NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three
Months and Six Months Ended June 30, 2017 and 2016
1.
Organization and Basis of Presentation
Organization
and Reverse Merger
On
January 24, 2017, Alltemp, Inc. (“Alltemp”), a Delaware corporation, CSES Group, Inc. (“CSES”), a Nevada
corporation, and CSES Acquisition, Inc. (“Merger Sub”), a Nevada corporation, executed an Agreement and Plan of Merger
(the “Merger Agreement”) that provided for Merger Sub to be merged into CSES (the “Merger”), with each
outstanding share of common stock of CSES to be converted into 10.65375 shares of Alltemp’s common stock (the “Exchange
Ratio”), and each outstanding warrant and stock option to purchase shares of CSES common stock to be cancelled in exchange
for a warrant or stock option to purchase shares of Alltemp’s common stock based on the Exchange Ratio.
On
April 21, 2017, in connection with the Merger, the Company’s Certificate of Incorporation was amended to change the Company’s
name to Alltemp, Inc. from Source Financial, Inc. and to increase the Company’s authorized shares to 500,000,000 shares
of common stock (par value $0.001 per share) and 10,000,000 shares of preferred stock (par value $0.01 per share).
On
April 27, 2017, the consummation of the Merger was effective and CSES became a wholly-owned subsidiary of Alltemp. Pursuant to
the Merger Agreement, the Company (1) issued to the shareholders of CSES an aggregate of 127,045,969 shares of the Company’s
common stock; (2) issued to the holders of warrants to purchase CSES common stock, warrants to purchase an aggregate of 18,409,680
shares of the Company’s common stock; (3) issued to the holders of stock options to purchase CSES common stock, stock options
to purchase an aggregate of 31,961,200 shares of the Company’s common stock; and (4) issued to the holder of a convertible
note of CSES, a promissory note of the Company in the principal amount of $100,000, convertible into 535,681 shares of the Company’s
common stock. The Series C Preferred Stock of Alltemp had previously been converted into common stock, and all stock options and
warrants of Alltemp were cancelled at the consummation of the Merger.
Additional
information with respect to the reverse merger is provided at Note 3.
Basis
of Presentation
For
financial reporting purposes, CSES was considered the accounting acquirer in the transaction and the merger was accounted for
as a reverse merger. Accordingly, the historical financial statements presented herein are those of CSES and do not include the
historical financial results of Alltemp through April 27, 2017. The stockholders’ equity section of Alltemp’s balance
sheet has been retroactively restated for all periods presented to reflect the accounting effect of the reverse merger transaction.
The net loss per share and weighted average common shares outstanding also reflect the retroactive restatement for all periods
presented. All costs associated with the reverse merger transaction were expensed as incurred. Unless the context indicates otherwise,
Alltemp and CSES are hereinafter referred to as the “Company”.
As
a result of the Merger, the former stockholders of CSES owned approximately 76.6% of Alltemp’s outstanding shares of common
stock immediately following the consummation of the Merger, reflecting effective control at the closing of the transaction. In
addition, CSES management and board members became the management and board members of Alltemp at the closing of the transaction.
Accordingly, for legal purposes Alltemp was the legal acquirer and CSES was the legal acquiree, but for accounting purposes, CSES
was the accounting acquirer and Alltemp was the accounting acquiree.
The
interim condensed consolidated financial statements are unaudited, but in the opinion of management of the Company, contain all
adjustments, which include normal recurring adjustments, necessary to present fairly the financial position at June 30, 2017,
and the results of operations and cash flows for the three months and six months ended June 30, 2017 and 2016. The condensed consolidated
balance sheet as of December 31, 2016 is derived from the Company’s audited financial statements. Operating results for
the interim periods presented are not necessarily indicative of the results of operations to be expected for a full fiscal year.
The
interim financial statements and related notes have been prepared pursuant to the rules and regulations of the U.S. Securities
and Exchange Commission (“SEC”) with respect to interim financial statements. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations, although management of the Company believes that the disclosures in
these financial statements are adequate to make the information presented therein not misleading. These financial statements should
be read in conjunction with the audited financial statements of CSES that were included in the Company’s Current Reports
on Form 8-K and Form 8-K/A, as filed with the SEC on April 28, 2017 and May 23, 2017, respectively.
Business
Operations
CSES
was incorporated in the State of Nevada on June 12, 2015 for the purpose of commercializing proprietary refrigerants under the
name
alltemp®.
CSES
develops, markets and sells commercial refrigerants that are marketed under the name
alltemp®
and which are a proven
solution for replacement of HCFC-22, better known as R-22, which is one of the world
’
s most commonly used refrigerants,
as well as R-134a and R-404a. R-22 is rapidly being phased out in all developed countries due to environmental concerns over its
strong effect on the depletion of the Earth
’
s ozone layer. The
alltemp®
proprietary refrigerants, with
various blends classified as L, M, 4 and H, have broad applications in heating, ventilation and air conditioning (
“
HVAC
”
)
systems, refrigeration, foam insulation, and industrial solvents.
The
Company’s activities are subject to significant risks and uncertainties, including the need for additional capital, as described
herein. The Company has not yet developed sustainable revenue-generating operations, does not have positive cash flows from operations,
and is dependent on periodic infusions of debt and equity capital to fund its operating requirements.
The
Company’s common stock is traded on the OTCQB operated by the OTC Markets under the symbol “LTMP”.
Going
Concern
The
Company’s condensed consolidated financial statements have been presented on the basis that the Company is a going concern,
which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As reflected in
the accompanying condensed consolidated financial statements, the Company has had nominal recurring sources of revenue to date,
and during the six months ended June 30, 2017, the Company incurred a net loss of $4,189,195 and used cash in operations of $978,772.
Additionally, the Company had an accumulated deficit of $8,017,936 as of June 30, 2017. The Company has financed its working capital
requirements since inception through the sale of its equity securities and borrowings.
At
June 30, 2017, the Company had cash of $2,415,009, which management believes is not sufficient to fund the Company’s operations
through June 30, 2018, nor to fund the Company’s continuing efforts during this period to transition from a technology development
company to a company with sustainable commercial operations. Management is currently seeking to raise additional funds, primarily
through the issuance of debt or equity securities, and estimates that a significant amount of capital will be necessary to advance
the development of its business to the point at which it will become commercially viable and self-sustaining.
As
a result, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern
within one year of the date that the condensed consolidated financial statements are being issued. In addition, the Company’s
independent registered public accounting firm, in their report on the Company’s financial statements for the year ended
December 31, 2016, has also expressed substantial doubt about the Company’s ability to continue as a going concern. The
ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds
and implement its business plan, and to ultimately achieve sustainable operating revenues and profitability. The condensed consolidated
financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
As
market conditions present uncertainty as to the Company’s ability to secure additional funds, there can be no assurances
that the Company will be able to secure additional financing on acceptable terms, or at all, as and when necessary to continue
to conduct operations. Such financing may contain undue restrictions on the Company’s operations, in the case of debt financing,
or cause substantial dilution for the Company’s stockholders, in case of equity financing. If cash resources are insufficient
to satisfy the Company’s ongoing cash requirements, the Company would be required to scale back or discontinue its operations,
or obtain funds, if available (although there can be no certainty), through strategic alliances that may require the Company to
relinquish rights to its technology, or to discontinue its operations entirely.
The
amount and timing of future cash requirements in 2018 and thereafter will depend on the capital resources required to develop
and expand the Company’s business. No assurances can be given that any future financing will be available or, if available,
that it will be on terms that are satisfactory to the Company.
[i]
Reclassifications
Certain
comparative figures in 2016 have been reclassified to conform to the current year’s presentation. These reclassifications
were immaterial, both individually and in the aggregate.
2.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying condensed consolidated financial statements of the Company are prepared in accordance with United States generally
accepted accounting principles (“GAAP”) and include the financial statements of Alltemp and its wholly-owned subsidiary,
CSES. Intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during
the reporting period. Significant estimates include the accounting for potential liabilities, the assumptions utilized in valuing
stock-based compensation issued for services, and the realization of deferred tax assets. Actual results could differ from those
estimates.
Cash
Concentrations
The
Company maintains cash balances with financial institutions in federally-insured accounts. The Company may periodically have cash
balances in banks in excess of FDIC insurance limits. The Company maintains its accounts with financial institutions with high
credit ratings. The Company has not experienced any losses to date resulting from this practice.
Research
and Development
Research
and development costs consist primarily of manufactured products utilized in research activities, fees paid to consultants and
outside service providers, laboratories and universities, and other expenses relating to the research and development of new products
and technology.
Research
and development costs were $104,636 and $125,790 for the three months ended June 30, 2017 and 2016, respectively, and $276,476
and $245,162 for the six months ended June 30, 2017 and 2016, respectively.
Concentration
of Risk
During
the three months and six months ended June 30, 2017, 90% and 78%, respectively, of the Company’s revenues were derived from
two customers.
The
Company purchased storage tanks from one supplier during the year ended December 31, 2016. No purchases of storage tanks
were made during the six months ended June 30, 2017. The Company believes that there are alternate suppliers of such storage tanks.
Income
Taxes
The
Company accounts for income taxes under an asset and liability approach for financial accounting and reporting for income taxes.
Accordingly, the Company recognizes deferred tax assets and liabilities for the expected impact of differences between the financial
statements and the tax basis of assets and liabilities.
The
Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized.
In the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of
its recorded amount, an adjustment to the deferred tax assets would be credited to operations in the period such determination
was made. Likewise, should the Company determine that it would not be able to realize all or part of its deferred tax assets in
the future, an adjustment to the deferred tax assets would be charged to operations in the period such determination was made.
The
Company is subject to U.S. federal income taxes and income taxes of various state tax jurisdictions. As the Company’s net
operating losses have yet to be utilized, all previous tax years remain open to examination by Federal authorities and other jurisdictions
in which the Company currently operates or has operated in the past. The Company had no unrecognized tax benefits as of June 30,
2017 and December 31, 2016 and does not anticipate any material amount of unrecognized tax benefits within the next 12 months.
The
Company accounts for uncertainties in income tax law under a comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns as prescribed by GAAP.
The tax effects of a position are recognized only if it is “more-likely-than-not” to be sustained by the taxing authority
as of the reporting date. If the tax position is not considered “more-likely-than-not” to be sustained, then no benefits
of the position are recognized. As of June 30, 2017, the Company had not recorded any liability for uncertain tax positions. In
subsequent periods, any interest and penalties related to uncertain tax positions will be recognized as a component of income
tax expense.
The
Company is currently delinquent with respect to certain of its U.S. federal income tax filings.
Stock-Based
Compensation
The
Company may periodically issue common stock options to members of the Board of Directors, officers, employees and consultants
for services rendered. Options will vest and expire according to terms established at the issuance date of each grant.
The
Company accounts for stock-based payments to officers, employees and directors by measuring the cost of services received in exchange
for equity awards based on the grant date fair value of the awards, with the cost recognized as compensation expense on the straight-line
basis in the Company’s financial statements over the vesting period of the awards. The Company accounts for stock-based
payments to consultants by determining the value of the stock compensation based upon the measurement date at either (a) the date
at which a performance commitment is reached or (b) at the date at which the necessary performance to earn the equity instruments
is complete.
Stock
options granted to outside consultants are revalued each reporting period to determine the amount to be recorded as an expense
in the respective period. As the stock options vest, they are valued on each vesting date and an adjustment is recorded for the
difference between the value already recorded and the value on the date of vesting.
The
fair value of stock options granted as stock-based compensation is determined utilizing the Black-Scholes option-pricing model,
and is affected by several variables, the most significant of which are the life of the equity award, the exercise price of the
stock option as compared to the fair market value of the common stock on the grant date, and the estimated volatility of the common
stock over the term of the equity award. Prior to the April 27, 2017 reverse merger date, expected volatilities were based on
an average historical stock price volatility of comparable public companies that were deemed to be representative of future stock
price trends, as the Company did not have a trading history for its own common stock. Since the reverse merger date, volatilities
are based on the historical volatility of the Company’s common stock. The risk-free interest rate is based on the U.S. Treasury
yield curve in effect at the time of grant. The fair market value of common stock is determined by reference to the quoted market
price of the Company’s common stock.
The
Company recognizes the fair value of stock-based compensation awards in selling, general and administrative costs and in research
and development costs, as appropriate, in the Company’s condensed consolidated statement of operations. The Company issues
new shares of common stock to satisfy stock option exercises.
Revenue
Recognition
The
Company recognizes revenue when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists;
(ii) delivery of the products and/or services has occurred; (iii) the fees earned can be readily determined; and (iv) collectability
of the fees is reasonably assured.
As
part of the Company’s product commercialization efforts, the Company periodically ships product to potential customers on
a trial basis under an “early adopter” program. As the Company maintains ownership of these products during the trial
period, these products are carried in inventory, at standard cost. At such time that the customer has completed evaluation of
the product’s performance and has formally confirmed that it will retain and utilize the product in its HVAC system, revenues
from such arrangements will be recorded on a cost recovery basis, without interest, which are generally expected within one year
of such installation. The Company does not recognize any revenues until all of the Company’s costs have been recovered.
Costs under this program are charged to selling, general and administrative costs. The Company reviews the status of such products
at each quarter end and records a loss for any products for which it does not expect to recover its costs. Through June 30, 2017,
the Company had not recognized any revenues under the early adopter program.
Accounts
Receivable
The
Company evaluates the collectability of its accounts receivable based on a number of factors. In circumstances where the Company
becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for
bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will
ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded
based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding.
The
allowance for doubtful accounts is established through a provision reducing the carrying value of receivables. At June 30, 2017
and December 31, 2016, management did not believe an allowance for doubtful accounts was necessary. The Company has not incurred
any losses from uncollectible accounts receivable to date.
Inventories
Inventories
consist of raw materials, work in progress and finished goods, which includes all direct material, labor and other overhead costs,
and purchased components. Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories also include
finished goods and purchased components under the Company’s “early adopter” program of $13,166 at June 30, 2017.
Cost
of Sales
Cost
of sales includes salaries, benefits, raw materials, packaging, overhead, and other direct and indirect costs incurred to manufacture
the Company’s proprietary
alltemp®
refrigerants at the Company’s Roseburg, Oregon facility, and to deliver
the refrigerant to the customer’s facility and install it to the customer’s specifications. During the year ended
December 31, 2016, prior to the commencement of revenue generating operations, such costs were classified as research and development
costs.
Selling
Expenses
Selling
expenses consist of commissions, advertising, marketing, conferences, travel and other similar costs incurred to market the Company’s
proprietary
alltemp®
refrigerants, as well as costs incurred under the Company’s “early adopter”
program (see “Revenue Recognition” above).
Comprehensive
Income (Loss)
Components
of comprehensive income or loss, including net income or loss, are reported in the financial statements in the period in which
they are recognized. Comprehensive income or loss is defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Net income (loss) and other comprehensive income (loss) are reported net of any
related tax effect to arrive at comprehensive income (loss). The Company did not have any items of comprehensive income (loss)
for the three months and six months ended June 30, 2017 and 2016.
Earnings
(Loss) Per Share
The
Company’s computation of earnings (loss) per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured
as the income (loss) attributable to common stockholders divided by the weighted average common shares outstanding for the period.
Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible
notes payable, warrants and stock options) as if they had been converted at the beginning of the periods presented, or issuance
date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS.
Loss
per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during
the respective periods. Basic and diluted loss per common share is the same for all periods presented because all preferred shares,
warrants and stock options outstanding are anti-dilutive.
Weighted
average common shares outstanding has been retroactively restated for the equivalent number of shares received by the accounting
acquirer as a result of the reverse merger as if these shares had been outstanding as of the beginning of the earliest period
presented.
At
June 30, 2017 and 2016, the Company excluded the outstanding securities summarized below, which entitle the holders thereof to
acquire shares of common stock, from its calculation of earnings per share, as their effect would have been anti-dilutive.
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
8% convertible note payable
|
|
|
532,687
|
|
|
|
—
|
|
Common stock options
|
|
|
31,961,250
|
|
|
|
21,307,500
|
|
Common stock warrants
|
|
|
18,409,680
|
|
|
|
—
|
|
Total
|
|
|
50,903,617
|
|
|
|
21,307,500
|
|
Fair
Value of Financial Instruments
The
authoritative guidance with respect to fair value established a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three levels, and requires that assets and liabilities carried at fair value be classified
and disclosed in one of three categories, as presented below. Disclosure as to transfers in and out of Levels 1 and 2, and activity
in Level 3 fair value measurements, is also required.
Level
1. Observable inputs such as quoted prices in active markets for an identical asset or liability that the Company has the ability
to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded
securities and exchange-based derivatives.
Level
2. Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly
observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include
fixed income securities, non-exchange based derivatives, mutual funds, and fair-value hedges.
Level
3. Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity
to develop its own assumptions. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded non-exchange-based
derivatives and commingled investment funds, and are measured using present value pricing models.
The
Company determines the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based
on the lowest level input that is significant to the fair value measurement in its entirety. In determining the appropriate levels,
the Company performs an analysis of the assets and liabilities at each reporting period end.
The
carrying value of financial instruments (consisting of cash, accounts receivable, and accounts payable and accrued expenses) is
considered to be representative of their respective fair values due to the short-term nature of those instruments.
Property
and Equipment
Property
and equipment is recorded at cost. Major improvements are capitalized, while maintenance and repairs are charged to expense as
incurred. Gains and losses from disposition of property and equipment are included in income and expense when realized. Depreciation
of property and equipment is provided using the straight-line method over the following estimated useful lives:
Plant
equipment
|
5
years
|
Computer
equipment
|
5
years
|
Furniture
and fixtures
|
7
years
|
The
Company recognizes depreciation costs in manufacturing, selling, general and administrative costs, and research and development
costs in the Company’s statements of operations. Maintenance and repairs that do not improve or extend the useful life of
the respective assets are expensed.
Long-Lived
Assets
The
Company reviews long-lived assets, consisting primarily of property and equipment, for impairment at each fiscal year end or when
events or changes in circumstances indicate the carrying value of these assets may exceed their current fair values. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows,
an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the assets.
Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated. The Company has not historically recorded any impairment to its long-lived
assets. In the future, if events or market conditions affect the estimated fair value to the extent that a long-lived asset is
impaired, the Company will adjust the carrying value of these long-lived assets in the period in which the impairment occurs.
As of June 30, 2017 and December 31, 2016, the Company had not deemed any long-lived assets as impaired, and was not aware of
the existence of any indicators of impairment at such dates.
Recent
Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2014-09, Revenue
from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 will eliminate transaction- and industry-specific revenue
recognition guidance under current GAAP and replace it with a principle based approach for determining revenue recognition. ASU
2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the
contract. ASU 2014-09 also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and
cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from
costs incurred to obtain or fulfill a contract. The FASB has issued ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, and ASU
2016-20, all of which clarify certain implementation guidance within ASU 2014-09. ASU 2014-09 is effective for reporting periods
beginning after December 15, 2017, with early adoption permitted. Entities will be able to transition to the standard either retrospectively
or as a cumulative-effect adjustment as of the date of adoption. The Company will adopt the provisions of ASU 2014-09 in the quarter
beginning January 1, 2018. Management is currently assessing the impact of the adoption of ASU 2014-09 and has not determined
its effect on the Company’s consolidated financial statements.
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842)(“ASU 2016-02”). ASU 2016-02
requires a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value
of the lease payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key
information about leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost,
calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. ASU 2016-02 requires
classification of all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide
the amount, timing and uncertainty of cash flows arising from leases. A modified retrospective transition approach is required
for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements, with certain practical expedients available. ASU 2016-02 is effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company
will adopt the provisions of ASU 2016-02 in the quarter beginning January 1, 2019. The Company generally does not finance purchases
of property and equipment, but does lease its operating facilities. While the Company is continuing to assess the potential impact
of ASU 2016-02, it currently expects that most of its lease commitments will be subject to ASU 2016-02 and accordingly, upon adoption
will be recognized as lease liabilities and right-of-use assets in the Company’s balance sheet.
In
July 2017, the FASB issued Accounting Standards Update No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities
from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down
Round Features; (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). ASU 2017-11
allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature)
is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with
down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value
of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding
financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income
available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features
containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be
amortized to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within
those fiscal years. Early adoption is permitted. The guidance in ASU 2017-11 can be applied using a full or modified retrospective
approach. The adoption of ASU 2017-11 is not expected to have any impact on the Company’s financial statement presentation
or disclosures.
Management
does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have
a material impact on the Company’s financial statement presentation or disclosures.
3.
Agreement and Plan of Merger
On
April 27, 2017, pursuant to a Merger Agreement dated as of January 24, 2017 by and among Alltemp (formerly Source Financial, Inc.)
and CSES, Alltemp issued 127,045,969 shares of its common stock, constituting approximately 76.6% of the total shares of common
stock of Alltemp outstanding upon consummation of the Merger, in exchange for all of the issued and outstanding shares of CSES.
As a result of the Merger, CSES became a wholly-owned subsidiary of Alltemp. The terms of the transaction were determined through
arm’s-length negotiations between Alltemp and CSES.
Additionally,
pursuant to the Merger Agreement, holders of options to purchase 3,000,000 shares of CSES common stock, constituting all outstanding
CSES common stock options, received options to purchase 31,961,250 shares of Alltemp common stock, and holders of warrants to
purchase 1,728,000 shares of CSES common stock, constituting all outstanding CSES common stock warrants, received warrants to
purchase 18,409,680 shares of Alltemp common stock. At the consummation of the Merger, all stock options and warrants of Alltemp
were cancelled, and all shares of Series C Preferred Stock outstanding were converted into shares of Alltemp common stock.
As
conditions precedent to the Merger, holders of five Alltemp convertible notes payable, with an aggregate principal amount of $350,000,
plus aggregate accrued interest of $9,513, were converted into 5,892,827 shares of Alltemp common stock. In addition, an Alltemp
consultant was issued 20,404,000 shares of Alltemp common stock in full settlement of amounts owed to him for services rendered.
Alltemp
had a total of 165,852,317 shares of common stock issued and outstanding immediately after giving effect to the Merger and the
related conditions precedent on April 27, 2017. On such date, the stockholders of the Company immediately prior to the Merger
owned 38,806,348 shares of common stock (consisting of 12,509,521 shares owned by the Alltemp common shareholders and former Alltemp
preferred shareholders, 5,892,827 shares owned by the former holders of Alltemp convertible notes payable, and 20,404,000 shares
owned by an Alltemp consultant), equivalent to approximately 23.4% of the issued and outstanding shares of the Company’s
common stock, as a result of which the Company is controlled subsequent to April 27, 2017 by the former stockholders of CSES.
There were no common or preferred stock issuances subsequent to the consummation of the reverse merger on April 27, 2017 through
June 30, 2017.
A
summary of the current assets acquired and current liabilities assumed in the reverse merger transaction is as follows:
Current assets:
|
|
|
|
|
Advances and prepaid expenses
|
|
$
|
20,049
|
|
Total current assets
|
|
|
20,049
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
|
23,034
|
|
Due to former management
|
|
|
7,895
|
|
Notes payable
|
|
|
8,000
|
|
Accrued interest on notes payable
|
|
|
1,054
|
|
Total current liabilities
|
|
|
39,983
|
|
|
|
|
|
|
Net current assets (liabilities)
|
|
$
|
(19,934
|
)
|
Prior
to the consummation of the Merger, on September 20, 2016, in connection with the entry into a binding Memorandum of Understanding
between Alltemp and CSES, Alltemp provided a bridge loan aggregating $250,000 to CSES during 2016 bearing interest at the rate
of 10% per annum, which was outstanding, including accrued interest of $15,181, on the closing date of the reverse merger transaction.
Upon completion of the closing of the reverse merger transaction, the elimination of the bridge loan and accrued interest aggregating
$265,181, less the net current liabilities assumed of $19,934, has been treated as an increase to additional paid-in capital of
$245,247 at the date of the reverse merger.
4.
Inventories
Inventories
as of June 30, 2017 are summarized as follows:
|
|
June
30, 2017
|
|
|
|
|
|
Raw materials
|
|
$
|
6,517
|
|
Work in process
|
|
|
4,738
|
|
Finished goods
|
|
|
4,497
|
|
Purchased components
|
|
|
28,647
|
|
Total inventories
|
|
$
|
44,399
|
|
The
Company had no inventories at December 31, 2016.
5.
Property and Equipment
Property
and equipment as of June 30, 2017 and December 31, 2016 are summarized as follows:
|
|
June
30,
2017
|
|
|
December
31,
2016
|
|
|
|
|
|
|
|
|
Plant equipment
|
|
$
|
127,623
|
|
|
$
|
124,728
|
|
Computer equipment
|
|
|
6,545
|
|
|
|
5,290
|
|
Furniture and fixtures
|
|
|
22,388
|
|
|
|
—
|
|
Construction in process
|
|
|
76,773
|
|
|
|
24,672
|
|
|
|
|
233,329
|
|
|
|
154,690
|
|
Less accumulated depreciation
|
|
|
(43,756
|
)
|
|
|
(28,097
|
)
|
Net property and equipment
|
|
$
|
189,573
|
|
|
$
|
126,593
|
|
Construction
in process at June 30, 2017 and December 31, 2016 consists of a revised and expanded production line at the Company’s manufacturing
facility in Roseburg, Oregon. Testing of this production line began in late July 2017 and operations are expected to commence
in September 2017.
Depreciation
expense for the three months and six ended March 31, 2017and 2016 is included in the condensed consolidated statements of operations
as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing costs
|
|
$
|
6,041
|
|
|
$
|
—
|
|
|
$
|
14,237
|
|
|
$
|
—
|
|
Selling, general and administrative costs
|
|
|
912
|
|
|
|
—
|
|
|
|
1,422
|
|
|
|
—
|
|
Research and development costs
|
|
|
—
|
|
|
|
5,432
|
|
|
|
—
|
|
|
|
11,759
|
|
Total
|
|
$
|
6,953
|
|
|
$
|
5,432
|
|
|
$
|
15,659
|
|
|
$
|
11,759
|
|
The
Company began its manufacturing activity in early 2017. Through December 31, 2016, depreciation expense related to research and
development activities with respect to Company’s proprietary
alltemp®
refrigerants.
6.
Notes Payable
Notes
Payable
As
of June 30, 2017, notes payable consisted of two notes with an aggregate principal amount of $8,000 and accrued interest payable
of $1,222, as described below. These notes were assumed by the Company on April 27, 2017 in connection with the Merger. These
notes were due and payable upon maturity in June 2017, and were repaid in full, including accrued interest, subsequent to June
30, 2017.
On
March 21, 2016, Alltemp entered into a 6-month promissory note agreement for $3,000. The note payable, which was originally due
on September 21, 2016, bears interest at 12% per annum and is unsecured. Subsequently, the note was amended to provide for a due
date of June 21, 2017. As of June 30, 2017, the note had a total balance due of $3,459, including accrued interest of $459.
On
March 23, 2016, Alltemp entered into a 6-month promissory note agreement for $5,000. The note payable, which was originally due
on September 23, 2016, bears interest at 12% per annum and is unsecured. Subsequently, the note was amended to provide for a due
date of June 23, 2017. As of June 30, 2017, the note had a total balance due of $5,763, including accrued interest of $763.
Interest
expense charged to operations with respect to these promissory notes payable during the three months and six months ended June
30, 2017 was $168.
8%
Convertible Promissory Note Payable
On
August 5, 2016, CSES issued an unsecured 8% Convertible Promissory Note (the “8% Note”) in the principal amount of
$100,000 to an accredited investor. The 8% Note was due and payable in full on August 5, 2017. The 8% Note was originally convertible
at any time into shares of CSES common stock at a price per share of $2.00, equivalent to 50,000 shares of CSES common stock.
In connection with the Merger, the 8% Note became convertible at $0.1877 per share into 532,687 shares of Alltemp common stock.
As of June 30, 2017, the 8% Note had a total balance due of $107,285, including accrued interest in the amount of $7,285. Interest
expense charged to operations with respect to the 8% Note during the three months and six months ended June 30, 2017 was $1,995
and $3,995, respectively.
10%
Demand Convertible Promissory Note Payable to Related Party
On
September 20, 2016, the Company entered into a Binding Memorandum of Understanding (“MOU”) with Alltemp, whereby CSES
and Alltemp agreed to cause a merger of CSES with Alltemp, and Alltemp agreed to provide certain financial accommodations and
services to the CSES. Pursuant to the terms of the MOU, CSES issued an unsecured 10% Demand Convertible Promissory Note (the “10%
Note”) in favor of Alltemp for a total principal amount of $250,000, which CSES received during the year ended December
31, 2016. The 10% Note became convertible at $0.0704 per share (originally $0.75 per share) as a result of the reverse merger
transaction, and accrued interest at a rate of 10% per annum. Interest expense charged to operations on the 10% Note during the
three months and six months ended June 30, 2017 was $1,849 and $9,515, respectively.
As
the conversion price of $0.0704 reflected a price discount below the fair market value of CSES common stock, which was determined
to be $0.1877 per share as of the date of the Note, there was deemed a beneficial conversion feature of $250,000 associated with
the 10% Note. As such, CSES recorded a charge of $250,000 to additional paid-in capital and as a note discount, representing the
fair value of the beneficial conversion feature at the date of issuance of the 10% Note. The note discount was amortized as additional
interest expense using the effective interest method over the term of the 10% Note. The unamortized portion of the note discount
at December 31, 2016 was $58,250. As of December 31, 2016, the 10% Note consisted of principal of $250,000, plus accrued interest
of $5,666, less unamortized note discount of $58,250. The amortization of note discount charged to operations as additional interest
expense was $0 and $58,250 for the three months and six months ended June 30, 2017, respectively.
Information
with respect to the accounting treatment of the 10% Note to Alltemp as a result of the completion of the reverse merger transaction
effective April 27, 2017 is provided at Note 3.
7.
Related Party Transactions
The
Company leases its research and development, manufacturing and distribution facility, located in Roseburg, Oregon, under a Commercial
Sublease Agreement dated July 1, 2015 (the “Sublease”) from a major shareholder who is also the Chairman of the Company’s
Board of Directors. The Sublease provides for a term of one year, with automatic renewal periods of one year unless either party
provides written notice of its intent not to renew, and provides for a monthly payment of $12,000.In July 2016 and July 2017,
the Sublease was automatically extended for additional periods of one year, respectively. During the three months ended June 30,
2017 and 2016, the Company paid $36,000 and $36,000, respectively, pursuant to the Sublease. During the six months ended June
30, 2017 and 2016, the Company paid $72,000 and $77,000, respectively, pursuant to the Sublease. There was no rent payable pursuant
to the Sublease at June 30, 2017 and December 31, 2016. The charge of $77,000 incurred during the six months ended June 30, 2016
included $5,000 due for the year ended December 31, 2015.
Prior
to April 13, 2017, the Company occupied its Westlake Village, California corporate offices under a sublease from a related party.
On April 13, 2017, the Company entered into an Assignment and Assumption & Third Modification to Lease Agreement (the “Lease”)
to assume the lease for its Westlake Village, California corporate offices. The Lease is for a term of five years, expiring on
April 30, 2022, at an initial monthly gross rent of $2,780, increasing by 3% annually each year. In connection with entering into
this Lease, the Company incurred a cost of $8,370, which is being amortized over the five-year term of the Lease. Rent expense
with respect to this office facility was $7,382 and $0 for the three months ended June 30, 2017 and 2016, respectively, and $12,092
and $0 for the six months ended June 30, 2017 and 2016, respectively.
During
the three months ended June 30, 2017 and 2016, the Company incurred charges of $45,000 and $0, respectively, with respect to the
compensation for its Chief Executive Officer. During the six months ended June 30, 2017 and 2016, the Company incurred charges
of $120,000 and $0, respectively, with respect to the compensation for its Chief Executive Officer. The charge of $120,000 incurred
during the six months ended June 30, 2016 includes $30,000 due for the year ended December 31, 2016. Compensation payable pursuant
to this arrangement was $135,000 and $15,000 at June 30, 2017 and December 31, 2016, respectively. The Company intends to continue
to accrue such compensation to its Chief Executive Officer until a formal compensation arrangement is finalized.
During
the three months and six months ended June 30, 2017 and 2016, the Company incurred charges of $29,500 and $48,500, respectively,
with respect to information technology and systems consulting services provided by Alexander Antebi, the son of Steven S. Antebi,
a consultant to and shareholder of the Company (see Notes 9 and 10). The Company did not incur any such consulting services during
the three months and six months ended June 30, 2016.
Information
with respect to a note payable to a related party is provided at Note 6.
8.
Stockholders’ Equity
Preferred
Stock
The
Company has authorized a total of 10,000,000 shares of preferred stock, par value $0.01 per share. As of June 30, 2017 and December
31, 2016, the Company had not issued or designated any class of preferred stock. The Company’s Board of Directors has the
authority to provide, out of the unissued shares of preferred stock, for one or more series of preferred stock and, with respect
to each such series, to fix the number of shares constituting such series and the designation of such series, the voting powers,
if any, of the shares of such series, and the preferences and relative, participating, optional or other special rights, if any,
and any qualifications, limitations or restrictions thereof, of the shares of such series. The powers, preferences and relative,
participating, optional and other special rights of each series of preferred stock, and the qualifications, limitations or restrictions
thereof, if any, may differ from those of any and all other series at any time outstanding.
Common
Stock
As
of December 31, 2016, the Company had authorized 50,000,000 shares of its common stock, par value $0.001 per share. In connection
with the Merger Agreement, the Company amended its Certificate of Incorporation to increase the its authorized shares of common
stock to 500,000,000 shares.
In
February 2016, the Company sold 532,688 shares of its common stock at a price of $0.1877 per share, generating gross proceeds
of $100,000 during the six months ended June 30, 2016.
From
November 2016 through February 2017, the Company sold equity securities under a private placement offering to individual accredited
investors (the “Offering”) that resulted in the sale of an aggregate of 17,046,000 units at a price of $0.2347 per
unit. Each unit consisted of one share of common stock and one common stock purchase warrant to purchase one share of common stock
at an exercise price of $0.7040 per share. Total cash proceeds from this offering were $3,680,000, net of placement agent fees
of $320,000, including gross proceeds of $180,000 received in February 2017 for 767,070 units. The placement agent’s fees
of $320,000 were paid in the form of 1,363,680 units. The warrants were fully vested when issued and expire three years after
the date of issuance.
Additionally,
in connection with the Offering, as an additional private placement fee, the placement agent was issued warrants exercisable at
$0.2347 per share for a period of three years to purchase 1,363,680 shares of common stock.
The
common stock warrants issued by CSES in connection with the Offering were converted into common stock warrants of Alltemp at the
closing of the reverse merger transaction on April 27, 2017.
Common
Stock Warrants
A
summary of common stock warrant activity during the six months ended June 30, 2017 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
Number
|
|
|
Average
|
|
|
Contractual
|
|
|
|
of
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in Years)
|
|
|
|
|
|
|
|
|
|
|
|
Stock warrants outstanding at December 31, 2016
|
|
|
17,642,610
|
|
|
$
|
0.6677
|
|
|
|
|
|
Issued
|
|
|
767,070
|
|
|
|
0.7040
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Stock warrants outstanding at June 30, 2017
|
|
|
18,409,680
|
|
|
$
|
0.6692
|
|
|
|
2.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock warrants exercisable at December 31, 2016
|
|
|
17,642,610
|
|
|
$
|
0.6677
|
|
|
|
|
|
Stock warrants exercisable at June 30, 2017
|
|
|
18,409,680
|
|
|
$
|
0.6692
|
|
|
|
2.46
|
|
The
exercise prices of common stock warrants outstanding and exercisable at June 30, 2017 are as follows:
|
|
|
Warrants
|
|
|
Warrants
|
|
Exercise
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Prices
|
|
|
(Shares)
|
|
|
(Shares)
|
|
|
|
|
|
|
|
|
|
$
|
0.2347
|
|
|
|
1,363,680
|
|
|
|
1,363,680
|
|
$
|
0.7040
|
|
|
|
17,046,000
|
|
|
|
17,046,000
|
|
|
|
|
|
|
18,409,680
|
|
|
|
18,409,680
|
|
The
intrinsic value of exercisable but unexercised in-the-money common stock warrants at June 30, 2017 was approximately $525,000,
based on a fair market value of $0.6200 per share on June 30, 2017. The common stock warrants did not have any intrinsic value
at December 31, 2016.
The
Company expects to satisfy such stock obligations through the issuance of authorized but unissued shares of common stock.
9.
Stock-Based Compensation
The
Company may periodically issue common stock options to members of the Board of Directors, officers, employees and consultants
for services rendered. Options will vest and expire according to terms established at the issuance date of each grant.
In
June 2015, the Board of Directors of CSES approved the 2015 Stock Option Plan For Directors, Executive Officers, and Employees
of Key Consultants (the “Plan”), which is administered by the Company’s Board of Directors or a committee thereof
(the “Administrator”) as set forth in the Plan. The Plan provides for the granting of up to 31,961,250 stock options
to employees, directors (including non-employee directors) and key consultants. Grants under the Plan vest and expire based on
periods determined by the Administrator, but in no event can the expiration date be later than ten years from the date of grant
(five years after the date of grant if the grant is an incentive stock option to an employee who owns more than 10% of the total
combined voting power of all classes of the Company’s capital stock (a “10% owner”). Grants of stock options
may be either incentive stock options or nonqualified stock options. The per share exercise price on an option, other than with
respect to substitute awards, shall not be less than 100% of the fair market value of the Company’s common stock on the
date the option is granted (110% of the fair market value if the grant is to a 10% owner). As of June 30, 2017, unexpired stock
options for 31,961,250 shares were issued and outstanding under the 2015 Plan and no further stock options were available for
issuance under the 2015 Plan.
On
June 15, 2015, CSES granted stock options pursuant to the Plan to three employees to purchased 21,307,500 shares of the Company’s
common stock at an exercise price of $0.2084 per share, vesting over twelve months from date of grant, and expiring of two years
from vesting date. The fair value of these stock options, as calculated pursuant to the Black-Scholes option-pricing model, was
determined to be $2,364,005 ($0.1109 per share), which was charged to operations ratably from June 15, 2015 through June 15, 2016.
During the three months and six months ended June 30, 2016, the Company recorded a total charge to operations of $489,284 and
$1,075,564, respectively, with respect to these stock options.
On
December 1, 2016, CSES granted stock options pursuant to the Plan to a consultant in connection with an Advisory Agreement to
purchase 10,653,750 shares of the Company’s common stock at a price of $0.1877 per share, vesting over twelve months from
date of grant, and expiring of two years from vesting date. The fair value of these stock options, as calculated pursuant to the
Black-Scholes option-pricing model, was determined to be $1,638,782 ($0.1538 per share), which is being charged to operations
ratably from December 1, 2016 through December 1, 2017. During the three months and six months ended June 30, 2017, the Company
recorded a total charge to operations of $2,627,841 and $3,031,924, respectively, with respect to these stock options. Additional
information with respect to the Advisory Agreement is provided at Note 10.
The
fair value of each stock option awarded is estimated on the date of grant and subsequent measurement dates using the Black-Scholes
option-pricing model. The expected dividend yield assumption is based on the Company’s expectation of dividend payouts.
Prior to the April 27, 2017 merger date, expected volatilities were based on an average historical stock price volatility of comparable
public companies that were deemed to be representative of future stock price trends, as the Company did not have any trading history
for its own common stock. Since the merger date, volatilities are based on historical volatility of the Company’s common
stock. The risk-free interest rate is based on the U.S. treasury yield curve in effect as of the grant date. The expected life
of the stock options is the average of the vesting term and the full contractual term of the stock options.
The
stock options issued by CSES in 2015 and 2016 were converted into stock options of Alltemp at the closing of the reverse merger
transaction on April 27, 2017.
For
stock options requiring an assessment of value during the six months ended June 30, 2017, the fair value of each stock option
award was estimated using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate
|
|
|
1.44
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
120
|
%
|
Expected life
|
|
|
2.4 years
|
|
For
stock options requiring an assessment of value during the six months ended June 30, 2016, the fair value of each stock option
award was estimated using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate
|
|
|
1.47
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
98
|
%
|
Expected life
|
|
|
3.0 years
|
|
Total
stock-based compensation expense was $2,627,841 and $489,284 for the three months ended June 30, 2017 and 2016, respectively.
Total stock-based compensation expense was $3,031,924 and $1,075,564 for the six months ended June 30, 2017 and 2016, respectively.
A
summary of stock option activity during the six months ended June 30, 2017 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
Number
|
|
|
Average
|
|
|
Contractual
|
|
|
|
of
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in Years)
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding at December 31, 2016
|
|
|
31,961,250
|
|
|
$
|
0.2015
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Stock options outstanding at June 30, 2017
|
|
|
31,961,250
|
|
|
$
|
0.2015
|
|
|
|
1.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercisable at December 31, 2016
|
|
|
21,307,500
|
|
|
$
|
0.2084
|
|
|
|
|
|
Stock options exercisable at June 30, 2017
|
|
|
21,307,500
|
|
|
$
|
0.2084
|
|
|
|
0.96
|
|
Total
deferred compensation expense for the outstanding value of unvested stock options was $2,311,182 at June 30, 2017, which is being
recognized subsequent to June 30, 2017 over a weighted-average period of approximately five months.
The
exercise prices of common stock options outstanding and exercisable at June 30, 2017 are as follows:
|
|
|
Options
|
|
|
Options
|
|
Exercise
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Prices
|
|
|
(Shares)
|
|
|
(Shares)
|
|
|
|
|
|
|
|
|
|
$
|
0.1877
|
|
|
|
10,653,750
|
|
|
|
—
|
|
$
|
0.2084
|
|
|
|
21,307,500
|
|
|
|
21,307,500
|
|
|
|
|
|
|
31,961,250
|
|
|
|
21,307,500
|
|
The
intrinsic value of exercisable but unexercised in-the-money stock options at June 30, 2017 was approximately $8,771,000, based
on a fair market value of $0.6200 per share on June 30, 2017.
The
intrinsic value of exercisable but unexercised in-the-money stock options at December 31, 2016 was approximately $1,060,000, based
on a fair market value of $0.0957 per share on December 31, 2016.
Outstanding
options to acquire 10,653,750 shares of the Company’s common stock had not vested at June 30, 2017.
The
Company expects to satisfy such stock obligations through the issuance of authorized but unissued shares of common stock.
10.
Commitments and Contingencies
Legal
Contingencies
The
Company may be subject to various legal proceedings from time to time as part of its business. As of June 30, 2017, the Company
was not a party to any legal proceedings or threatened legal proceedings, the adverse outcome of which, individually or in the
aggregate, would have a material adverse effect on its business, financial condition or results of operations.
Significant
Agreements and Contracts
The
Company leases its research and development, manufacturing and distribution facility, located in Roseburg, Oregon, under a Commercial
Sublease Agreement dated July 1, 2015 (the “Sublease”) from a major shareholder who is also the Chairman of the Company’s
Board of Directors. The Sublease provides for a term of one year, with automatic renewal periods of one year unless either party
provides written notice of its intent not to renew, and provides for a monthly payment of $12,000. In July 2016 and July 2017,
the Sublease was automatically extended for additional periods of one year, respectively.
Effective
January 1, 2016, the Company entered into a Statement of Work (“SOW”) with Kawasaki Consulting, Inc. for quantitative
consulting, statistical analysis and forecasting, project management, analytic reporting services, and data management.
The SOW provides for a monthly cash fee of $15,000 for a period of three years through December 31, 2018.
On
April 13, 2017, the Company entered into an Assignment and Assumption & Third Modification to Lease Agreement (the “Lease”)
to assume the lease for its Westlake Village, California corporate offices. The Lease is for a term of five years, expiring on
April 30, 2022, at an initial monthly gross rent of $2,780, increasing by 3% annually each year.
On
December 1, 2016, the Company entered into an Advisory Agreement with Steven S. Antebi, a 9.99% shareholder of the Company, to
provide financial advisory services to the Company at a monthly cash fee of $10,000 for a period of two years. Information with
respect to a stock option issued by CSES to Mr. Antebi on December 1, 2016 is provided at Note 9.