existing
industry relationships and available resources, (vi) the relative geographic accessibility of the market, (vii) the seasonality
of the market, if any, (viii) the relative barriers-to-entry within the market, (ix) the relative, projected length of the particular
sales cycle, (x) the projected gross profit margins, (xi) both the presence within the subject market, together with the relative
quality, of competitive products, and (xii) the relative size and strength of the individual competitors:
|
▪
|
Heavy Construction Equipment/Vehicles
|
|
▪
|
Oil and Gas Drilling and Related Heavy Equipment
|
|
▪
|
Industrial and Residential HVAC Equipment, Commercial Refrigeration Systems and Power Generators
|
|
▪
|
Interior and Exterior Flooring and Tiling, Pavers and Hardscapes
|
Heavy Construction Equipment/Vehicles.
This is the market segment application involving foundational heavy
terrain construction equipment fleets and
individual units. It comprises a wide range of vehicles including gators, bulldozers,
excavators, dump trucks, cement mixers, and other, similar types of equipment. This is the market segment application surrounding
a vast array of opportunities to sell certain of our coatings to prevent rust, oxidation, corrosion and abrasion breakdown in the
heavy construction industry. We believe that our coatings could result in notably significant savings in maintenance costs as well
as extended life for these types of equipment/vehicles used in these highly corrosive environments.
|
Oil
and Gas Drilling, Mining and Related Heavy Equipment.
This is the market segment application surrounding a vast array
of opportunities to sell certain of our coatings to prevent rust, oxidation, corrosion and abrasion breakdown in the oil, gas and
mining industries. We believe that our coatings could result in notably significant savings in maintenance costs as well as extended
life for equipment, tools, and infrastructure used in these highly corrosive environments. In this market segment, our coatings
could be used as protective pipe linings
and as protective coating on storage tanks, micro-turbines, hydraulic systems, fleet vehicles,
rail cars and shipping containers. According to recent industry reports, and with industrial coatings generally comprising more
than approximately a third of the worldwide aggregate coatings market, the oil and gas segment is one viewed by us as holding the
greatest growth potential. Based on the preliminary results of early-stage field and lab tests being conducted by prospective customers,
and though there can be no assurance, management believes the effectiveness of its products for this purpose is already higher
than many competing products, and that the market and demand for these products is potentially very significant. We are aggressively
targeting this application based on a combination of all of the factors identified above, and, to date, we have been pursuing potential
distribution opportunities through select industry operators.
|
|
Industrial
and Residential HVAC Equipment, Commercial Refrigeration Systems, and Power Generators.
This
is the market segment application consisting of coatings for HVAC and commercial refrigeration systems intended to serve as protection
from corrosion, including in salt water, acid, alkaline and chemical environments, and from clogging by particles of mold, pollen,
dust, and soot. Substantial testing in this area by a variety of industry participants has shown that there is a significant efficiency
loss factor on HVAC units due to natural oxidation and the restricted airflow resulting from dirt build-up on the condenser coils.
With a product that repels moisture and contaminants, offers increased operating/energy efficiency of 12-15% over the life of a
subject condensing unit, and substantially reduced cleaning requirements generally, management believes a significant opportunity
exists for the Company within this market. Accordingly, we have targeted this application based on a combination of all of the
factors identified above and are currently in the process of pursuing a strategic marketing plan aimed at this segment.
|
Interior
and Exterior Flooring and Tiling, Pavers and Hardscapes.
This
is the market segment defined by us to include applications involving surfaces consisting of pavers, poured and stamped concrete,
natural stone, brick, and ceramic tile. It has been targeted based on a combination of all of the factors identified above, with
a particular emphasis on (i) geographic accessibility to the regional market of South Florida, in which the Company maintains its
executive offices and principal operations, and (ii) relative ease of installation. At a competitive price point, the Company’s
products offer this market a high-grade, functional alternative to comparatively under-performing water-based hardscape sealants,
and one with numerous unique, secondary benefits. The marketing and sales strategy being applied by us is a dual-pronged approach
aimed at manufacturers of primary materials, on the one hand, and contractor installers, on the other. Our latest entrant into
this market is a competitively priced, single-part application paver coating that features greater ease-of-use than many comparable
and competing products.
|
In general, though not necessarily across all segments, we intend
to pursue a strategic approach to identify market opportunities that rely on master distribution arrangements within individual
product/application industry verticals. An emphasis is being made in the immediate-term on the establishment of such master distribution
relationships with prospective sellers that already have in place an industrial customer-base with the greatest likelihood of benefitting
from our product(s) and, ideally, without there being an appreciable lag-time in customer adoption of our product because of it
effectively serving as an available upgrade to their existing offerings.
For purposes of development, competitive analysis, and prioritizing
sales initiatives and resource deployment, we view our specialty coatings business in terms of numerous individual markets identified
in each case by reference to the particular combination of our product, on the one hand, and targeted surface and application,
on the other. While our complete line of individual specialty coatings products includes more than fifteen separate formulations,
the following list identifies some of our largest selling products, by name, together with their respective primary targeted surfaces
and application categories, as well certain information in each case relating to their unique benefits in relation to the target
application.
Product Name:
|
|
ECT-1090 Metal Coating
|
Primary Targeted Surfaces:
|
|
Steel and other metal substrates
|
Primary Target Application Categories:
|
|
industrial equipment
|
Featured Properties For Target Application:
|
|
extreme protection against oxidation, microbial intrusion, chemical corrosion, and ultra violet degradation; friction across the coated surface decreases on average of 18-20%, resulting in an increased durability and longevity of the coated surface; demonstrates an increased flow rate of both liquid and gaseous substances across its surface versus a metal surface that is not coated, resulting, among other things, in making the coated surface very easy to keep clean
|
* * *
Product Name:
|
|
ECT-1110 Interior Coating
|
Primary Targeted Surfaces:
|
|
indoor tile, masonry, paint, cement, plastics, fabric, flame-exposed, cryogenic
|
Primary Target Application Categories:
|
|
interior flooring and tiling
|
Featured Properties For Target Application:
|
|
hydrophobic (water-repellent) and oleophobic (oil-repellent); slip-resistant when wet; protective barrier at all temperatures resistant to abrasion/scratching, corrosion, oxidation, microbials, (effects of) weather/elements, UV, guano, acid rain, staining, color fading, mold/fungal spore growth
|
* * *
Product Name:
|
|
ECT-1390 HVAC Anti-Corrosion Energy Coating
|
Primary Targeted Surfaces:
|
|
all surfaces of condensing unit, including coils, copper lines, compressor and cabinet
|
Primary Target Application Categories:
|
|
HVAC, refrigeration condensing units, cooling towers, and other HVAC equipment
|
Featured Properties For Target Application:
|
|
“glassifying surface treatment”; condensing unit protection from corrosion, including in salt water, acid, alkaline and chemical environments; protection from clogging by particles of mold, pollen, dust, and soot; increased operating/energy efficiency of 12-15% over life of condensing unit; reduced cleaning requirements generally, and condensing units easily cleaned with only water and/or mild soap eliminating need for caustic coil cleaners; reduced maintenance for cooling towers and chiller barrels
|
* * *
Product Name:
|
|
ECT-1000 Universal Micro-Coating
|
Primary Targeted Surfaces:
|
|
glass, mirrors, fiberglass, paints, plastics, metals, fabrics, granites
|
Primary Target Application Categories:
|
|
automotive/motorcycle/marine interior and exteriors, countertops, sunglasses, surfboards, water and snow skis
|
Featured Properties For Target Application:
|
|
ultra-thin (50 millionths of an inch) gasified glass layer version of ECT-1000 that be easily applied directly by consumers and last for 6-8 months; hydrophobic (water-repellent) and oleophobic (oil-repellent); repels dirt and dust, including brake dust; exceptional clarity on glass and mirrors by filling in microscopic voids in the surface (tests conducted by the Ford Motor Company showed improvement in the “Distinction of Image” measurement (clarity of a glossy surface) of 10% on new, and 20% on old, automotive paint); protective barrier at all temperatures resistant to abrasion/scratching, corrosion, oxidation, microbials, (effects of) weather/elements, UV, guano, acid rain, acid damage from insects, staining, color fading, mold/fungal spore growth
|
* * *
Product Name:
|
|
ECT-1470 Hardscape Coating
|
Primary Targeted Surfaces:
|
|
pavers, concrete, roofing tile, ceramic tile, and other porous surfaces
|
Primary Target Application Categories:
|
|
floors, walls, decorative panels, swimming pools
|
Featured Properties For Target Application:
|
|
able to be applied in heavy coats; hydrophobic (water-repellent) and oleophobic (oil-repellent); slip-resistant when wet; protective barrier at all temperatures resistant to abrasion/scratching, corrosion, oxidation, microbials, (effects of) weather/elements, UV, guano, acid rain, staining, color fading, mold/fungal spore growth
|
Certain
of the Science Behind Our Technology
The most unique feature shared by our coatings, and the specific
focal point of a patent held by us and considered by management to be the centerpiece of our smart surface technology, is the positive
surface charge they possess once applied. It is this positive surface charge that is responsible for their most unique and valuable
properties identified above, including the hydrophobicity, oleophobicity, microbial and fungal resistance, dust-repellance, and
the enhanced aerodynamics and hydrodynamics.
Hydrophobicity is a term largely unfamiliar to many outside scientific
circles, but that describes a quality with which most everybody has a basic familiarity. Surfaces may be characterized as either
hydrophilic or hydrophobic depending on whether or not they attract or repel water or other water-based liquids. Hydrophilic and
hydrophobic surfaces are abundant in both nature as well as in synthetic materials, and they exist both organically and inorganically
in terms of chemical composition. A hydrophilic surface
can
be wet and may adsorb water; a hydrophobic surface cannot and will not – it is compositionally incapable of becoming wet.
An example of a hydrophilic surface encountered routinely in daily life are sponges, which, of course, readily soak up whatever
water with which they come into contact, at least to the point of saturation. Hydrophobic materials and coatings, by contrast,
prevent water from pooling on their surfaces. In scientific terms, hybrophobicity is caused by surfaces that disrupt the hydrogen
bonding in water; so as to minimize the disruption in its molecular makeup, the water droplet pushes itself away from the surface
to minimize its contact area, thus becoming very tightly bound. Hydrophobic materials are generally easy to identify because water
forms into droplets upon contact with them after which they tend to roll around freely, like marbles on a flat Formica countertop,
as occurs commonly on the freshly waxed exterior of a car or recently cleaned windshield with new wiper blades. The more hydrophobic
the material (all the way up to and including so-called “superhydrophobic” surfaces), the stronger this effect, until
the water effectively floats or skims across the surface with what amounts to very low friction. Naturally occurring hydrophobic
surfaces include many species of plant leaves and flower petals, as well as many types of bird feathers and the outer body parts
of a variety of insects; the lotus leaf is among the most hydrophobic of naturally occurring hydrophobic surfaces. Synthetic hydrophobic
surfaces include such household-name brands as Scotchgard
™
™ treated fabric, Teflon
®
®
coated metal, or Rain-X
®
® coated glass.
Oleophobicity is a property very comparable to hydrophobicity, but
it relates to oil-repellancy, not water-repellancy. There are important technical differences, but, for practical and basic observational
purposes, they are very similar.
In
terms of chemistry, our platform smart surface, and the coating variations identified above for which it serves as a basis, are
inorganic, formed as they are of chemically “grown” glass. The process by which they form upon application can be likened
to the process, witnessed by many daily in science classrooms, labs, or at home with popular science kits, whereby quartz crystals
are effectively “grown” in a solution. This is important because it results in the establishment of a uniquely firm
chemical bond between the coating and the surface, far stronger than would exist through either a mechanical or light bonding (the
traditional alternatives), fundamentally setting the coatings apart from most others. When coupled with the unusually thin layer
they inhabit – approximately 50 millionths to 1-2 thousandths of an inch – the combination of properties leaves them
notably flexible, permitting their use in connection with such items as fabrics, plastics, and pliable floor-boards, yet hard,
durable, and resilient, particularly when refined with select additives.
The
additives used in our various coating formulations available to customers fall into three basic categories. In the first category
are color tints, which, in recent years, have seen major technology advancements in terms of durability, variety and depth of color,
reflectivity, and fade-resistance. We have available to us a wide range of the most advanced offerings in this regard. In the second
category are additives intended to provide increased hardness and wear-resistance. Here, too, we have access to what we believe
are some of the most superior materials available. In the third category are EPA-approved, “on-contact” mechanical
microbial germ and virus (so-called) “quat” (industrial and commercial quaternary ammonium) killers. These additives
work in such a way as to prohibit the mutation of microbials which can otherwise become resistant over time to chemical kill mechanisms
such as antibiotics and are capable of fortifying any of our coatings with additional protection against bacteria and relatively
large viruses/microbials, including, for example, Methicillin-resistant Staphylococcus Aureus (more commonly known as “MRSA),
Clostridium difficile bacterial infection (more commonly known as “C-diff”), and Influenza A virus subtype H1N1 (more
commonly known as “H1N1” or “Swine Flu”). By combining our coatings – which, based on their positive
surface charge, already powerfully discourage the growth of many of the smaller, more common viruses which can exist between active
elements of existing “on-contact” killers (such as the Norovirus, for example, a concern long plaguing the vacation
cruise ship industry) – with a quat and certain other additives available to us, a unique, broader spectrum of microbial
protection is afforded, un-matched, in the belief of the Company’s management, by any other product in anti-microbial effectiveness.
Long-Term
Strategic Direction
Although there can be no assurance, over time, we intend to progress
in the strategic direction of becoming a leading research-oriented high-tech specialty “smart-surface” materials development
and licensing company centered around a highly qualified research team and state-of-the-art research lab and applying a combination
of organic and inorganic chemistries, materials science engineering, and nanotechnology. We currently have developing expertise
and capabilities in each of these areas.
Organic chemistry is a chemistry sub-discipline involving the scientific
study of the structure, properties, and reactions of organic compounds and organic materials (i.e., matter in its various forms
that contain carbon atoms). Inorganic chemistry, by contrast, refers to the chemistry sub-discipline aimed at understanding the
synthesis and behavior of inorganic and organometallic compounds, generally focused on the silicon atom. Nanotechnology is the
creation of functional materials, devices and systems through control of matter (atoms and molecules) on the nanometer length scale
(1-500 nanometers), and exploitation of novel phenomena and properties (physical, chemical, biological, mechanical, electrical)
at that length scale. Materials science engineering has as its focus, among others, the development of new products based on materials
whose properties and behavior are controlled at the micrometer and nanometer scales, and through microfabrication technologies.
Manufacturing and Fulfillment
We currently conduct all manufacturing and fulfillment operations
on our own at our facility in Lake Park, FL. Though output capacity is currently limited, we intend to expand in-house capacity
in the near future, subject to our having available to us the requisite capital investment. The manufacturing process is comprised
largely of combining and blending raw materials and chemicals, including additives, in each case consistent with our proprietary
formulations, and bottling of final product into labeled, quart, gallon and larger containers. In general, on-hand inventory is
kept to a minimum and built up based on forecasted near-term sales.
Backlog
In general, we do not manufacture our products against a backlog
of orders and do not consider backlog to be a significant indicator of the level of future sales activity. Production and inventory
levels are based on the level of incoming orders as well as projections of future demand. Accordingly, we do not believe that backlog
information is material to an understanding of our overall business and should not be considered a reliable indicator of our ability
to achieve any particular level of revenue or other metric of financial performance.
Product Returns
Policies and Warranties
Our product returns policies and warranties differ materially based
on the type of surface to which our products are being applied as well as the anticipated performance life of the particular product.
In general, we maintain a consistent return policy relative to any
products in relation to which there is either no associated installation or, if there is an installation involved, it is one in
which we have no participation or for which we have any responsibility (as may be the case in relation to our paver application
specialty coating products). The policy under such circumstances requires that the subject products be returned unopened within
no more than 30 days of purchase, and that all shipping charges associated with the return be borne by the customer. For a period
of up to five years from purchase, a warranty is extended in such cases to customers relative to both the chemical integrity (as
represented upon sale) and the performance integrity of the coatings based on the specific characteristics of the subject product
and application, and the corresponding representations made by the Company in relation thereto.
Our returns policies and product warranties are general policies
and warranties and are subject to change in relation to any particular sale. Further, the general policies and warranties themselves
are subject to change from time to time and are likely to evolve as our operations and revenues develop.
Significant
Customers and Vendors
During the years ended December 31, 2016 and 2015, we generated
a significant portion of our revenues from certain customers as follows:
|
|
% of Total Revenues
|
Customer
|
|
2016
|
|
2015
|
Dekko Concrete
|
|
|
15.46
|
%
|
|
|
4.23
|
%
|
Infiniti Coatings, LLC.
|
|
|
14.80
|
%
|
|
|
5.32
|
%
|
Ready Mix USA, LLC.
|
|
|
13.38
|
%
|
|
|
—
|
|
During the years ended December 31, 2016 and 2015, our significant
product and chemical raw material purchases were as follows:
|
|
|
% to Total Products
|
|
|
|
2016
|
|
|
|
2015
|
|
Vendor A
|
|
|
54.73
|
%
|
|
|
46.40
|
%
|
Vendor B
|
|
|
10.05
|
%
|
|
|
—
|
|
Vendor C
|
|
|
—
|
|
|
|
16.94
|
%
|
We currently have no long-term written agreements with any of these
vendors. The payment terms are generally net 30 days, and we are not substantially dependent upon any one or more of them; all
are easily replaceable with any locally or nationally available supplier.
Research
and Development
Though a substantial and growing percentage of our operating expense,
our research and development (“R&D”) has been very modest in recent years, in real dollar terms, due to a lack
of allocable funds. The limited R&D activities that have been pursued over this period have been conducted exclusively in-house.
Our R&D objective is to leverage our unique, integrated, emerging
science capabilities to drive revenue and margin growth. Our R&D initiatives are principally focused on our strategic priority
of achieving a leadership position across the relatively higher margin, science-driven segments of the specialized coatings and
surfaces markets in which it operates by developing and refining differentiated, advanced industrial and related coatings and surface
materials. We believe that our specialized scientific expertise, together with our developing R&D program, combine to provide
us with distinctive, competitive advantages that position us to establish broad global reach over time and deep market penetration
in our market verticals.
Our EcoSmart R&D team consists of two full-time personnel and
two part-time personnel.
We continue to protect our R&D investments and assets through
pursuit of a comprehensive intellectual property strategy. See discussion under “Intellectual Property.”
Regulation
We are subject to an extensive array of stringent regulations arising
under a broad range of U.S. federal, state, local and foreign environmental, health and safety laws relating to the generation,
storage, handling, discharge, disposition and stewardship of hazardous wastes and other harmful materials. These regulations have
potential implications for us in terms of our manufacturing operations, product handling and use by customers and agents, as well
as installation processes. In this regard, we will likely have to expend substantial amounts to comply with such laws and regulations
as well as establish and maintain an evolving set of policies to minimize and control our environmental discharge and emissions.
Nevertheless, legislative, regulatory and economic uncertainties (including existing and potential laws and regulations pertaining
to climate change) may make it difficult for us to project future spending for these purposes and, if there is an acceleration
in new regulatory requirements, we may be required to expend substantial additional funds to remain in compliance.
Competition
Product performance, technology, cost effectiveness, quality and
technical and customer service are major competitive factors in the industrial coatings businesses. We are unaware of any one or
more products possessing the same combination of physical properties, and that, on the whole, offers the same array of benefits,
as its proprietary line of specialty smart surface coatings. There can be no assurance, however, that there not products under
development or already in existence and in the early stages of market introduction of which management is not yet aware. The market
for industrial and product performance coatings is extremely large, broad in scope, and consists of many different segments and
sub-segments, each of which involves a range of product applications. It is also increasingly characterized by rapidly evolving
technology. Precisely because of the wide array of beneficial properties they possess, and notwithstanding the U.S. patent held
by us on our platform smart surface technology, the specialty coatings produced and distributed by us should be viewed as competing
with other coatings products across a wide variety of the various existing market segments and sub-segments. Hydrophobic, anti-corrosion
and antimicrobial coatings, for example, are each segments in which numerous companies are aggressively competing with one another
worldwide, both in terms of technology and market share, but that, combined, represent only a minor portion of the aggregate competition
that we should be viewed as meaningfully confronting.
The competition faced by us in relation to our proprietary line
of specialty smart surface coatings includes both public and private organizations and collaborations among academic institutions
and large companies, both domestic and foreign, most of which have significantly greater experience and financial resources than
us. We expect that our most significant competitors will tend to be larger, more established companies, including many major multinational
corporations such as Akzo Nobel N.V., PPG Industries, Inc., Axalta Coating Systems, and Valspar Corporation. In general, these
companies are all developing products that, at some level or in one or more ways, compete with ours and, in addition to many existing
issued and pending patents, they have significantly greater capital and other resources available to them for research and development,
testing, seeking and obtaining any required regulatory approvals, marketing and distribution. In addition, many smaller coatings
and related nanotechnology companies have formed strategic alliances or collaborative arrangements, partnerships, and other types
of joint ventures with larger, well-established industry competitors that afford these companies’ potential research and
development and commercialization advantages, and may be aided in becoming significant competitors through rapid evolution of new
technologies. Academic institutions, governmental agencies, and other public and private dedicated research organizations are also
financing and conducting research and development activities that could result in the introduction of products directly competitive
to our own.
Intellectual Property
Patents and Licenses
The competitive environment in which we operate is largely driven
by technology, proprietary or otherwise. In general, companies in this environment seek to develop competitive advantages –
both offensive and defensive – through the obtaining and maintaining of relevant patents relating to their respective technological
advancements. As a science and technology based company, we believe that securing intellectual property is an important part of
protecting our research, and that, in particular, patent, as well as related trade secret – protection, is critical for the
new specialty coatings technologies we develop, as well as any products and processes derived through them.
By way of assignment, we currently hold a United States patent relating
to our smart surface specialty coatings technology:
Title
|
|
Awarded
|
|
Pending
|
|
Expiration
|
Method of Treating Surfaces For Self-Sterilization and Microbial Growth Resistance
|
|
X
|
|
|
|
2025
|
Over time, we intend to apply for additional patents relating to
advancements we achieve through our research and development initiatives. There can be no assurance however, that any of the patents
currently held, or any obtained in the future, will prove adequate to protect our technologies or that we will have sufficient
financial and other resources to keep others from infringing the exclusive rights we possess in relation to our technologies. The
fields in which we operate have been characterized by significant efforts by competitors to establish dominant or blocking patent
rights to gain a competitive advantage, and by considerable differences of opinion as to the value and legal legitimacy of competitors’
purported patent rights and the technologies they actually utilize in their businesses.
Because we may license our technology and products in foreign markets,
we may also seek foreign patent protection for some specific patents. With respect to foreign patents, the patent laws of other
countries may differ significantly from those of the United States as to the patentability of our products or technology.
It is possible that competitors in both the United States and foreign
countries, many of which have substantially greater resources and have made substantial investments in competing technologies,
may have applied for, or may in the future apply for and obtain, patents, which will have an adverse impact on our ability to make
and sell our products. There can also be no assurance that competitors will not infringe on our patents or will not claim that
we are infringing on their patents. Defense and prosecution of patent infringement suits, even if successful, are both costly and
time consuming. An adverse outcome in the defense of a patent infringement suit could subject us to significant liabilities to
third parties, require disputed rights to be licensed from third parties or potentially even require us to cease our operations.
Trade Secrets
Certain aspects of our know-how and technology are not patentable,
or, for strategic reasons, are best protected in the determination of management by leaving them unpatented. In this regard, trade
secrets play an important part in our intellectual property strategy, and we vigilantly seek to protect them. To protect our proprietary
position in trade secrets, we require all employees, consultants, advisors and collaborators with access to our technology to enter
into confidentiality and invention ownership agreements with us. There can be no assurance, however, that these agreements will
provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized
use or disclosure. Further, in the absence of patent protection, competitors who independently develop substantially equivalent
technology, or otherwise acquire it, may adversely impact our business. If and when we discover that any trade secrets have been
misappropriated, it is expected that we will, unless we otherwise determine for strategic or similar reasons, report the matter
to governmental authorities for investigation and potential criminal action, as appropriate. In addition, and to the extent that
we have the available financial resources, we intend to take all reasonably required measures in an effort to mitigate any potential
adverse economic impact, which may include civil actions seeking redress, restitution and/or damages based on losses sustained
by us and/or unjust enrichment by a counter-party.
We are currently in the process of evaluating our options in connection
with the registering of trademarks for our specialty coatings business, and this process is expected to be ongoing. Unlike patent
rights, ownership rights in trademarks do not expire if the trademarks are continued in use and properly protected.
ADVANCED NANOFIBERS (VARIABLE INTEREST ENTITY)
Advanced Nanofibers LLC (“Advanced”) is a variable interest entity of which the Company owned
a minority 24.875% interest at December 31, 2016. During the fourth quarter of 2016 management determined that the Company was
the primary beneficiary based on qualitative and quantitative factors, and consolidated the entity in accordance with U.S. GAAP.
Advanced is a Florida-based, nano-technology firm founded in September 2016 by the Company and two other technology firms as a
collaborative joint venture focused on globally broadening the utilization of nanoparticle-enhanced nanofibers across a diverse
range of mass-market industrial and consumer applications. Management believes the prospects for Advanced Nanofibers are extraordinary
based on the following key factors that afford it a distinct competitive advantage:
|
▪
|
An industrial end-product
that is significantly meaningfully to competitive products by virtue of a proprietary high-tech process;
|
|
▪
|
The ability to deliver that product at a
fraction of the cost for which competitive product - meaningfully inferior in quality - is available; and
|
|
▪
|
The ability to produce and deliver that product – and to facilitate its use by those handling it - in a way that meaningfully lessens the health and safety risks ordinarily associated with the handling of both nanofibers and nanoparticles.
|
As of the date of this Annual Report on Form 10-K, Advanced Nanofibers
is owned and controlled approximately 96% by its three founding entities, each of which are actively involved in its development.
In addition to the Company, this includes Nanotech Fibers LLC, a recently organized, Florida-based, closely-held, private firm
engaged in various strategic pursuits within and surrounding the nanotech and related materials industrial sector, and EnVont,
LLC, a Florida-based, venture-stage developer and marketer of proprietary nanotechnology-based materials and coatings focused on
protective thin films, smart coatings and multi-functional particles. Although it is still in a pre-revenue stage of development, our management team devotes a very significant
percentage of time to the business of Advanced Nanofibers.
Technology
EcoSmart management views Advanced Nanofiber’s platform technological
contributions as centering around:
|
▪
|
disruptive technological advances in the custom molecular bonding of nanofibers to application-specific nanoparticles
|
|
▪
|
cost-efficient production capabilities at scale, and
|
|
▪
|
materials characteristics that render them relatively safe by industry standards in terms of their production, handling and use.
|
Nanofibers
are generally recognized as any industrial fibers with diameters of less than 500 nanometers. They can be produced by melt processing,
interfacial polymerization, electro-spinning, antisolvent-induced polymer precipitation and/or electrostatic spinning. In their
raw form, they can be either polymer-based nanofibers, carbon-based nanofibers, or carbon nanotube composite nanofibers, each of
which have different properties and qualities, and corresponding advantages and disadvantages. Advanced Nanofibers is strictly
focused for the time being on product development involving polymer-based nanofibers.
Historically, the primary obstacles in significantly broadening
the use of nanofibers (all types) throughout global industry have been the following:
|
▪
|
inadequacy of materials performance, resulting from a technological inability to successfully bond nanoparticles to the surface area of host nanofibers at sufficiently high ratios to achieve the performance objectives, principally attributable to the lack of an effective process for nanoparticle dispersion;
|
|
▪
|
high cost, due to the combination of ultra-high energy requirements for production, on the one hand, and transport challenges stemming from the finished product being extremely lightweight but voluminous, on the other; and
|
|
▪
|
environmental health and safety challenges stemming from the potentially hazardous particulates emitted into the air during the production, transport and handling of these materials.
|
Because
of their relative strength-to-weight ratio, raw nanofibers can be very useful for many industrial purposes and products. The wide-scale
benefits potentially derivable by their use, however, have not historically been significant enough to justify the associated expense,
leaving adoption rates low. It has only been through the use of nanoparticle additive enhancements (e.g. silicone dioxide [SiO2],
titanium dioxide [TiO2], among many others) that the value of the underlying benefits of using nanofibers has been viewed by observers
across a wide industrial spectrum to rise to a level significant enough to fundamentally change the economics involved and support
a compelling commercial value proposition. But principally due to the lack of an effective production process at the quantum level
for dispersion of the nanoparticles throughout and among the fibers, even the use of nanoparticle additive enhancements in connection
with nanofibers has never gained the level of industrial traction many have long been projecting. Such a process, if it existed,
would ideally enable the successful bonding of a homogenuous mix of the nanoparticles to the surface area of host fibers at an
average ratio sufficiently high to achieve most recognized industrial-level performance objective thresholds.
Advanced
Nanofibers has developed a process that it believes provides a solution to each of the obstacles hindering the wide-scale incorporation
of nanofibers in industrial and consumer products. What Advanced Nanofibers is doing is expected by both ourselves and the members
of the Advanced Nanofibers senior management team to provide a technological catalyst for participants across the industrial spectrum
to finally capitalize on the potential for nanofiber-based applications and the pent-up industrial demand for the substantially
higher-quality goods that they make possible.
The
unique and compelling aspect of Advanced Nanotech’s proprietary technology is the capacity it enables to molecularly bond
performance/application-specific nanoparticle reinforcements to raw nanofibers with an end-result that – owing to extremely
high surface-to-weight ratio when compared to traditional fiber-based technologies – exhibits new and improved physical,
flexural, chemical and structural properties. Meeting the long-standing, historic challenges in this area head on, the technology
centers around a process that enables the much broader dispersibility of those nanoparticles throughout the nanofiber environment
within which the bonding process itself occurs. This is accomplished through a hybridized nanofiber surface treatment process with
dispersion properties believed by Advanced Nanofiber’s management to be superior to any previously utilized and which results
in a homogeneous mix of the nanoparticles on the fibers themselves that is comparatively, and significantly, higher than any other
that either we or the Advanced Nanofibers management team are aware.
Products
The nanoparticle-enhanced product that Advanced Nanofibers will
be producing is expected by the firm’s management to bring a new dimension to polymeric-based advanced composites. Because
of its base composition, it can be produced in a virtually limitless array of industrial application-specific varieties, to be
used either alone or in conjunction with other fibers and materials, making it an ideal host for a variety of advanced and custom
composites.
Although Advanced Nanofibers is expecting to produce only polymer-based
nanoparticle-enhanced nanofibers in the near-term (inclusive, however, of a wide variety of polymers), to the best of our knowledge,
application of the technology possessed by Advanced Nanofibers theoretically extends to both carbon and nanotube composite nanofibers
as well.
Applications and Markets
We anticipate that our nanoparticle-bonded nanofibers have a very
broad range of applications and will come to be utilized across and throughout many large global markets, including cement, building
materials, textiles, thermoplastics, steel, medical, energy and a wide range of insulation and filtration applications.
Initially
and currently, Advanced Nanofibers is focused on the global cement industry, a space within which we offer a commercially scalable
and economically viable technology platform that intelligently marries innovation and sustainability. In this opportunity-rich
domain, we are uniquely able to deliver value-added solutions by reducing emissions, cement content, and minimizing carbon footprint.
Nanoparticles, such as silicone dioxide [SiO2] and titanium dioxide [TiO2], have been found to be a very effective additive for
achieving high-performance and self-compacting concrete with improved workability and strength. The non-silica addition makes the
concrete mixes more cohesive, reducing bleeding and segregation. It also increases density, reduces porosity and improves the bond
between cement matrix and aggregates. This produces concrete that shows higher compressive and flexural strength. The addition
of nanoparticles results in denser and improved microstructure making concrete more durable and resistant to environmental degradation.
In
recent tests conducted by a highly regarded ASTM testing firm serving the U.S. cement industry, Advanced Nanofibers received certain
very positive performance data relating to its nanofiber/particle-enhanced concrete.
As the following statistical data highlight, the global cement opportunity
reflects one of the largest product markets of any kind:
|
▪
|
Approximately a USD$394 billion market worldwide in 2016, up from approximately USD$237 billion in 2011, representing an increase of roughly 40% over the past 5 years.
|
|
▪
|
According to the Portland Cement Association (PCA), a widely recognized industry group, global cement consumption is expected to have grown 3.7 percent in 2016, and progress at a roughly 4 percent rate during each of 2017 and 2018. At approximately 4.3 billion metric tons in 2014, such consumption shall have exceeded the 5 billion metric ton threshold by 2018.
|
Advanced
Nanofibers is currently in the process of introducing to the market its proprietary NanoAdmix™, an advanced one-component
admixture consisting of a blend of nanofibers, nanoparticles and/or admixtures for high-performance cementitious composites and
coatings.
Manufacturing/Production
Historically, the high per-unit costs of delivered product have
severely dampened the rate at which nanofibers have been used on a wide scale in industrial and consumer products, both domestically
throughout the U.S., and globally. This high cost has been attributable to the combination of the high energy requirements for
production, on the one hand, and the transport economics stemming from the finished product being, at once, extremely lightweight
yet highly voluminous, on the other.
The raw nanofibers Advanced Nanofibers is expected to soon be utilizing
as a base in the manufacturing of its bonded nanofibers are expected by us to be the highest-grade polymer nanofibers available.
What sets Advanced Nanofibers apart at this level is the notably low price-point at which it is expected to be producing this base
product – relying on state-of-the-art, super-high-speed melt-blowing machines in relation to which it holds certain partially
exclusive supply rights through a contract manufacturer, - which is expected to be approximately 10-20% of what it otherwise costs
to produce.
After a several month period of planning, an aggressive push is
now underway towards the start of production at a facility in Greenville, South Carolina. While unforeseen events in equipment
transport, installation and testing may result in delays, production is currently expected to commence during the latter half
of Q2 2017.
With regard to the challenges surrounding product transport economics,
Advanced Nanofibers believes that its proprietary manufacturing process is one through which nanofiber can be condensed up to roughly
80% from its original (cotton candy-like) agglomerated form, significantly ameliorating the otherwise existing shipping cost burden.
Historically, the handling of nanofibers and nanoparticles has posed
significant health and safety challenges stemming from the potentially hazardous particulates emitted into the air during the production,
transport, and use of these materials, and this, too, has been yet another contributing factor in the anemic growth in the wide-scale
industrial use of nanoparticle-enhanced nanofibers. This is because the processes applied to working with the nanoparticles have
not included anything to effectively contain them from becoming loose, airborne particulates that can get into the eyes and lungs,
and onto the skin, of those handling or being around the materials. Because our proprietary bonding process involves the infusing
of the nanoparticles to the nanofibers, which, based on other proprietary and applied methodologies, have been chopped and processed
in a manner that still leaves them partially agglomerated, the otherwise potentially harmful nanoparticles are constrained and
thus unable to become loose, airborne particulates that can get into the eyes and lungs, and onto the skin, of those handling or
being around the materials.
CORPORATE INFORMATION
Corporate Formation, Legacy,
History & Subsidiaries
We were incorporated in the State of Nevada on November 7, 1997
as EJH Entertainment, Inc. On December 4, 1997, a predecessor corporation with the same name as our own but domiciled in Idaho
was merged with and into us. Although the predecessor Idaho corporation was without material assets or operations as of the time
of the merger, since being organized in 1968, it had historically been involved in mining and entertainment businesses unrelated
to our current business.
Beginning in 1997, and although we were not then a reporting company
under the Securities Exchange Act, our common stock was quoted on the OTC Bulletin Board (originally under the symbol “TIXX”,
which was later changed to “TIXXD”). On May 13, 1999, we changed our name to FINdex.com, Inc. On March 7, 2000, in
an effort to satisfy a then recently imposed NASD Rule eligibility requirement that companies quoted on the OTC Bulletin Board
be fully reporting under the Securities Exchange Act (thereby requiring recently audited financial statements) and current in their
filing obligations, we acquired, as part of a share exchange in which we issued 150,000 shares of our common stock, all of the
outstanding capital stock of Reagan Holdings, Inc., a Delaware corporation. At the time of this transaction, Reagan Holdings was
subject to the requirements of having to file reports pursuant to Section 13 of the Securities Exchange Act, had recently audited
financial statements and was current in its reporting obligations. Having no operations, employees, revenues or other business
plan at the time, however, it was a public shell company. As a result of this transaction, Reagan Holdings, Inc. became our wholly
owned subsidiary and we became the successor issuer to Reagan Holdings for reporting purposes pursuant to Rule 12g-3 of the Securities
Exchange Act. Shortly thereafter, we changed our stock symbol to “FIND”. Though it does not currently have any operations,
employees, or revenues, Reagan Holdings remains our wholly owned subsidiary.
In addition to Reagan Holdings, we also have one other wholly owned
subsidiary, Findex.com, Inc. (i.e. the same name as our own), a Delaware corporation. Like Reagan Holdings, this entity, too, does
not currently have any operations, employees, or revenues. This subsidiary resulted from an acquisition on April 30, 1999 pursuant
to which we acquired all of the issued and outstanding capital stock of FINdex Acquisition Corp., a Delaware corporation, from
its then stockholders in exchange for 4,700,000 shares of our common stock, which, immediately following the transaction, represented
55% of our total outstanding common stock. Our purpose for this acquisition (under a previous management) was to broaden our then-existing
stockholder base, an important factor in our effort to develop a strong market for our common stock. On May 12, 1999, in exchange
for the issuance of 457,625 shares of FINdex Acquisition Corp. common stock, FINdex.com, Inc., another Delaware corporation (originally
incorporated in December 1995 as FinSource, Ltd.), was merged with and into FINdex Acquisition Corp., with FINdex Acquisition Corp.
remaining as the surviving entity. Our purpose for this merger (under a previous management) was to acquire a proprietary financial
information search engine for the Internet which was to serve as the cornerstone for a Web-based development-stage business, but
which has since been abandoned. As part of the certificate of merger relating to this transaction, FINdex Acquisition Corp. changed
its name to FINdex.com, Inc. We currently own 4,700,000 shares of FINdex.com, Inc. (the Delaware corporation), representing 100%
of its total outstanding common stock.
On July 23, 2014, we merged with EcoSmart Surface & Coating
Technologies, Inc., a Florida corporation (“EcoSmart Florida”). Because, for accounting purposes, this merger was treated
in accordance with ASC 805-40, Reverse Acquisitions, and Findex was recognized as the accounting acquiree in relation thereto with
EcoSmart Florida as the accounting acquirer, our consolidated financial statements for the reporting period from January 1, 2013
through July 23, 2014 were those of EcoSmart Florida, not the enterprise historically recognized as Findex. Accordingly, our consolidated
financial statements for the periods since July 24, 2014, the day after which the merger was consummated, recognize Findex and
EcoSmart Florida as a single operating enterprise and entity for accounting and reporting purposes, albeit with a carryover capital
structure inherited from Findex (attributable to the legal structure of the transaction). Readers of this annual report on Form
10-K should note that, in order to provide materially relevant disclosure regarding certain of Findex’s historical, operational
expenses not otherwise appropriately accounted for in our consolidated financial statements given the applied accounting treatment
described herein, certain disclosure is contained in the text of this report relating to such expenses, including e.g. executive
compensation, director compensation, and audit fees, that does not numerically align with the corresponding figures contained in
our consolidated financial statements.
Prior to the merger with EcoSmart Florida, and since 1999, our business
had been developing, publishing, marketing, distributing and direct-selling off-the-shelf consumer and organizational software
products for the Windows platform. Following divestitures of two software titles which had consistently accounted for the overwhelming
majority of our revenues while owned by us, including our Membership Plus product line, which we sold in late 2007, and our flagship
QuickVerse product line, which we sold during 2011, and title acquisitions during the same period that, in the aggregate, had been
relatively insignificant in offsetting the loss of revenues associated with those major divestitures, our continuing operations,
while not nominal, had been very limited and insubstantial in terms of revenue, both relative to what they had been prior thereto
and by any appropriate standalone measure. Specifically, our operations immediately prior to the merger with EcoSmart Florida consisted
exclusively of those relating to the FormTool line of products which we acquired in February 2008, as well as two language tutorial
products, which were retained after the sale of the QuickVerse product line. Due to a continuing lack of capital over a number
of years, we were unable to meaningfully grow the FormTool line and develop related products, and our business and financial prospects
became increasingly challenged. Since the merger with EcoSmart Florida, our primary focus has shifted away from the continued development
of our FormTool line and much more intently in the direction of our surfaces and coatings business, where we believe the opportunities
for our future growth are greater and have significantly more to offer economically.
In its most recent corporate form, EcoSmart Florida was organized
in 2012. The patents and other intellectual property forming the foundation of the EcoSmart business were originally developed
during a preceding period dating back to 2003 in which it was operated by the developers of the Company’s technologies as
Surface Modification Technologies, Inc. (“SMT”), a Florida corporation, and EcoSmart, LLC, a Florida limited liability
company, which were sold together to The Renewable Corporation, a Florida based company with its common stock then traded in the
over-the-counter market (“TRC”) in 2012. On January 20, 2012, EcoSmart Coating Technologies, Inc., a Florida corporation,
was organized as a wholly-owned subsidiary of TRC. Simultaneously, EcoSmart Surface Technologies, Inc., also a Florida corporation,
was formed as a wholly-owned subsidiary of TRC. With common ownership by TRC, the assets of each of SMT and EcoSmart, LLC were
thereafter transferred in part to EcoSmart Coating Technologies, Inc. with the remainder to EcoSmart Surface Technologies, Inc.
On September 18, 2012, EcoSmart Surface Technologies, Inc. changed its name to EcoSmart Surface & Coating Technologies, Inc.
On October 19, 2012, EcoSmart Coating Technologies, Inc. was merged with and into EcoSmart Surface & Coating Technologies,
Inc., leaving EcoSmart Surface & Coating Technologies, Inc. as the surviving corporation.
The Company became the holder of its minority equity stake in Advanced
Nanofibers in mid-September, 2016. Through two private holding entities owned jointly with our general counsel, Michael Membrado,
and exclusive of indirect interests held through ownership of Company common stock (disclosed elsewhere in this Annual Report on
Form 10-K), our president and chief executive officer, Steven Malone, currently holds a combined approximate 10% equity interest
in Advanced Nanofibers, primarily through an ownership interest in Nanotech Fibers.
Employees
As of March 31, 2017, we had eight full-time and two part-time employees/contractors.
One full-time employee/contractor is part of the senior-level executive team, two full-time employees/contractors and two part-time
employee/contractor are part of the product research and development and business development team, two full-time employee/contractor
is part of the marketing, customer service and sales team, one full-time employee/contractor is part of the internal general counsel
team, one full-time employee/contractor is part of the manufacturing team, and one full-time employee/contractor is part of the
financial management and administration team.
We rely heavily on our current officers and directors in operating
the business. We are not subject to any collective bargaining agreements and believe that our relationships with our employees/contractors
are good.
Principal
Executive Offices and Contact Information
Our executive offices are located at 1313 South Killian Drive, Lake
Park, FL 33403, and our main telephone number at that address is 561-328-6488. The Internet address for our website is http://www.ecosmartsurfaces.com.
The contents of our website are not incorporated by reference into this Annual Report on Form 10-K and should not be relied on
by investors for the accuracy of the information set forth therein.
ITEM 1A. RISK FACTORS.
Several of the matters discussed in this annual report on Form 10-K
for the fiscal year ended December 31, 2016 contain forward-looking statements that involve risks and uncertainties. Factors associated
with the forward-looking statements that could cause actual results to differ from those projected or forecast are included in
the statements below. In addition to other information contained in this annual report, readers should carefully consider the following
cautionary statements and risk factors.
An investment in our securities is speculative and involves a
high degree of risk.
Company Liquidity and Related Risks
If we are required to repay our outstanding
debt as and when required, we may not be able to without either depleting our working capital or raising additional funds, and
any failure on our part to repay such debt could result in legal action against us, which could require the sale of material assets,
including our smart surface patent.
As of December 31, 2016, and in addition to $244,278 in trade and
related accounts payables, we owed an aggregate of $2,185,916 in principal face amount of combined notes payable and notes payable,
related parties. In accordance with the respective terms of these notes, $300,000 is required to be serviced with quarterly interest
payments (calculated on the basis of a 10% annual percentage rate) and have been overdue and payable since August 1, 2015, and
$1,032,133 is payable by us upon demand by the holders of the notes (i.e. our creditors). The extent of this debt, when coupled
with our limited revenue production during recent reporting periods, presents a situation in which our ability to service that
debt is in serious question. The Company recognized revenue of $319,676 for the period ended December 31, 2016 and our ongoing
operating costs and capital investment requirements, has us under financial pressures that materially threaten our near-term viability
and sustainability. In the event that we are required to repay some or all of these notes and/or other payables in the near-term
(and potentially beyond), in whole or substantial part, the funds available to us for this purpose would have to come from either
working capital or funds on hand in excess of working capital at that time. No assurance can be provided, however, that any such
required funds would be available to us for this purpose, and, historically, we have never had any such surplus funds. If funds
are not available to us for this purpose, we would likely need to undertake a financing transaction of some kind. No assurance
can be provided, however, that we would be able to complete any such financing between the date hereof and the date by which we
would be required to satisfy our obligations, or that, if we are able, that it would be on the basis of terms that are not unfavorable
to us. Among other reasons, this is true because investors in early-stage technology companies such as ours generally look unfavorably
on the allocation of funds invested by them towards the repayment of debt to third parties as opposed to growing the business.
In the event that we are required to repay some or all of the outstanding principal or interest, in whole or in part, and we have
insufficient funds to meet and satisfy the obligation, legal action is likely to be taken against us, which could lead to our having
to sell some or all of our material assets, including our smart surface technology patent, or potentially even to our having to
liquidate the Company.
We are operating at a substantial
working capital deficit and our liquidity and capital resources are very limited.
For the year ended December 31, 2016, we generated $319,676
in total revenue while incurring $1,097,880 in combined sales, marketing, general and administrative expenses. This
represents a substantial working capital deficit that is severely constraining our ability to operate, both near-term and
long-term and our ability to meet our obligations as they become due. Our ability to fund working capital, as well as
anticipated capital expenditures, will depend on both our ability to raise much-needed capital and our future performance,
which is subject to general economic conditions, our customers, actions of our competitors and other factors that are beyond
our control. Our ability to fund operating activities is also dependent upon (i) the extent and availability of bank and
other credit facilities, (ii) our ability to access external sources of financing, and (iii) our ability to effectively
manage our expenses in relation to revenues. The Company’s cash on hand as of December 31, 2016 was insufficient to
support our operations for the next twelve months. Therefore, it is likely to become necessary for us to raise additional
capital to support growth and/or otherwise finance potential acquisitions. Furthermore, there can be no assurance that our
operations or access to external sources of financing will continue to provide resources sufficient to satisfy our
liabilities arising in the ordinary course of business, and while it may be possible to borrow funds as required, any such
additional capital is likely to require that we sell and issue additional equity and/or convertible securities,
including shares issuable upon exercise of currently outstanding warrants, any of which issuances would have a dilutive
effect on holdings of existing shareholders. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources” included in this Annual Report on Form 10-K.
There is uncertainty as to our ability
to continue as a going concern.
Our audited financial statements for the period ending
December 31, 2016, including the footnotes thereto, call into question our ability to continue as a going concern. This
conclusion was drawn from the fact that, as of the date of those financial statements, we had a negative current ratio and
total liabilities in excess of total assets. Those factors, combined with the Company’s operating deficits, have
resulted in uncertainty regarding our ability to continue as a going concern. See Note 2 in the Notes to the Consolidated
Financial Statements for the year ended December 31, 2016 included in this Annual Report on Form 10-K.
We owe an aggregate amount of $66,581
to various third parties which, under state escheat laws, could subject us to substantial additional liabilities for penalties
and interest.
We are carrying certain liabilities on our balance sheet in the
aggregate amount of $62,253 for trade payables and royalties payable in connection with services and content licenses associated
with certain of our former software titles extending back up to fourteen years but in relation to which we have been unable to
locate the parties to whom we owe such trade payables and royalties and no effort to collect such obligations by such parties or
any successors-in-interest have been made. We are additionally carrying certain liabilities on our balance sheet in the aggregate
amount of $4,328 for amounts payable to customers for product return refunds extending back up to eight years many of whom we expect,
without actually knowing at this point one way or the other, to similarly be unable to locate and in connection with which no effort
to date to collect such obligations has been made. Under the escheat laws of the various states in which these creditors were last
known to have an address based on our records, we are or may be required to pay to such states the aggregate amounts owed for these
obligations – in both categories – even though we cannot locate the actual parties to whom they are owed. Moreover,
we are likely to be additionally liable for substantial penalties, both individually and in the aggregate, for not having previously
reported such obligations and paid such amounts to such various states, which reporting obligations and associated penalties for
non-compliance vary significantly among states, as well as interest for amounts deemed past due. It is likely that these additional
liabilities, neither the individual nor collective extent of which are known at this time and as such have not been accrued, will
be material in the aggregate and have a material adverse effect on our financial condition and our results of operations, including
our liquidity.
Depending on how quickly we can generate
a sufficient level of sales, if at all, we will likely require additional funding, potentially substantial, and any failure to
raise additional capital necessary to support and expand our operations could reduce our ability to compete and adversely affect
our business.
At December 31, 2016, we had $108,035 in cash and cash equivalents.
Given ongoing cash constraints, we currently need to raise substantial additional capital, through either equity, debt and/or
hybrid (combination equity and debt) financing. Specifically, an infusion of cash is now necessary for the following:
|
▪
|
insuring the integrity of, and/or continuing to develop, our technologies, products, and related systems;
|
|
▪
|
commercially exploiting our technologies, products, and related systems;
|
|
▪
|
aggressively preparing, filing, prosecuting, maintaining and enforcing potential patent and/or other intellectual property claims;
|
|
▪
|
establishing manufacturing capabilities for commercial quantities of our products;
|
|
▪
|
fully developing and exploiting sales, marketing, and distribution channels for our products;
|
|
▪
|
maintaining and meeting our general and administrative expenses at required levels, including the hiring and training of personnel, and the securing of outside technical and other consultants;
|
|
▪
|
developing and expanding our operations and business infrastructure;
|
|
▪
|
responding to competitive pressures;
|
|
▪
|
making strategic acquisitions of complementary technologies and/or product lines; or
|
|
▪
|
meeting unanticipated capital requirements.
|
There can be no assurance that any such financing, be it through
strategic collaborations, public or private equity financings or other financing sources, will be available to us as and when required,
either on acceptable terms or at all. To the extent that financing is only available through the sale of equity or convertible
securities, or that a determination is made by management that the sale of equity or convertible securities is otherwise in our
best interests, any such financing could and likely would result in significant dilution to our existing stockholders. Further,
if additional funds are obtained through arrangements with collaborative partners, these arrangements may require us to relinquish
rights to some of our technologies, product candidates or products that we would otherwise seek to develop and commercialize on
our own. If sufficient capital is not available, we may be required to delay, reduce the scope of or eliminate one or more of our
development programs or product lines, or be unable to adequately protect our intellectual property or other competitive advantages,
any of which could have a material adverse effect on our financial condition or business prospects.
Our accumulated deficit makes it
harder for us to borrow funds.
As of December 31, 2016, and as a result of historical losses both
during the year ended December 31, 2016 and prior years, our accumulated deficit was $6,438,653. The fact that we maintain an accumulated
deficit, as well as the extent of our accumulated deficit relative to recent earnings, negatively affects our ability to borrow
funds because lenders – and particularly commercial and other market rate lenders – generally view an accumulated deficit
as a negative factor in evaluating creditworthiness, and ours is roughly 20 times our total 2016 revenues. Any inability on our
part to borrow funds if and when required, or any reduction in the favorability of the terms upon which we are able to borrow funds
if and when required, including amount, applicable interest rate and collateralization, would likely have a material adverse effect
on our business, our financial condition, including liquidity and profitability, and our results of operations. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” included in this
Annual Report on Form 10-K.
Risks Associated with Our Business and Industry
Our coatings business is early-stage
with highly speculative prospects.
Although we have certain operations and revenues, our coatings business
has been slow to develop and, taken as a whole, remains an early-stage enterprise insofar as (i) our management expects to devote
a very substantial percentage of our efforts and resources to commercializing our coatings and materials technologies, products,
and related systems, and (ii) our planned principal operations associated with our coatings business are only still ramping up.
Accordingly, our primary business segment remains one characterized by largely unproven, relatively new-to-the-market technologies
and related systems, and subject to some or all of the attendant risks and uncertainties associated with early-stage technology
companies more generally, including without limitation:
|
▪
|
failures in technologies and systems performance and reliability;
|
|
▪
|
unanticipated costs in getting technologies and systems commercialized;
|
|
▪
|
high costs of ongoing research and development;
|
|
▪
|
technologies and systems obsolescence;
|
|
▪
|
business model non-feasibility;
|
|
▪
|
inability to manufacture or obtain from third-party manufacturers sufficient quantities of product at an acceptable quality level and at an acceptable cost to meet market demand;
|
|
▪
|
inability to establish potential markets;
|
|
▪
|
unanticipated costs in establishing potential markets;
|
|
▪
|
inability to adequately protect intellectual property;
|
|
▪
|
potential infringement on the intellectual property rights of others;
|
|
▪
|
intense market competition from other technologies and systems;
|
|
▪
|
competition for employee talent; and
|
|
▪
|
inability to manage rapid growth.
|
The market for industrial and consumer
coatings products is highly competitive.
Product performance, technology, cost-effectiveness, quality and
technical and customer service are major competitive factors in the industrial coatings business. We are aware of only several
other products possessing the same combination of physical properties, and that, on the whole, offer a similar array of benefits
as our proprietary line of specialty smart surface coatings. There can be no assurance, however, that there are not products under
development by others, or already in existence and in the early stages of market introduction, of which our management is not yet
aware. The market for industrial and product performance coatings is extremely large, broad in scope, and consists of many different
segments and sub-segments, each of which involves a range of product applications, and each of which is also increasingly characterized
by rapidly evolving technology. Precisely because of the wide array of beneficial properties they possess, and notwithstanding
the U.S. patent held by us on our platform smart surface technology, the specialty coatings produced and distributed by us should
be viewed as competing with other coatings products across a wide variety of the various existing market segments and sub-segments.
Hydrophobic and antimicrobial coatings, for example, are each segments in which numerous companies are aggressively competing with
one another worldwide, both in terms of technology and market share, but that, combined, represent only a minor portion of the
aggregate competition that we should be viewed as meaningfully confronting in relation to our coatings business.
The competition faced by us in relation to our proprietary line
of specialty smart surface coatings includes both public and private organizations and collaborations among academic institutions
and large companies, both domestic and foreign, most of which have significantly greater experience and financial resources than
us. Management expects that our most significant competitors in our coatings business will tend to be larger, more established
companies, including many major multinational corporations such as Akzo Nobel N.V., PPG Industries, Inc., Axalta Coating Systems,
BASF Corporation, and Valspar Corporation. In general, these companies are all developing products that, at some level or in one
or more ways, compete with our own and, in addition to many existing issued and pending patents, they have significantly greater
capital and other resources available to them for research and development, testing, seeking and obtaining any required regulatory
approvals, marketing and distribution. In addition, many smaller coatings and related nanotechnology and materials companies have
formed strategic alliances or collaborative arrangements, partnerships, and other types of joint ventures with larger, well-established
industry competitors that afford these companies’ potential research and development and commercialization advantages, and
may be aided in becoming significant competitors through rapid evolution of new technologies. Academic institutions, governmental
agencies, and other public and private dedicated research organizations, moreover, are also financing and conducting research
and development activities that could result in the introduction of products directly competitive to those of ours.
Our coatings business is based on
a technology with only limited testing, independent verification, and commercial history.
Although certain limited testing results conducted by independent
laboratories and prospective customers in relation to some of the potential applications for our specialty smart surface coatings
technology have provided positive indications of its reliably yielding performance results consistent with internal management
expectations, to date, such technologies have not been extensively tested or independently evaluated and assessed in a comprehensive
way, and have only recently developed any meaningful commercial history. Although we have no reason to suspect that the technologies
will not ultimately meet reliability, efficiency, or other performance targets, and that their efficacy will exceed minimally
acceptable qualitative standards given benchmark economic objectives, there can be no assurance of this result. If our specialty
smart surface coatings technology fails to consistently perform at levels that enable cost-effective solutions for customers,
or fails to do so without undesirable environmental consequences, or we are unable to effectively manage the implementation of
the technology despite its otherwise satisfactory performance capabilities, it would likely have a material adverse effect on
our financial condition and prospects.
Our coatings products may not be
accepted in the marketplace.
The degree of market acceptance of our coatings products will depend
on many factors. We cannot predict or guarantee the degree to which targeted customers will accept or utilize some or even any
of these products. Failure to achieve market acceptance would limit our ability to generate revenue and would have a material adverse
effect on our business. In addition, if any of our products achieve market acceptance, we may not be able to maintain that market
acceptance over time if competing products or technologies are introduced that are received more favorably or are more cost-effective.
New products markets take time to
develop and many of the applications markets for our smart surface specialty coatings should be viewed as separate, new market
opportunities that will only ever be cultivated over time.
Commercialization of new technology products often has a very long
lead-time and a multiplicity of risks. The confluence of materials engineering and nanotechnology is in its very early stages and
acceptance and demand for products in this developing area can often be a long, evolutionary process. In general, new products
markets – even those surrounding innovative, revolutionary, and so-called ‘break-through’ or ‘game-changing’
technologies – develop gradually over time; despite advancements offering meaningful benefits, they tend to be resistant
to change and slow to adapt, evolve, and keep pace with the rate of those advancements. Many of the applications markets potentially
served by our smart surface specialty coatings are new – either brand new or recently emerging – and should thus be
viewed as likely to take significant time to develop and cultivate. Moreover, each should be viewed individually, separate and
distinct from all others in terms of development-life. If one or more of these applications markets takes longer to develop and
cultivate than we expect, it will likely have an adverse effect on the pace with which we are able to grow revenues, as well as
on our prospects more generally, outcomes which, in turn, are likely to lead to a downward adjustment in our publicly quoted stock
price.
We may make strategic determinations
to allocate capital towards the pursuit of particular applications markets that turn out to be less receptive to our products,
or more difficult to penetrate, than expected.
We perceive our smart surface technology as having a wide array
of potential product applications, spanning across numerous industrial, consumer, and household segments. As we grow our coatings
business, we will thus be faced with the challenges – as we are currently – of having to select certain of these potential
product applications markets over others for purposes of focusing our human and financial resources because those resources are
necessarily limited and would be less apt to bring about meaningfully positive results if allocated across too many separate market
initiatives concurrently. The considerations involved in making these determinations are complex and involve many factors, including
the following:
|
▪
|
the relative size, age and projected growth trend of the subject market;
|
|
▪
|
experience, observational/anecdotal intelligence, and lab and field testing results previously obtained in relation to the application;
|
|
▪
|
the relative strength of the value proposition to prospective customers;
|
|
▪
|
the comparative time-to-market;
|
|
▪
|
the comparative cost-to-market coupled with existing, internal, industry relationships and available resources;
|
|
▪
|
the relative geographic accessibility of the market;
|
|
▪
|
the seasonality of the market, if any;
|
|
▪
|
the relative barriers-to-entry within the market;
|
|
▪
|
the relative, projected length of the particular sales cycle;
|
|
▪
|
the projected gross profit margins;
|
|
▪
|
both the presence within the subject market, together with the relative quality, of competitive products; and
|
|
▪
|
the relative size and strength of the individual competitors.
|
While management will exercise its best judgment in making these
determinations, there can be no assurance that the determinations it makes in this regard will turn out to have been the most productive
or otherwise best ones for us all things considered. Some of the potential applications markets will inevitably be more receptive
to our products than others due to the inherent vagaries of product markets generally, and it may turn out that strategic determinations
we make along the way to forego the pursuit of certain applications markets in the immediate- and near-term – in favor of
pursuing others that our management expects to be comparatively more promising or susceptible to penetration by us in that timeframe
– are proven incorrect. If this should occur, it would be an indication that, despite our intentions and prudence in assessing
future demand, we had not allocated our capital as effectively as we might have otherwise, and this could have a material adverse
effect on our returns on capital and/or be reflected in a downward adjustment in our publicly quoted stock price.
For strategic reasons, we may pursue
more applications markets for our smart surface specialty coatings products in the near-term and concurrently than we can most
effectively penetrate given our available resources.
As noted in the risk factor immediately above, given the notably
wide array of industrial and consumer products that we perceive our smart surface specialty coatings technology as potentially
benefitting, we are faced with important decisions as to which of these applications markets to pursue in each of the immediate-,
near- and long-term. As also noted in the risk factor immediately above, the considerations involved in making these determinations
are complex and involve many factors. While management seeks to exercise sound judgment in making these determinations, there can
be no assurance that, in hindsight, the determinations it makes in this regard will turn out to have been the most productive or
otherwise best ones for us. For purposes of achieving a degree of so-called ‘first-mover advantage,’ for example, we
may pursue some markets in the immediate- or near-term that we might otherwise wait to pursue until sometime in the future when
we are better equipped to do so effectively. Further, some applications markets may be targeted by management to be pursued in
the immediate- or near-term because of their perceived likelihood, whether accurate or inaccurate, to generate revenues sooner
than others, even though such others are expected to be larger in the aggregate and/or to offer higher gross margin opportunities.
If the strategic determinations that management makes in this regard prove after the fact not to have been the most productive
or otherwise best ones for the Company, it will likely have an adverse effect on the pace with which we are able to grow revenues,
as well as on our prospects more generally, outcomes which, in turn, are likely to lead to a downward adjustment in our publicly
quoted stock price.
Our smart surface technology may
turn out to be less effective for one or more applications than we expect.
Our current view of the potential applications markets for our smart
surface specialty coatings is intentionally broad and far-reaching, spanning numerous potential industrial, consumer, and household
segments in relation to which we believe our technology may provide a range of meaningful benefits. To date, however, we have not
commissioned or otherwise undertaken or obtained any comprehensive market study in respect of any one or more of these applications
markets. Whether before or after we undertake any such market study, it may turn out to be the case that our coatings are not as
effective for any one or more of these applications as we have preliminarily concluded and pursued accordingly, and we may make
a subsequent determination at some point to abandon any continued pursuit of the corresponding market or markets for this reason.
If this should occur, it will likely have an adverse effect on the pace with which we are able to grow revenues, as well as on
our prospects more generally, outcomes which, in turn, are likely to lead to a downward adjustment in our publicly quoted stock
price.
It is conceivable that the coatings
products of others – including those having fewer attributes than ours that could reasonably be expected to make them attractive
to manufacturers and customers – will be adopted more broadly than ours within one or more applications markets.
The applications markets that we are targeting for our smart surface
specialty coatings are perceived by management to present substantial, attractive economic opportunities for us because of the
unique array of benefits the coatings are expected to be able to provide. With many different companies in the industrial coatings
market all vying for market share, ranging from small and specialized, on the one hand, to large and diversified, on the other,
and each selling products with coatings that offer many of the same benefits as ours, however, there can be no assurance that the
coatings products marketed by others will not become the preferred choice among manufacturers of end products and/or customers
over time with respect to any one or more individual applications markets category. For many different reasons the particular combination
of which is not consistent in each case, category leaders are not always necessarily the most effective products in a given market
segment. Well-established brand recognition, industry ‘marketing muscle,’ and credibility, for example, and especially
when coupled with relative financial strength, can often be more important than technological superiority in a head-to-head market
competition. If it turns out that one or more other companies are able to achieve a dominant market position in any one or more
applications markets potentially served by our smart surface specialty coatings, and whether on the basis of broad market strength
or otherwise, it will likely have an adverse effect on the pace with which we are able to grow revenues, as well as on our prospects
more generally, outcomes which, in turn, are likely to lead to a downward adjustment in our publicly quoted stock price.
Either individually or collectively,
and without infringing on our smart surface patent or other proprietary rights, one or more technologies owned by others may be
able to effect the same or similar results as our own.
We believe that our smart surface proprietary technology affords
us a competitive advantage in a wide variety of product applications markets that we are either currently pursuing or intend to
fully evaluate as potential targets in the future. There can be no assurance, however, that other technologies, whether existing
or developed in the future, and whether individually or combined with others, will not be able to effect the same or similar results
as our own, thereby potentially neutralizing whatever unique market advantage we had theretofore believed we possessed. This could
potentially occur, moreover, without any infringement on the part of others as it relates to our smart surface technology patent
or our other, related proprietary intellectual property rights. It is not at all uncommon for meaningfully different technologies
– each protectable in their own right – to produce the same or a very similar result, albeit through an alternate means.
If any such other technologies are determined to exist, or are developed in the future, that effect the same or a similar result
as our own, and particularly if they can do so at a reduced cost, it will likely have an adverse effect on the pace with which
we are able to grow revenues, as well as on our prospects more generally, outcomes which, in turn, are likely to lead to a downward
adjustment in our publicly quoted stock price.
Our smart surface coatings technology
is, or will become, a component within end-products marketed and sold by others for the most part, and the success of our coatings
products is, accordingly, dependent on the success of such end-products.
The need for effective solutions-based coatings such as those featuring
our smart surface technology will depend upon industrial and commercial needs going forward and the related demand for such products
as components. The success of our smart surface specialty coatings products will thus depend largely upon the continuing need for
the end-user products into which they become incorporated, and the market demand this engenders. If a significant percentage of
the products into which our smart surface specialty coatings products are incorporated are not embraced by end-users, it will likely
have an adverse effect on the pace with which we are able to grow revenues, as well as on our prospects more generally, outcomes
which, in turn, are likely to lead to a downward adjustment in our publicly quoted stock price.
We depend on strategic relationships
with commercial and industrial collaborators to help us develop and test our products, and our ability to develop and commercialize
products may be impaired or delayed if collaborations are unsuccessful.
Our strategy for the development, testing and commercialization
of our proposed products requires that we enter into collaborations with actual and potential corporate partners, licensors, licensees
and others. Wherever possible, and in order to benefit from their resources and abilities, we are seeking collaborators in this
regard with established lines of business and greater financial resources than our own. We are dependent upon the subsequent success
of these other parties in performing their respective responsibilities as well as the continued cooperation and interest. Under
agreements with collaborators, we may rely significantly on such collaborators to, among other things, (i) fund research, development
and testing activities either with or for us, and (ii) market with us any commercial products that result from our collaborations.
There can be no assurance, however, that collaborators will cooperate with us or perform their obligations under agreements reached
with them, even where such matters are provided for within such agreements. Moreover, we cannot control the amount and timing of
our collaborators’ resources that will be devoted to our research, development and testing activities related to our collaborative
agreements with them. Such collaborators may not place the same degree of relative importance that we do on product lines that
rely on our products to meet benchmark performance standards because the success or failure of such product lines is not as material
to their business, taken as a whole, as it is to ours. If our collaborators fail to cooperate with us as desired, devote the requisite
resources to our joint initiatives, or meet their obligations under agreements we establish, or if they choose for any reason to
pursue existing or alternative technologies in preference to those being developed in collaboration with us, it will likely have
an adverse effect on the pace with which we are able to grow revenues, as well as on our prospects more generally, outcomes which,
in turn, are likely to lead to a downward adjustment in our publicly quoted stock price.
Our reliance on the activities of
our non-employee consultants, research institutions, and scientific contractors, whose activities are not wholly within our control,
may lead to delays in development of our proposed products.
We rely extensively upon and have relationships with outside consultants
and contract research organizations having specialized skills to conduct research and to help develop and test our coatings products,
and we expect to have to continue to rely on these types of relationships for the indefinite future. The consultants and contract
research organizations we engage, or that we may engage, provide us, or may provide us as the case may be, critical skills and
resources that we do not have internally. These consultants are not, or may not be, our employees and may have commitments to,
or consulting or advisory contracts with, other entities that may limit their availability to us. We have, or would have, limited
control over the activities or operations of these consultants and, except as otherwise required by our collaboration and consulting
agreements to the extent they exist, can expect only limited amounts of their time to be dedicated to our activities and our research
and development goals. These research facilities may have commitments to other commercial and non-commercial entities.
We have limited resources to manage
development activities, and because of the numerous risks and uncertainties associated with our product development and commercialization
efforts, we are unable to predict the extent of our future losses or when or if we will become profitable.
Our limited resources in conducting and managing development activities
might prevent us from successfully developing or exploiting potential markets for our existing products. If we do not succeed in
conducting and managing our development activities, we may not be able to commercialize our products, or may encounter significant
delays in doing so, either of which is likely to materially harm our business. Our ability to generate revenues from any of our
products, moreover, will depend on a number of factors, including our ability to successfully complete and implement our commercialization
strategy. Our failure to successfully commercialize our products or to become and remain profitable would likely depress the market
price of our common stock and impair our ability to raise capital, expand our business, diversify our product offerings and continue
our operations.
Our ability to commercially develop our technologies will be dictated
in large part by forces outside our control which cannot be predicted, including, but not limited to, general economic conditions.
Other such forces include the success of our research and field testing, the availability of collaborative partners to finance
our work in pursuing applications markets for our smart surface technologies or other developments in the field which, due to efficiencies
or technological breakthroughs, may render one or more areas of commercialization more attractive, obsolete or competitively unattractive.
It is possible that one or more areas of commercialization will not be pursued at all if a collaborative partner or entity willing
to fund research and development cannot be located. Our decisions regarding the ultimate products we pursue could have a material
adverse effect on our ability to earn revenue if we misinterpret trends, underestimate development costs and/or pursue technologies,
products, or applications markets that turn out to have lesser market appeal and demand than expected. Any of these factors, either
alone or in concert, could materially harm our ability to earn revenues or could result in a loss of any investment in the Company.
If we are unable to keep up with
rapid technological changes in the coatings field, we will be unable to effectively compete.
The coatings industry is engaged in activities in the organic and
inorganic chemistry, materials engineering, and nanotechnology fields, which are generally characterized by extensive research
efforts and rapid technological progress. Materials engineering and the manipulation of materials of nanometer sizes and dimensions
is a relatively new science and the creation of new products is dependent upon new and different properties of such materials created
that will result in many uncertain applications and rapid change. The evolution of nanotechnology as a new science adds greater
uncertainty to new applications and new and improved product introductions are unpredictable. If we fail to anticipate or respond
adequately to scientific or technological advancements developments, our ability to operate profitably could suffer. We cannot
assure you that research and discoveries by other companies will not render our technologies or potential products or services
uneconomical or result in products superior to those we have or develop or that any technologies, applications, or products we
have or develop will be preferred to any existing or newly-developed technologies, applications, or products.
Our coatings business has historically
depended on a disproportionate percentage of its revenues being attributable to only a few customers.
Although our marketing and sales focus has been evolving rapidly,
and aggregate revenues have been modest, during the year ended December 31, 2016, and the year ended December 31, 2015, and as
reflected in the table below, our coatings business generated a significant portion of its revenues from a select few customers.
|
|
% of Total Revenues
|
Customer
|
|
2016
|
|
2015
|
Dekko Concrete
|
|
|
15.46
|
%
|
|
|
4.23
|
%
|
Infiniti Coatings, LLC.
|
|
|
14.80
|
%
|
|
|
5.32
|
%
|
Ready Mix USA, LLC.
|
|
|
13.38
|
%
|
|
|
—
|
|
In general, any concentration of customer base for a business creates
a risk that the continuity of the business is more dependent on such customer or customers than is desirable and that the loss
of that customer or customers for any reason would have a material adverse effect on the business. Although management believes
that the planned direction of our coatings business going forward will result in an expanded and more diverse customer base over
time, and a discontinuance of this trend in reliance on only a few customers, there can be no assurance that we will be successful
in achieving this targeted objective and any failure in this regard would likely have a material adverse effect on our financial
condition and prospects.
The business model to be applied
in our coatings business may be highly capital intensive.
Our definitive business model going forward for our coatings product
lines is currently subject to further research, development and change. As a result, there can be no assurance as to what the business
model will ultimately be. While there is a possibility that we will ultimately determine to focus our strategy exclusively on the
exploitation of our technology through a model that contemplates our involvement and risk solely to the extent of our exploitation
of licensing opportunities to third parties, in the meantime, and quite possibly as a long-term plan, we are manufacturing and
marketing our own products to customers both directly and through distribution channels. Some contemplated business models in this
regard, including those that involve any manufacturing and stocking of product, are considerably more capital intensive than others.
Accordingly, there can be no assurance as to the degree of capital intensity of our business model. Although it may be possible
to rely to a significant extent on debt financing over time, substantial debt financing is unlikely to be a realistic option in
the near-term given our lack of financial strength (both balance sheet and income statement) and a high degree of capital intensity
could lead to the need to raise additional equity financing, thereby resulting in dilution to the interests of existing stockholders.
The patent we hold on our platform
coatings smart surface technology comes off patent in approximately eight years.
We currently own only a single patent, which is a United States
patent and relates to our platform smart surface coating technology. Once filed, patents in the United States provide exclusive
rights for a period of only twenty years, not indefinitely. As a result, and because the patent was filed in 2005, whatever exclusive
rights we have in this flagship proprietary technology, including all associated licensing rights, will only benefit us, at most,
for another approximately eight years. Once it comes off patent, the resulting loss of our exclusive rights could have a material
adverse effect on our gross profit margins and/or our ability to generate or sustain revenues.
We may not be able to protect our
proprietary technology, which could harm our ability to become profitable.
We believe that our intellectual property with respect to our specialty
smart surface coatings is critical to our future success. Patent and trade secret protection is critical, more generally, for our
technologies, as well as the products and processes derived through them. The fields in which we operate have been characterized
by significant efforts by competitors to establish dominant or blocking patent rights to gain a competitive advantage, and by considerable
differences of opinion as to the value and legal legitimacy of competitors’ purported patent rights and the technologies
they actually utilize in their businesses. Our success will depend, to a substantial degree, on our ability to obtain and enforce
patent protection for our products, preserve any trade secrets, and operate without infringing the proprietary rights of others.
We cannot assure you that:
|
▪
|
we will succeed in obtaining any patents in a timely manner or at all, or that the breadth or degree of protection of any such patents will protect our interests;
|
|
▪
|
the use of our technology will not infringe on the proprietary rights of others;
|
|
▪
|
patent applications relating to our potential products or technologies will result in the issuance of any patents or that, if issued, such patents will afford adequate protection to us or not be challenged, invalidated or infringed;
|
|
▪
|
patents will not issue to other parties, which may be infringed by our potential products or technologies; or
|
|
▪
|
we will continue to have the financial resources necessary to prosecute our existing patent applications, pay maintenance fees on patents and patent applications, or file patent applications on new inventions.
|
Efforts to patent critical technologies
in our coatings business may not be successful.
New patent activity from other companies could affect and alter
the ability to obtain and/or license what we believe to be our own patentable intellectual property. Additionally, the possibility
exists that our efforts could infringe on the proprietary rights of third parties. Competitive patent activity is always a risk,
and U.S. patent applications are unpublished for at least one year. Although we intend to reasonably protect our rights with respect
to what we believe to be our intellectual property, there can be no assurance that such initiatives will be successful or that,
in any event, such initiatives would not divert management’s attention away from operational matters and indirectly result
in adverse consequences to our financial condition and results of operation.
Certain aspects of our coatings business
technology are not protectable by patent.
Certain aspects of our know-how and technology are not patentable,
or, for strategic reasons, are best protected in the determination of management by leaving them unpatented. In this regard, trade
secrets play an important part in our intellectual property strategy, and we vigilantly seek to protect them. To protect our proprietary
position in trade secrets, we require all employees, consultants, advisors and collaborators with access to our technology to enter
into confidentiality, and, wherever possible, invention ownership, agreements with us. There can be no assurance, however, that
these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event
of any unauthorized use or disclosure. Further, in the absence of patent protection, competitors who independently develop substantially
equivalent technology, or otherwise acquire it, may adversely impact our business.
Patent litigation presents an ongoing
threat to our coatings business in terms of both outcome and cost.
It is possible that litigation over patent matters with one or more
competitors could arise. We could incur substantial litigation or interference costs in defending ourselves against lawsuits brought
against us or in lawsuits in which we assert our patent rights against others. If the outcome of any such litigation is unfavorable,
our business could be materially adversely affected. To determine the priority of inventions, we may also have to participate in
interference proceedings declared by the United States Patent and Trademark Office, the associated expense of which could become
substantial. In such event, there can be no assurance that we will have available to us the requisite financial resources to aggressively,
or even adequately, defend, initiate, or pursue this type of litigation.
Patents obtained by other persons
may result in infringement claims against us that are costly to defend and which may limit our ability to use the disputed technologies
and prevent us from pursuing research and development or commercialization of potential products and/or applications markets.
If third party patents or patent applications contain claims infringed
by either our technology or other technology required to make and use our potential products, and such claims are ultimately determined
to be valid, there can be no assurance that we would be able to obtain licenses to these patents at a reasonable cost, if at all,
or be able to develop or obtain alternative technology. If, under such circumstances, we are unable to obtain any such licenses
at a reasonable cost, we may not be able to develop some products commercially, and, further, we may be required to defend ourselves
in court against allegations of infringement of third party patents. Patent litigation is generally very expensive and can consume
substantial resources and create significant uncertainties. Any adverse outcome in such a suit could subject us to significant
liabilities to third parties, require disputed rights to be licensed from third parties, or require us to cease using such technology.
We may not be able to adequately
defend against piracy of intellectual property in foreign jurisdictions.
Considerable research in the areas of organic and inorganic chemistry,
materials engineering, and nanotechnology is being performed in countries outside of the United States, and a number of potential
competitors are located in these countries. The laws protecting intellectual property in some of those countries may not provide
adequate protection to prevent our competitors from misappropriating our intellectual property within those jurisdictions and elsewhere.
Several of these potential competitors may be further along in the process of product development and also operate large, company-funded
research and development programs. As a result, our international competitors may develop more competitive or affordable products,
or achieve earlier patent protection or product commercialization than we are able to achieve. Any such competitive products may
render any products or product candidates that we develop obsolete.
Our products are currently expensive
to manufacture for the most part, and they may not be profitable if we are unable to reduce our costs to produce them.
Our coatings products are significantly more expensive to manufacture
than most comparable products on the market today. This is because our sales to date have been modest, causing our raw materials
purchasing volumes and manufacturing output volumes to be correspondingly low, and our costs for each relatively high. We have
only been exploring and experimenting for a relatively short period with purchasing and manufacturing processes and procedures
enabling our production capacity to reach commercial volumes. Although there can be no assurance, it is our intention to substantially
reduce manufacturing costs through process improvements, increases in manufacturing scale and outsourcing to experienced manufacturers.
If we are not able to make these or other improvements, and depending on the pricing of the product, our profit margins may be
significantly less than that of our competitors. In addition, we may not be able to command a high enough price from our customers
for our products within some or all applications markets to generate a profit. If we are unable to realize significant profits
from our products, our business would be materially harmed.
We will likely be required to spend
large amounts of money for environmental compliance in connection with our manufacturing operations.
As a manufacturer of applied specialty coating and surfacing materials,
we are subject to a variety of stringent regulations under numerous U.S. federal, state, local and foreign environmental, health
and safety laws and regulations relating to the generation, storage, handling, discharge, disposition and stewardship of hazardous
wastes and other materials. In this regard, we will likely have to expend substantial amounts to comply with such laws and regulations
as well as establish a policy to minimize our environmental emissions. Nevertheless, legislative, regulatory and economic uncertainties
(including existing and potential laws and regulations pertaining to climate change) may make it difficult for us to project future
spending for these purposes and, if there is an acceleration in new regulatory requirements, we may be required to expend substantial
additional funds to remain in compliance.
Our production operations involve
our having to work with dangerous materials that can potentially injure our employees, damage our facilities, and disrupt our work
flow.
Some of our operations involve the handling of hazardous materials
that may pose the risk of fire, explosion, or the release of hazardous substances into the surrounding environment. Such events
could result from operational failures, natural disasters, or terrorist attacks, and might cause injury or loss of life to our
employees and others, environmental contamination, and property damage. Any such events might cause a temporary shutdown of an
affected plant, or portion thereof, or a customer’s premises, or a portion thereof, and we could be subject to penalties,
civil claims, or both, as a result. A disruption of our operations caused by any of these or other events could have a material
adverse effect on our financial condition and results of operations.
Our product sales could expose us
to product liability claims, which, in turn, could diminish our assets and adversely affect our operations.
We may be held liable or incur expenses to settle product liability
claims if our products cause injury, directly or indirectly, or are found unsuitable during product testing, manufacturing, marketing,
sale or use. These risks exist even with respect to any products that have received, or may in the future receive, regulatory approval,
registration or clearance for commercial use. There can be no assurance that we will be able to avoid product liability exposure.
We currently do not maintain product liability insurance of any
kind, and we will likely need to obtain such insurance coverage in the very near future at levels determined to be sufficient and
consistent with industry standards for companies such as ours. It is possible that such insurance coverage may not be available
to us on commercially reasonable terms or at all, and a product liability claim could potentially result in liability to us greater
than our assets and insurance coverage, if any, at such time. Whether or not a product liability insurance policy is obtained or
maintained in the future, any product liability claim could harm our business and financial condition. Moreover, even if we have
adequate insurance coverage, product liability claims or recalls could result in negative publicity or force us to devote significant
time and attention to matters other than those that arise in the normal course of business.
Our insurance policies may be inadequate
and potentially expose us to unrecoverable risks.
We do not carry director and officer insurance and have only limited
general liability insurance coverage. Any significant insurance claims would have a material adverse effect on our business, financial
condition and results of operations. Insurance availability, coverage terms and pricing continue to vary with market conditions.
We endeavor to obtain appropriate insurance coverage for insurable risks that we identify, however, we may fail to correctly anticipate
or quantify insurable risks, we may not be able to obtain appropriate insurance coverage, and insurers may be unwilling to cover
insurable events for which we seek coverage. We have observed rapidly changing conditions in the insurance markets relating to
nearly all areas of traditional corporate insurance. Such conditions have resulted in higher premium costs, higher policy deductibles,
and lower coverage limits. For some risks, we may not have or maintain insurance coverage because of cost or availability.
Conditions in the global economy
and global capital markets may adversely affect our results of operations, financial condition, and cash flows.
Our business and operating results may in the future be adversely
affected by global economic conditions, including instability in credit markets, declining consumer and business confidence, fluctuating
commodity prices and interest rates, volatile exchange rates, and other challenges such as the changing financial regulatory environment
that could affect the global economy. Our customers may experience deterioration of their businesses, cash flow shortages, and
difficulty obtaining financing. As a result, existing or potential customers may delay or cancel plans to purchase products and
may not be able to fulfill their obligations in a timely fashion. Further, suppliers could experience similar conditions, which
could impact their ability to fulfill their obligations to us. Because we intend to have significant international operations,
there are expected to be a large number of currency transactions that result from international sales, purchases, investments and
borrowings. And although we also intend to actively manage currency exposures that are associated with net monetary asset positions,
committed currency purchases and sales, foreign currency-denominated revenues and other assets and liabilities created in the normal
course of business, there can be no assurances that such initiatives will be effective. Future weakness in the global economy and
failure to manage these risks could adversely affect our results of operations, financial condition and cash flows in future periods.
Changes in government policies and
laws could adversely affect our financial results.
Although there can be no assurance, our coatings product sales to
customers outside the U.S. are expected over time to account for a material percentage of gross revenues. As a result, our financial
results could be affected by changes in trade, monetary and fiscal policies, laws and regulations, or other activities of U.S.
and non-U.S. governments, agencies and similar organizations. These conditions include, but are not limited to, changes in a country’s
or region’s economic or political conditions, trade regulations affecting production, pricing and marketing of products,
local labor conditions and regulations, reduced protection of intellectual property rights in some countries, changes in the regulatory
or legal environment, restrictions on currency exchange activities, burdensome taxes and tariffs and other trade barriers. International
risks and uncertainties, including changing social and economic conditions as well as terrorism, political hostilities and war,
could lead to reduced sales and profitability.
Increases in prices and declines
in the availability of raw materials could negatively impact our financial results.
Our financial results are significantly affected by the cost of
raw materials. Coatings raw materials, both organic and inorganic, generally comprise a significant percentage of our cost of goods
sold in most coatings formulations and represent our single largest production cost component.
Most of the raw materials used in production are purchased from
outside sources, and we intend in the near future to begin making supply arrangements from time to time to meet our planned operating
requirements for the future. Supply of critical raw materials is managed by qualifying multiple and local sources of supply, sometimes
including suppliers from outside the U.S., establishing contracts, procuring from multiple sources, and identifying alternative
materials or technology whenever possible. We are continuing our aggressive sourcing initiatives to support our continuous efforts
to find the lowest raw material costs.
Increases in the cost of raw materials may have an adverse effect
on our earnings or cash flow in the event we are unable to offset these higher costs in a timely manner. Any inability to obtain
critical raw materials would adversely impact our ability to produce our products.
General Business Risks
The loss of key personnel could adversely
affect our business.
We are presently dependent to a great extent upon the
experience, abilities and continued services of our management team. Currently, our only executive under contract is Mr.
Malone, our president and chief executive officer. In accordance with its terms, this agreement expires on July 22, 2017.
Beyond the obligations expressly set forth in Mr. Malone’s employment agreement (a copy of which is included as Exhibit
10.1 to our Current Report on Form 8-K filed July 29, 2014), no assurances can be given that either he or any other executive
will remain with us for any particular duration or that any of such other executives will enter into employment agreements
with us. The loss of services of any of the management personnel could have a material adverse effect on our business,
financial condition or results of operation.
Failure to effectively manage acquisitions,
divestitures, strategic ventures, alliances and other portfolio actions could adversely impact our future results.
From time to time, we expect to be evaluating and pursuing acquisition
or strategic venture candidates that may strategically fit our business and/or growth objectives. If we are unable to successfully
integrate and develop acquired businesses, we could fail to achieve anticipated synergies and cost savings, including any expected
increases in revenues and operating results, which could materially and adversely affect our financial results. We intend to continually
review our portfolio of operational assets to assess their respective contributions to our larger objectives and alignment with
our broader growth strategy. However, we may not be successful in separating underperforming or non-strategic assets and gains
or losses on the divestiture of, or lost operating income from, such assets may affect our results of operations. Moreover, we
may incur asset impairment charges related to acquisitions or divestitures that reduce any otherwise reportable earnings.
Our results of operations and financial
condition could be seriously impacted by business disruptions and security breaches, including cybersecurity incidents.
Business and/or supply chain disruptions, plant and/or power outages
and information technology system and/or network disruptions, regardless of cause including acts of sabotage, employee error or
other actions, geo-political activity, weather events and natural disasters could seriously harm our operations as well as the
operations of our customers and suppliers. Failure to effectively prevent, detect and recover from security breaches, including
attacks on information technology and infrastructure by hackers, viruses, breaches due to employee error or actions, or other disruptions
could result in misuse of our assets, business disruptions, loss of property including trade secrets and confidential business
information, legal claims or proceedings, reporting errors, processing inefficiencies, negative media attention, loss of sales
and interference with regulatory compliance. Though our resources are meaningfully limited, we intend to actively manage the risks
within our reasonable control that could lead to any such business disruptions and security breaches. As these threats continue
to evolve, particularly around cybersecurity, and particularly as our business grows, however, we may be required to expend significant
resources to enhance our control environment, processes, practices and other protective measures. Despite these efforts, such events
could materially adversely affect our business, financial condition or results of operations.
Our business, including our results
of operations and reputation, could be adversely affected by process safety and product stewardship issues.
Failure to appropriately manage safety, human health, product liability
and environmental risks associated with our products, product life cycles and production processes could adversely impact employees,
communities, stakeholders, the environment, as well as our reputation and results of operations. Public perception of the risks
associated with our products and production processes could impact product acceptance and influence the regulatory environment
in which we operate. While we have in place procedures and controls to manage process safety risks, issues could be created by
events outside of our control including natural disasters, severe weather events, acts of sabotage and substandard performance
by our external partners.
Our results of operations could be
adversely affected by litigation and other commitments and contingencies.
We face risks arising from various asserted and unasserted litigation
matters, including, but not limited to, product liability, patent infringement, and claims for third party property damage or personal
injury stemming from alleged environmental torts. We have observed and noted a nationwide trend in purported class actions against
manufacturers of chemical and materials-based products generally seeking relief such as medical monitoring, property damages, off-site
remediation and punitive damages arising from alleged environmental torts without claiming present personal injuries. We have further
observed and noted a trend in public and private nuisance suits being filed on behalf of states, counties, cities and utilities
alleging harm to the general public. Various factors or developments can lead to changes in current estimates of liabilities such
as a final adverse judgment, significant settlement or changes in applicable law. A future adverse ruling or unfavorable development
could result in future charges that could have a material adverse effect on us. An adverse outcome in any one or more of these
matters would likely have a material adverse effect on our business, financial condition or results of operations.
In the ordinary course of business, we may make certain commitments,
including representations, warranties and indemnities relating to current and past operations, including those related to products
we sell, divested businesses, and issue guarantees of third party obligations. If we were required to make payments as a result,
they could exceed the amounts accrued, thereby adversely affecting our results of operations.
Risks Uniquely Associated with Our Minority
Interest in Advanced Nanofibers
Although we currently own a 24% equity
interest in Advanced Nanofibers, that percentage is likely to be reduced in the near future.
As of September, 2016, and as more fully disclosed in the Description
of Business section of this Annual Report on Form 10-K we have held a minority equity interest in a private technology firm, Advanced
Nanofibers. As of the date of this Annual Report on Form 10-K, we own 23.88% of the firm. Because Advanced Nanofibers
is a relatively early-stage company, however, and likely to require near-term investment capital, on the one hand, and establishing
strategic relationships, on the other, investors in our shares should expect that our percentage interest will be reduced in the
future, possibly significantly, as equity in that company is issued in exchange for cash, economic interests in strategic partnerships,
or other value. Although we expect that management of Advanced Nanofiber will limit any such issuances of equity to those in which
the exchange of underlying intrinsic value is favorable, or at least not unfavorable, thereby resulting in no actual dilution of
economic value in the firm, valuing technology firms is challenging at best and to some degree, at least, subjective, and there
can be no assurance that any such transactions will not result in some dilution of economic value.
Our chief executive officer is allocating
increasing amounts of his time and focus to matters associated with Advanced Nanofibers, a business in which we currently hold
less than a 24% interest.
Since September 2016, when we became one of the founding co-venturers
in Advanced Nanofibers, LLC, our chief executive officer, Steven Malone, has been allocating increasing amounts of his time and
focus to the business, operational, legal and administrative matters associated with Advanced Nanofibers, a trend that we currently
expect to continue indefinitely. Although we currently hold less than a 24% interest in Advanced Nanofibers, Mr. Malone’s
increasing allocation of his time and focus in the direction of this pursuit reflects our senior management’s belief in the
growth prospects for Advanced Nanofibers, both top-line and bottom-line, and the fact that earnings from that venture, if and when
achieved. While our management team remains as optimistic as ever relative to the prospects surrounding our core coatings business,
it views the opportunities associated with the business of Advanced Nanofibers – even though we currently hold less than
a 24% minority interest in it – as presenting a uniquely promising economic opportunity given the proprietary technology
it possesses coupled with the diverse range of very large markets to which it can be applied. Moreover, our active role and involvement
in Advanced Nanofibers has been understood by all of the co-venturers in Advanced Nanofibers since its inception as being strategically,
operationally and administratively vital to its development. For these reasons, and despite the fact that there can be no assurance,
our management team believes that Mr. Malone’s increasing focus on Advanced Nanofibers represents the optimal allocation
of his time on behalf of the Company.
Because our chief executive officer
holds a significant interest in Advanced Nanofibers separate from the interest he holds through the Company, there exists a conflict
of interest which may cause him to make decisions surrounding the allocation of our limited resources with which you may disagree.
Our chief executive officer, Steven Malone, beneficially holds 23,408,848
(93,074,102 fully diluted) shares of our common stock, which currently represents 4.74% (12.85% fully diluted) of our total shares
outstanding. In addition, and through various other entities, he also currently holds an indirect 10% beneficial interest in Advanced
Nanofibers, a company in which, separately, we own an approximate 24% interest. Furthermore, Mr. Malone has indirect holdings and
influence through other members of Advanced Nanofibers. Because, by contrast, our core coatings business is owned 100% by us, there
exists a risk that Mr. Malone could make decisions on our behalf to allocate human and financial resources of ours, including his
own time, to the development and operations of Advanced Nanofibers with which you may not agree.
Risks Associated with the Prospective Dilution
of Our Common Stock
Future issuances of our common stock
or preferred stock are likely and may dilute your economic interest.
We are likely to issue additional shares of our common stock in
the future in connection with various financings, which will likely have to do repeatedly until such time, if at all, that our
revenues attain a consistent level at which they can support both our operating and capital investment requirements. While any
such financings may involve registered or unregistered sales of securities, in the case of unregistered sales, the subject securities
may, and likely will – given our relatively early stage of development – be either preferred stock or debt, convertible
into common stock on the basis of a given ratio. We may also issue shares of our common stock or preferred stock in connection
with acquisitions and/or business combinations, and here, too, in either registered or unregistered, exempted transactions. Although
we intend to limit any financings or acquisitions in relation to which we issue shares to those for which the implied value of
our shares are equal to or greater than our most reasoned estimate of our intrinsic value, thereby avoiding dilution to our existing
stockholders in terms of economic value, there can be no assurance in this regard because (i) intrinsic value is, to at least some
degree, an inherently subjective benchmark range in relation to which reasonable minds can differ, and (ii) financings may be critical
at a time when we are unable to attract the interest of potential investors willing to invest on the basis of a valuation considered
by us to be within our intrinsic value range.
Other Risks Associated with an Investment
in our Common Stock
A holder of certain of our debt has
veto power over the filling of vacant board seats, which we have agreed to limit to five until that debt is retired.
Our corporate bylaws currently provide for a classified board of
directors consisting of up to 15 members, as determined from time to time within the discretion of our board of directors through
the due execution of appropriate resolutions and procedures. As of the date of this Memorandum, we have a 5-person classified board
of directors with three sitting members and two vacancies. Of the three sitting members, one, John Kuehne, is a Class I member,
whose current term expired on July 22, 2016, one, Donald Schoenfeld, is a Class II member, whose current term expires on July 22,
2017, and one, Steven Malone, is a Class III member, whose current term expires on July 22, 2018. In accordance with a debt restructuring
effected concurrently with the consummation of the Merger, however, and since amended, we have agreed to limit the size of our
board of directors to no more than five sitting members until such time as that debt is satisfied and to obtain the consent of
the holder of such debt to any directorship appointments effectively filling the two existing vacancies in the meantime. As a result
of this agreement, and though still possessing all of the same voting rights relative to the constitution of our board of directors,
holders of our common stock, individually and collectively, are deprived for the time being of the same right to influence and
effect such constitution as otherwise entitled under Nevada corporate law and our articles of incorporation and bylaws, and there
can be no assurance that the constitution of our board of directors will be consistent with what it would be in the absence of
this agreement and/or that any actions taken or not taken by our board of directors during the effectiveness of this agreement
will be consistent with those that would have occurred were it not in place.
Future issuances of our common stock
or preferred stock are likely and may depress our stock price.
We may issue additional shares of our common stock in the future
in connection with financings, which we expect to do in the very near-term and will likely have to do repeatedly until such time,
if at all, that our revenues attain a consistent level at which they can support both our operating and capital investment requirements.
While any such financings may involve registered or unregistered sales of securities, in the case of unregistered sales, the subject
securities may, and likely will – given our relatively early stage of development – be either preferred stock or debt,
convertible into common stock on the basis of a given ratio. We may also issue shares of our common stock or preferred stock in
connection with acquisitions and/or business combinations, and here, too, in either registered or unregistered, exempted transactions.
Although we intend to limit any financings or acquisitions in relation to which we issue shares to those for which the implied
value of our shares are equal to or greater than our most reasoned estimate of our intrinsic value, thereby avoiding dilution to
our existing stockholders in terms of economic value, there can be no assurance in this regard because (i) intrinsic value is,
to at least some degree, an inherently subjective benchmark range in relation to which reasonable minds can differ, and (ii) financings
may be critical at a time when we are unable to attract the interest of potential investors willing to invest on the basis of a
valuation considered by us to be within our intrinsic value range. In any event, future issuances of shares may have the effect
of depressing our stock price for any one or more of the following reasons, among others:
|
▪
|
the market perceives our shares as having been issued below intrinsic value, thereby diluting the economic interests of our shareholders, who, thereafter sell for that reason, thereby putting downward pressure on the stock price;
|
|
▪
|
the market will perceive an “overhang” in shares soon to be entering the float via resale registration or exemption, and discount the current value accordingly, thereby putting downward pressure on the stock price;
|
|
▪
|
investors that acquire substantial blocks of common stock in connection with a private financing subsequently determine to sell out their position rapidly once the shares become eligible for resale, particularly if they are professional investors that acquired their shares at a price below current market, but in any event putting downward pressure on the stock price;
|
|
▪
|
recipients of shares in a business combination subsequently determine to sell out their position rapidly once the shares become eligible for resale, particularly if they are individual investors that had held the shares throughout an extended period of illiquidity, but in any event putting downward pressure on the stock price.
|
Future sales of our common stock
by our officers or directors may depress our stock price.
Our officers and directors are not contractually obligated to refrain
from selling any of their shares; therefore, our officers and directors may sell any shares owned by them which are registered
under the Securities Act, or which otherwise may be sold without registration to the extent permitted by Rule 144 or other exemptions.
Because of the perception by the investing public that a sale by such insiders may be reflective of their own lack of confidence
in our prospects, the market price of our common stock could decline as a result of a sell-off following sales of substantial amounts
of common stock by our officers and directors into the public market, or even the mere perception that these sales could occur.
Though our common stock is quoted
on the OTC Markets, there is no liquidity and no established public market for our common stock, which means that it will likely
be difficult to sell shares.
Our common stock is quoted over the counter on the OTC Markets under
the symbol “FIND.” The OTC Markets is not an exchange and the over-the-counter market is a significantly more limited
market than established trading markets and national exchanges such as the New York Stock Exchange and Nasdaq, including the Nasdaq
Global Select Market. Broker dealers may not be willing to make a market in shares quoted solely over the counter such as ours.
In addition, many of the issues traded on the OTC Markets, including our own, are often characterized by low trading volumes and
price volatility, which may make it difficult for an investor holding shares to sell them on acceptable terms.
Although we are an Exchange Act reporting company, there is no active
trading market for our common stock. There can be no assurance that an active trading market will ever develop for our common stock
or, if it does develop, that it will be maintained. Failure to develop or maintain an active trading market will generally result
in relatively low-priced shares, which may, in turn, cause an investor to be unable to sell its shares or to attempt to sell its
shares with the effect of lowering the market price, all of which could lead to a complete or partial loss of investment. Unless
an active trading market develops for our common stock, for which there can be no assurance, investors may not be able to sell
their shares.
We cannot assure you that our common
stock will ever be listed on one of the national securities exchanges.
Although it is our intention to seek the listing of our common stock
on Nasdaq (Global or Capital Markets) or another stock exchange as soon as we are able, there can be no assurance that we will
be able to meet the initial listing standards of either of those or any other stock exchange in the foreseeable future, or ever,
or that, if we do, and we become listed, that we will be able to maintain such listing for any given period through continuing
eligibility. Until our common stock is listed on one of the national stock exchanges, for which there can be no assurance, we expect
that our common stock would continue to trade in the OTC Markets.
Since our common stock is thinly
traded, it is more susceptible to extreme rises or declines in price, and you may not be able to sell your shares at or above the
price you paid.
Investors in our common shares may have difficulty reselling them,
either at or above the price paid, or even at a fair market value. The stock markets often experience significant price and volume
changes that are not related to the operating performance of individual companies, and because our common stock is thinly traded,
it is particularly susceptible to such changes. These broad market changes may cause the market price of our common stock to decline
regardless of how well we perform as a company, and, depending on when you determine to sell, you may not be able to obtain a price
at or above the price you paid.
We were once a shell company, which,
coupled with other factors, makes resale of our restricted shares unusually challenging.
For stockholders of ours that hold restricted shares (typically
because they were acquired in private offerings), the most common means for reselling their shares requires reliance by them on
Rule 144 under the Securities Act, which provides an exemption from the otherwise applicable requirements of SEC registration.
Given the current securities brokerage environment, however, selling restricted shares of microcap penny stocks pursuant to Rule
144 is proving increasingly difficult because fewer and fewer brokerage firms are dealing in these securities and those that continue
to do so are charging transaction fees that are exorbitant to the point of making them prohibitive as a practical matter. This
reality renders the prospect of selling restricted shares of our stock through anything other than an effective registration statement
daunting at best. Complicating matters even further for our shareholders, however, is the fact that, as a former shell company,
we are subject to certain heightened regulations under Rule 144 that, as a practical matter, make the process of selling restricted
shares of our stock all the more administratively challenging. For this reason, and unless their resale is registered through an
effective registration statement, holders of restricted shares of our stock (shares purchased in an offering directly from us,
or, in any event, not purchased in the open market) are likely to encounter major challenges in selling their shares, even if and
when they otherwise qualify for resale under Rule 144.
If you require dividend income, you
should not rely on an investment in our common stock.
Because we have very limited cash resources, significant cash needs,
and a substantial accumulated deficit, we have not declared or paid any dividends on our
common stock since our inception and we do not anticipate declaring or paying any dividends on our common stock in the foreseeable
future. Rather, we intend to retain earnings, if any, for the continued operation and expansion of our business. It is unlikely,
therefore, that holders of our common stock will have an opportunity to profit from anything other than potential appreciation
in the value of our common stock held by them. If you require dividend income, you should not rely on an investment in our common
stock.
If we are unable to establish appropriate
internal controls over financial reporting, it could cause us to fail to meet our reporting obligations, result in the restatement
of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose
confidence in our reported financial information and have a negative effect on the market price for shares of our common stock.
Effective internal controls are necessary for us to provide reliable
financial reports and to effectively prevent fraud. We maintain a system of internal control over financial reporting, which is
defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer,
or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
As a public company that files reports under the Exchange Act, we
have significant additional requirements for enhanced financial reporting and internal controls. We are required to document and
test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which
requires annual management assessments of the effectiveness of our internal controls over financial reporting. Our disclosure controls
and procedures are not effective as a result of the material weakness in internal control over financial reporting because of inadequate
segregation of duties over authorization, review and recording of transactions as well as the financial reporting of such transactions.
Management is attempting to develop a plan to mitigate the above material weaknesses. The process of designing and implementing
effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the
economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate
to satisfy our reporting obligations as a public company under the Exchange Act.
We cannot assure you that we will not, in the future, identify areas
requiring improvement in our internal control over financial reporting. We cannot assure you that the measures we will take to
address any areas in need of improvement will be successful or that we will implement and maintain adequate controls over our financial
processes and reporting in the future as we continue our growth. If we are unable to establish appropriate internal financial reporting
controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial
statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our
reported financial information and have a negative effect on the market price for shares of our common stock.
Unless and until we garner analyst
research coverage, we are unlikely to create long-term market value in our common stock.
Although we are an Exchange Act reporting company and our common
stock is quoted on the OTC Markets, we are unaware of any investment banking firms, large or small, that currently provide analyst
research coverage on the Company and, given our relatively small size within the public securities markets, it is unlikely that
any investment banks will begin doing so in the near future. Without continuing research coverage by reputable investment banks
or similar firms, it is considerably more difficult to attract the interest of most institutional investors, which are generally
considered to be very important in achieving a desirable balance in shareholder composition and long-term market value (as distinct
from intrinsic value) in a stock. While we intend to continue to aggressively pursue investor relations initiatives designed to
create visibility for the Company and common stock, and hope to garner analyst coverage in the future, there can be no assurance
that we will succeed in this regard and any inability on our part to develop such coverage is likely to materially impede the realization
of long-term market value in our common stock.
Our common stock is subject to the
“penny stock” regulations, which is likely to make it more difficult to sell.
Our common stock is considered a “penny stock,” which
generally is a stock trading under $5.00 and not registered on any national securities exchanges under applicable securities laws.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. This regulation
generally has the result of reducing trading in such stocks, restricting the pool of potential investors for such stocks, and making
it more difficult for investors to sell their shares. Prior to a transaction in a penny stock, a broker-dealer is required to:
|
▪
|
deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market;
|
|
▪
|
provide the customer with current bid and offer quotations for the penny stock;
|
|
▪
|
explain the compensation of the broker-dealer and its salesperson in the transaction;
|
|
▪
|
provide monthly account statements showing the market value of each penny stock held in the customer’s account; and
|
|
▪
|
make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.
|
These requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that is subject to the penny stock rules. For this reason, investors in our
common stock may find it more difficult to sell their shares.
As an issuer of “penny stock,”
we do not currently benefit from the protection provided by the federal securities laws relating to forward-looking statements.
Although, generally, federal securities laws provide a safe harbor
for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor
is not available to issuers of penny stocks. As a result, and since our common stock has consistently traded in recent years at
a level at which it is considered to constitute a “penny stock,” we do not have the benefit of this safe harbor protection
in the event of any legal action based upon a claim that any forward-looking statements contained in any one or more of our public
filings proved to be inaccurate. Any such legal action could hurt our financial condition.
Our stock price could be volatile,
and your investment could suffer a decline in value.
The trading price of our common stock is likely to be highly volatile
and could be subject to extreme fluctuations in price in response to various factors, many of which are beyond our control, including:
|
▪
|
the trading volume of our shares;
|
|
▪
|
the number of securities analysts, market-makers and brokers following our common stock;
|
|
▪
|
changes in, or failure to achieve, financial estimates by securities analysts;
|
|
▪
|
new products introduced or announced by us or our competitors;
|
|
▪
|
announcements of technological innovations by us or our competitors;
|
|
▪
|
actual or anticipated variations in quarterly operating results;
|
|
▪
|
announcements by us of significant acquisitions, strategic partnerships, joint ventures, or capital commitments;
|
|
▪
|
additions or departures of key personnel;
|
|
▪
|
sales of our common stock; and
|
|
▪
|
stock market price and volume fluctuations of publicly-traded, particularly microcap, companies generally.
|
The volatility of our common stock is illustrated by reference to
the fact that, during the twelve months ended December 31, 2016, the market trading price of our common stock has fluctuated from
a low of $0.003 to a high of $0.013 per share.
The stock market has recently experienced significant price and
volume fluctuations. Volatility in the market price for particular companies has often been unrelated or disproportionate to the
operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common
stock, regardless of our operating performance. In addition, securities class action litigation has often been initiated following
periods of volatility in the market price of a company’s securities. A securities class action suit against us could result
in substantial costs, potential liabilities and the diversion of management’s attention and resources from our business.
Moreover, and as noted above, our common stock is currently quoted on the OTC Market and, further, sales of our shares are subject
to the penny stock regulation. Price fluctuations in such shares are particularly volatile and subject to manipulation by market
makers, short-sellers and option traders.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
There were no reportable events under this Item 1B during the fiscal
year ended December 31, 2016.
ITEM 2. PROPERTIES.
Our principal executive offices are located
at 1313 South Killian Drive, Lake Park, Florida 33403. We lease this 8,560 square foot facility under a five-year lease agreement
ending on December 31, 2019 with a with an option to renew for one successive term of five years at the then current occupancy
rates with 1313 Group LLC. Our monthly rent, including related sales and use taxes, is $7,211. In accordance with the terms of
this leasehold agreement, we are responsible for all utilities, repairs and maintenance.
We also leased a research facility located at 223 Fentress Boulevard,
Daytona Beach, Florida 32114 as of October 2014. In February 2015, we entered into a month to month lease agreement with an expiration
date of December 31, 2016 for this 3,200 square foot facility. Monthly rent, including related sales and use taxes, was $2,929.
In accordance with the terms of this leasehold agreement, we were responsible for all utilities, repairs and maintenance. In June
2016, we provided notice that we were terminating this lease agreement effective July 31, 2016. There were no termination fees
incurred due to the lease being a month to month lease agreement. As of December 31, 2016, we had accrued $7,891 for past rent
owed less a deposit of $2,500 (total $5,391). We have since relocated all property and equipment as well as our Vice President
of Research and Development whom previously occupied this facility to our corporate headquarters located in Lake Park, Florida.
ITEM 3. LEGAL PROCEEDINGS.
As of the date of this annual report on Form 10-K for the fiscal
year ended December 31, 2016 and to the best knowledge of our officers and directors, there are no pending material legal proceedings
to which we were a party and none are threatened or contemplated. There can be no assurance, however, that we will not be made
a party to litigation in the future.
ITEM 4. MINE SAFETY DISCLOSURES.
There were no reportable events under this Item 4 during the fiscal
year ended December 31, 2016.