UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549    
 


FORM 10-Q  
 

 
Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2017

Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to _______

000-55152
(Commission file number)
 
ZNERGY, INC.
(Exact name of registrant as specified in its charter)

Nevada
 
46-1845946
(State or other jurisdiction of incorporation
or organization)
 
(I.R.S. Employer Identification No.)

6102 South MacDill Avenue, Suite G
Tampa, FL 33611
 
33611
(Address of principal executive offices)
 
(Zip Code)

800-931-5662
(Registrant’s telephone number, including area code)

MAZZAL HOLDING CORP.
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes                                  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes                                  No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 
Accelerated filer                   
Non-accelerated filer ☐  (Do not check if a smaller reporting company)
 
Smaller reporting company  
Emerging growth company
 
 

If an emerging growth company, indicate by check mark if he registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provide pursuant to Section 13(a) of the Exchange Act.  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes                                  No

On August 9, 2017, there were 226,024,960 shares of the registrant’s common stock outstanding.

 
TABLE OF CONTENTS
 
PART I - FINANCIAL INFORMATION
3
 
Item 1.
3
 
Item 2.
12
 
Item 3.
16
 
Item 4.
16
 
 
Part II - OTHER INFORMATION
18
 
Item 1.
18
 
Item 5.
18
 
Item 6.
19
 
 
 
 
20

 
 
PART I - FINANCIAL INFORMATION

Item 1.            Condensed Consolidated Financial Statements


ZNERGY, INC.
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
CONTENTS:
 
 
 
4
 
 
5
 
 
6
 
 
7
 
 
8

 

ZNERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
as of

   
June 30,
   
December 31,
 
   
2017
   
2016
 
   
(UNAUDITED)
       
ASSETS
           
CURRENT ASSETS
           
Cash
 
$
645,607
   
$
40,507
 
Accounts receivable
   
284,043
     
79,612
 
Prepaid expenses
   
1,250
     
3,750
 
Inventory
   
226,231
     
192,105
 
Total current assets
   
1,157,131
     
315,974
 
                 
Furniture & equipment, net
   
2,100
     
2,567
 
Intangible assets, net
   
1,845
     
1,845
 
TOTAL ASSETS
 
$
1,161,076
   
$
320,386
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
               
CURRENT LIABILITIES
               
Accounts payable
 
$
106,901
   
$
284,930
 
Accrued expenses
   
108,119
     
139,336
 
Customer deposits
   
3,545
     
6,605
 
Advances
   
-
     
60,000
 
Loan from related party
   
100,967
     
135,749
 
Total current liabilities
   
319,532
     
626,620
 
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS’ EQUITY (DEFICIT)
               
               
  Preferred stock, $0.0001 par value, 100,000,000
  authorized shares; no shares issued and outstanding
   
-
     
-
 
  Common stock, $0.0001 par value; 500,000,000 shares
  authorized; 221,324,960 and 193,150,000 shares issued
  and outstanding at June 30, 2017 and December 31, 2016
   
22,132
     
19,315
 
  Additional paid-in-capital
   
10,929,761
     
7,626,099
 
  Accumulated deficit
   
(10,110,349
)
   
(7,951,648
)
Total stockholders’ equity (deficit)
   
841,544
     
(306,234
)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
$
1,161,076
   
$
320,386
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
ZNERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
   
For the Three Months Ended
   
For the Six Months Ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2017
   
2016
   
2017
   
2016
 
                         
Revenue
 
$
284,562
   
$
6,160
   
$
428,241
   
$
12,240
 
Cost of revenue
   
115,281
     
-
     
173,327
     
-
 
Gross profit
   
169,281
     
6,160
     
254,914
     
12,240
 
                                 
Selling, general and administrative expenses
   
1,549,969
     
562,749
     
2,413,615
     
600,069
 
                                 
Loss from operations
   
(1,380,688
)
   
(556,589
)
   
(2,158,701
)
   
(587,829
)
                                 
Provision for income taxes
   
-
     
-
     
-
     
-
 
                                 
Net loss
 
$
(1,380,688
)
 
$
(556,589
)
 
$
(2,158,701
)
 
$
(587,829
)
                                 
Net loss per common share - basic and diluted
 
$
(0.01
)
 
$
(0.00
)
 
$
(0.01
)
 
$
(0.00
)
                                 
Weighted average number of shares outstanding
   - basic and diluted
   
204,266,206
     
181,423,626
     
201,269,197
     
213,509,016
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
ZNERGY, INC.
CONSOLIDATED STATEMENT OF CHANGE IN  STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 2017
(Unaudited)
 
                           
Total
 
               
Additional
         
Stockholders’
 
    
Common Stock
   
Paid in
   
Accumulated
   
Equity
 
    
Shares
   
Amount
   
Capital
   
Deficit
   
(Deficit)
 
                               
Balance at December 31, 2016
   
193,150,000
   
$
19,315
   
$
7,626,099
   
$
(7,951,648
)
 
$
(306,234
)
                                         
Common Shares and Options issued for services
   
13,250,000
     
1,325
     
1,666,696
     
-
     
1,668,021
 
                                         
506b Offering:
                                       
Common Shares and Warrants issued for cash
   
10,600,000
     
1,059
     
793,941
     
-
     
795,000
 
Common Shares and Warrants issued for debt conversion
   
4,324,960
     
433
     
843,025
     
-
     
843,458
 
                                         
Net loss
                           
(2,158,701
)
   
(2,158,701
)
                                         
Balance at June 30, 2017
 
$
221,324,960
   
$
22,132
   
$
10,929,761
   
$
(10,110,349
)
 
$
841,544
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


ZNERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
   
For the Six
   
For the Six
 
   
Months Ended
   
Months Ended
 
   
June 30,
   
June 30,
 
   
2017
   
2016
 
             
CASH FLOWS USED IN OPERATING ACTIVITIES:
           
Net loss
 
$
(2,158,701
)
 
$
(587,829
)
Adjustments to reconcile net loss to net cash
used in operating activities:
               
Depreciation and amortization
   
467
     
2,500
 
Common stock and options issued for services
   
1,668,021
     
500,000
 
Accounts receivable
   
(204,431
)
   
(9,440
)
Prepaid expenses
   
2,500
     
-
 
Inventory
   
(34,126
)
   
-
 
Accounts payable & accrued expenses
   
318,940
     
47,436
 
Customer deposits
   
(3,060
)
   
-
 
          Net cash used in operating activities
   
(410,390
)
   
(47,333
)
                 
CASH FLOWS USED IN INVESTING ACTIVITIES:
               
Equipment & furniture
   
-
     
(1,213
)
          Net cash used in  investing activities
   
-
     
(1,213
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from common stock
   
795,000
     
-
 
        Repayment of advances from third parties
   
(6,000
)
       
        Payments of Loan from Related Parties
   
(260
)
       
        Advances from third parties
   
226,750
     
48,900
 
          Net cash provided by financing activities
   
1,015,490
     
48,900
 
                 
INCREASE IN CASH
   
605,100
     
354
 
                 
CASH, BEGINNING OF PERIOD
   
40,507
     
1,279
 
                 
CASH, END OF PERIOD
 
$
645,607
   
$
1,633
 
                 
Supplemental Disclosures
       
Non-cash investing and financing activities:
       
Transfer of assets and liabilities to related party
for return of common shares
 
$
-
   
$
1,018,679
 
Common Stock and warrants issued for the Conversion of Debt
 
$
843,458
   
$
-
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
ZNERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017 (UNAUDITED)

NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION
 
Znergy, Inc., (formerly Mazzal Holding Corp., formerly Boston Investment and Development Corp.) is a Nevada corporation (the “Company”), incorporated on January 23, 2013. The original business plan of the Company was the construction and management of multi-family home developments and the subsequent sale thereof.

On October 26, 2015 the Company acquired Global ITS, Inc. and its wholly owned subsidiary, Znergy, Inc. in order to expand into the Energy Efficiency (EE) marketplace, focusing on commercial lighting and green project financing. On February 9, 2016, the Company agreed to sell to the Mazzal Trust the real property which the Trust had previously sold to the Company and the Trust returned to the Company 149,950,000 of the 150,000,000 shares of the Company’s common stock owned by the Trust.  The Company is now focused solely on the EE marketplace with an emphasis on LED retrofitting and relamping.

Basis of Presentation
The accompanying interim condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and do not include all of the information and footnotes required by GAAP for complete financial statements. All intercompany transactions have been eliminated in consolidation.

Certain information and footnote disclosures normally included in the Company’s annual audited consolidated financial statements and accompanying notes have been condensed or omitted in these interim condensed consolidated financial statements. Accordingly, the unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited condensed consolidated financial statements for the year ended December 31, 2016, as filed with the Securities and Exchange Commission (“SEC”) on Form 10-K.

The results of operations presented in this quarterly report are not necessarily indicative of the results of operations that may be expected for any future periods. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments and accruals, consisting only of normal recurring adjustments that are necessary for a fair presentation of the results of all interim periods reported herein.

Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation.

NOTE 2 – GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. As of June 30, 2017, while the Company has a working capital surplus of $837,599, the accumulated losses from operations aggregated $10,110,349 and it continutes to experience operating losses. The Company intends to fund operations through equity financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements through June 2018.

The Company is dependent upon, among other things, obtaining additional financing to continue operations and to execute its business plan. In response to these problems, management intends to raise additional funds through public or private placement offerings. No assurances can be made that management will be successful in pursuing any of these strategies.

These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
NOTE 3 – INTANGIBLE ASSETS

The Company was granted a federally registered trademark for “ZNERGY”. The cost of applying for and prosecuting this trademark was $1,845 which cost was accounted for as a non-amortizing intangible asset.


NOTE 4 – LOANS FROM RELATED PARTY

 
 
June 30,
2017
   
December 31, 2016
 
Loans from related party
 
$
100,967
   
$
135,749
 

The loan at December 31, 2016 is from B2 Opportunity Fund, LLC, a major shareholder of the Company, and is unsecured, bears no interest and is repayable on demand.  The loan at June 30, 2017 is from our Chairman and is secured by our inventory, bears 4% interest per annum, is due November 15, 2017 and has accrued interest of $967.
 
NOTE 5 – STOCKHOLDERS’ EQUITY

Common Stock

On January 25, 2017 the Company appointed Richard Mikles as Chairman of the board of directors and issued to Mr. Mikles 3,000,000 shares of its common stock, valued at its trading price and vested immediately, and 4,000,000 options to purchase shares of common stock of the Company at a price of $0.10 per share said options vesting equally over eight quarters and having an expiration of three years from the date of issue. Concomitantly, the Company entered into a consulting agreement with Mr. Mikles to provide marketing, strategic, and organizational services to the Company. Upon execution of this consulting agreement the Company issued 2,000,000 shares of common stock, valued at its trading price and vested immediately, and 5,000,000 options to purchase shares of common stock of the Company at a price of $0.10 per share said options to vest quarterly in the amount of one option for every two dollars of revenue recognized by the Company.

On January 27, 2017 the Company appointed Kevin Harrington to its Board of Directors and issued 2,000,000 shares of its common stock, valued at its trading price and vested immediately, and 4,000,000 options to purchase shares of common stock of the Company at a price of $0.10 per share said options vesting equally over eight quarters and having an expiration of three years from the date of issue.

On February 2, 2017 the Company entered into a consulting agreement with Venture Legal Services, PLLC, to provide legal and strategic advisory services for the Company. In conjunction with the execution of this agreement, the Company granted Venture options to purchase up to 2,000,000 shares of its common stock at a price of $0.10 per share. The options have an expiration of three years from the date of issue and vest quarterly one option for every two dollars of revenue recognized by the Company.

On May 15, 2017, the Company entered into an employment agreement with Mr. Baker, our CEO.  Mr. Baker was granted 5,000,000 shares of common stock of the Company, valued at its trading price and vested immediately, and was granted 5,000,000 options to purchase common stock of the Company at $0.10 per share. These options have a three-year expiration and vest quarterly one option for every two dollars of revenue recognized by the Company.

On May 15, 2017, the Company entered into an employment agreement with Mr. Floyd, our CFO.  Mr. Floyd was granted 10,000,000 options to purchase common stock of the Company at $0.10 per share. These options have a three-year expiration and vest quarterly one option for every two dollars of revenue recognized by the Company.

On June 1, 2017, the Company entered into a service agreement with a provider of investor relations services. Under the agreement, the Company issued 1,000,000 shares of common stock to the provider, valued at its trading price, vesting 500,000 on June 1, 2017, 250,000 shares on October 1, 2017 and 250,000 shares on January 1, 2018.

On June 13, 2017, the Company entered into a service agreement with a provider of bookkeeping, accounting, payroll and human resources services.  Under the agreement, the Company issued 250,000 shares of common stock to the provider, valued at its trading price and vested immediately, and 1,000,000 options to purchase common stock of the Company at $0.10 per share.  These options have a three-year expiration and vest evenly over two years.
 
Private Offerings of Common Stock and Warrants
During the period ended June 30, 2017 the Company completed a private offering of common stock and warrants to accredited and unaccredited investors for gross proceeds of $1,119,372 which securities were offered under Regulation D, Rule 506(b) of the Securities and Exchange Act of 1933. The Company accepted subscriptions, in the aggregate, for 14,924,960 shares of common stock and one-year warrants to purchase 14,924,960 shares of common stock of which 10,600,000 shares of its common stock and 10,600,000 warrants were issued for $795,000 in cash and 4,324,960 shares of its common stock and 4,324,960 warrants were issued for $324,372 in the conversion of debt. Investors received one-year fully vested warrant to purchase up to 100% of the number of shares purchased in the offering. The warrants have an exercise price of $0.15 per share. The purchase price for each share of common stock together with the warrants was $0.075.


Options

There were 7,400,000 options issued and outstanding as of December 31, 2016. The following table shows the stock option activity during the period ended June 30, 2017:

         
Weighted
 
   
Number
   
Average
 
   
Of
   
Exercise
 
   
Options
   
Price
 
             
Options outstanding at beginning of year
   
7,400,000
   
$
0.10
 
Changes during the period:
               
Granted - at market price
   
31,600,000
   
$
0.10
 
Exercised
   
-
         
Expired
   
-
         
Options outstanding at end of period
   
39,000,000
   
$
0.10
 
Options exercisable at end of period
   
4,850,149
   
$
0.10
 
Weighted average fair value of options granted during the period
 
$
3,073,200
    $ 0.10  
 
Options issued were valued using the Black-Sholes model assuming zero dividends, a $0.10 strike price, 3-year expiration, 1.47% average risk-free rate and 238% average volatility. Costs incurred in respect of stock based compensation for employees, advisors and consultants for the three and six-month periods ended June 30, 2017 were $215,374 and $274,563, respectively. Costs incurred in respect of stock based compensation for employees, advisors and consultants for the three and six-month periods ended June 30, 2016 were $-0- and $-0-, respectively.

Unrecognized compensation costs related to options was $3,631,029 which is expected to be recognized ratably over approximately 17 months.

Warrants

There were no warrants were issued and outstanding as of December 31, 2016. The following table shows the warrant activity during the period ended June 30, 2017:

         
Weighted
 
   
Number
   
Average
 
   
Of
   
Exercise
 
   
Warrants
   
Price
 
             
Warrants outstanding at beginning of year
   
-
       
Changes during the period:
             
Granted
   
14,924,960
   
$
0.15
 
Exercised
   
-
         
Expired
   
-
         
Warrants outstanding at end of period
   
14,924,960
   
$
0.15
 
Warrants exercisable at end of period
   
14,924,960
         
Weighted average fair value of warrants granted during the period
 
$
367,662
         
                 
Total warrant costs incurred during the period
 
$
367,662
         

Warrants issued were valued using the Black-Sholes model assuming zero dividends, a $0.15 strike price, 1-year expiration, 1.49% risk-free rate and volatility of 238%. Costs incurred in respect of warrants issued to investors for the period ended June 30, 2017 was $367,662.


NOTE 6 – LITIGATION

16(b) Litigation
On September 26, 2016, Registrant filed in the United States District Court for the Middle District of Florida a Complaint against defendants The Mazzal Trust, Nissim S. Trabelsi and Shawn Telsi (collectively the “Defendants”), seeking the disgorgement of profits obtained by Defendants and certain of their shareholder affiliates defined under Rule 16a-1(a)(1) under the Exchange Act defined below (collectively, the “Group”) through “short swing profits” in violation of Section 16(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Specifically, Registrant alleged that the Group acted under the guidance and control of the Defendants, whose individual defendants had filed forms 3 and 4 with the Securities and Exchange Commission (the “SEC”), declaring themselves to be “insiders” for the purpose of Section 16(b). The Group owned 100% of the shares of Registrant at the time that members of the group were engaged in the sale and purchase of such shares. The sales and purchases referenced all occurred within six months of other sales and purchases, subjecting Defendants to disgorge to Registrant all profits made by the Group in such sales and purchases. As detailed in paragraphs 16-22 of the Complaint, the total profits received by the Group is $1,695,689. Accordingly, Registrant has demanded the return of all such profits to Registrant plus the statutory payment of attorneys’ fees.

VStock Transfer Communications
On January 26, 2017, the Company received an email from its transfer agent, VStock Transfer, LLC, (“VStock”) informing the Company that it had been served with a Summons and Complaint (B2 Opportunity Fund (“B2”) v. Trabelsi et al. - Index No.:17-CV-10043, the “Claim”) and further stating that the Company was obligated to indemnify VStock for fees and expenses incurred in defending the Claim.  The Company responded on February 24, 2017 stating that (1) we reviewed the Transfer Agent and Registrar Agreement between Mazzal and VStock dated May 20, 2014 and that in Article VI(c) of that agreement it states that indemnification will not be offered if the acts of VStock constitute bad faith or gross negligence, (2) we reviewed the lawsuit filed by B2 against VStock and others and find that VStock’s actions constitute gross negligence and perhaps bad faith, and we therefore deny indemnification of VStock relating to the Claim, and (3) should VStock take any action to seek indemnification by Znergy in any manner, Znergy will either join B2 in its lawsuit or will file an action on its own.  The Company terminated its agreement with VStock.  Management cannot at this time estimate what, if any, financial impact this matter will have on the Company.

NOTE 7 – SUBSEQUENT EVENTS

On July 10, 2017 the Company entered into an employment agreement with Ryan Smith, 60, to serve as Senior Vice President of the Company. The agreement has a term of three years, and Mr. Smith’s employment with the Company is on an at-will basis.  The agreement specifies an annual base salary of $100,000 and a performance based bonus within 45 days from the end of the Company’s fiscal year as determined by the Compensation Committee of the Board of Directors. In addition, Mr. Smith was granted 3,000,000 shares of common stock of the Company, vested immediately, and was granted 7,000,000 options to purchase common stock of the Company at $0.10 per share (the “Options”). The Options have a three-year expiration and vest quarterly one option for every two dollars of revenue recognized by the Company.
 
On July 13, 2017, the Company entered into a service agreement with a provider of tax services.  Under the agreement, the Company issued 100,000 shares of common stock to the provider, valued at its trading price and vested immediately, and 400,000 options to purchase common stock of the Company at $0.10 per share.  These options have a three-year expiration and vest evenly over two years.
 
On July 13, 2017, the Company amended and extended a consulting agreement, originally executed on January 23, 2017, with its Chairman, Rick Mikles.  Under the amended and extended agreement, the Company issued 1,600,000 shares of common stock to Mr. Mikles, valued at its trading price and vested immediately.
 
On July 22nd, 2017, the Company entered into a purchase agreement for a property located at 808 A South Huntington Street, Syracuse, Indiana.  The agreement stipulates a purchase price of $255,000 of which $30,000 was paid on July 22, 2017 with the balance of $225,000 due 180 days after closing.  There is no interest payable on the balance due.  The square footage of the building is approximately 2,348.  The property also includes 27 storage units generating approximately $19,000 per year rental income.  The Company expects to close on the property in August 2017.


CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  We have based these forward-looking statements on our current expectations and projections about future events, and they are applicable on as of the dates of such statement.  These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.  In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “forecast,” “expect,” “plan,” anticipate,” believe,” estimate,” continue,” or the negative of such terms or other similar expressions.  Factors that might cause or contribute to such a discrepancy include, but are not limited to, those listed under the heading “Risk Factors” and those listed in our other SEC filings. You should not put undue reliance on any forward-looking statements.  These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available on our website or otherwise, and we undertake no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.  The following discussion should be read in conjunction with our Financial Statements and related Notes thereto included elsewhere in this report. Throughout this Quarterly Report on Form 10-Q we will refer to Znergy, Inc., together with its subsidiaries, as the “Company,” “we,” “us,” and “our.”

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company was formed in January 2013 as a Nevada corporation.  The original business plan of the Company was to build and sell multi-family housing projects. The Company acquired a parcel of land in Taunton, Massachusetts, from The Mazzal Trust, a trust of which the founder of the Company, Nissim Trabelsi, was the Trustee, in exchange for shares of the Company’s common stock, and began development of the project and construction of multi-family units.

Subsequently, on October 26, 2015, the Company acquired Global ITS, Inc., a Wyoming corporation (“Global”), and its wholly owned subsidiary, Znergy, Inc., a Florida corporation (“Znergy”), in order to expand into the Energy Efficiency (EE) marketplace, focusing on commercial lighting and green project financing.

On February 9, 2016, the Company agreed to sell to The Mazzal Trust the real property which the Trust had previously sold to the Company, and the Trust returned to the Company 149,950,000 of the 150,000,000 shares of the Company’s common stock owned by the Trust, which shares were cancelled. The Company is now focused solely on the EE marketplace.  Both of these transactions are discussed in more detail below.

Recent Developments

Global ITS Transaction

Share Exchange Agreement

On October 26, 2015, the Company entered into a Share Exchange Agreement (the “Agreement”) with Global ITS, Inc., a Wyoming corporation (“Global”), and the shareholders of Global, pursuant to which we exchanged 120,000,000 of our common shares (the “Company Shares”) for 24,000,000 Global common shares held by Global’s shareholders representing 100% of Global’s outstanding shares (the “Share Exchange”). The transaction was reported in, and the Agreement was filed as an exhibit to, a Current Report filed with the SEC on October 27, 2015.

Change in Control Transaction

On February 9, 2016, the Company, Nissim Trabelsi, Shawn Telsi, the Mazzal Living Trust, the majority shareholder of the Company (the “Trust”), and B2 Opportunity Fund, LLC, a Nevada limited liability company (“B2”), entered into an Amended Master Stock Purchase Agreement (the “Master Agreement”).

Pursuant to the Master Agreement, Mr. Trabelsi and Mr. Telsi agreed to sell all of the shares of the Company’s common stock owned by them, 45,800,000 shares and 9,500,000 shares, respectively, to B2 or B2’s designees. In connection with the Master Agreement, B2 paid $315,000 to Mr. Trabelsi for his and Mr. Telsi’s shares.


Also in connection with the Master Agreement, the Company agreed to sell to the Trust all of its real property with a carrying value of $1,897,000, and the Trust assumed the related party loan with a carrying value of $853,521 and accounts payable and accrued expenses with a carrying value of $24,500. In exchange, the Trust returned to the Company 149,950,000 of the 150,000,000 shares of the Company’s common stock owned by the Trust. In connection with the execution of the Master Agreement, the Company canceled the 149,950,000 shares of common stock conveyed by the Trust.

In connection with his sale of his and Mr. Telsi’s shares, Mr. Trabelsi appointed Christopher J. Floyd to the Board of Directors of the Company and to the Board of Directors of Command Control Center Corp. (“Command Control”), a wholly owned subsidiary of the Company. Mr. Trabelsi also appointed Mr. Floyd as the CEO, CFO, and Secretary of both the Company and of Command Control. Following Mr. Trabelsi’s appointment of Mr. Floyd to the boards of directors and as an officer of the Company and Command Control, Mr. Trabelsi resigned from all positions with the Company and with Command Control, effective immediately.

Results of Operations

The Company had revenues of $428,241 and $12,240 for the six-month periods ended June 30, 2017, and June 30, 2016, respectively. The Company had revenues of $284,562 and $6,160 for the three-month periods ended June 30, 2017, and June 30, 2016, respectively. Revenues in 2017 comprise LED installation projects and associated rebates from utilities while revenues in 2016 consist of consulting services.

The Company incurred costs of revenue of $173,327 and $-0- for the six-month periods ended June 30, 2017, and June 30, 2016, respectively. The Company incurred costs of revenue of $115,281 and $-0- for the three-month periods ended June 30, 2017, and June 30, 2016, respectively. Costs of revenue in 2017 comprise primarily LED product and installation costs.
 
The Company had general and administrative expenses of $2,413,615 and $600,069 for the six-month periods ended June 30, 2017, and June 30, 2016, respectively. The Company had general and administrative expenses of $1,549,969 and $562,749 for the three-month periods ended June 30, 2017, and June 30, 2016, respectively. General and administrative expenses in 2017 comprised primarily of $1,688,021 in common stock and options issued for services, $367,662 in warrants issued in the conversion of debt, $73,566 in salaries and wages, and $48,415 in legal and auditing fees. General and administrative costs in 2016 consisted primarily of $522,401 in consulting fees and $54,730 in legal and auditing fees.

The Company had net losses of $2,158,701 and $587,829 for the six-month periods ended June 30, 2017 and June 30, 2016, respectively. The Company had net losses of $1,380,688 and $556,589 for the three-month periods ended June 30, 2017 and June 30, 2016, respectively.
 
Liquidity and Capital Resources
 
As of June 30, 2017, the Company had a working capital surplus of $837,599 with total current assets of $1,157,131 comprising $645,607 in cash, $284,043 in accounts receivable, $1,250 in prepaid expenses and $226,231 in inventory, and total current liabilities of $319,532 comprising $106,901 in accounts payable, $108,119 in accrued expenses, $3,545 in customer deposits and $100,967 in a loan from a related party. Use of cash for operating activities totaled $410,390 primarily for funding an increase in accounts receivable of $204,431 and inventory of $34,126, and for payments on accounts payable and accrued expenses of $202,401. The primary source of funds was loans from related parties in the amount of $226,750 and proceeds from the offering of our common stock in the amount of $795,000.
 
Going Concern Discussion

For the year ending December 31, 2016, our auditors issued an explanatory note regarding our ability to continue as a going concern. This means that our auditors believe there is substantial doubt that we can continue as an on-going business for the next 12 months. Our auditor’s opinion is based on our suffering recurring losses. Accordingly, we must raise cash from sources other than operations. Our only other source for cash at this time is investments by third parties and loans from others in our company.
 
At the time of this filing, we have three officers, David Baker, our CEO, Christopher Floyd, our CFO and Secretary, and Ryan Smith, our Senior Vice President. Mr. Baker and Mr. Floyd are responsible for our managerial and organizational structure which will include preparation and implementation of disclosure and accounting controls under the Sarbanes Oxley Act of 2002. When these controls are implemented, Mr. Baker and Mr. Floyd, together with any other executive officers in place at that time, will be responsible for the administration of these controls.

As of June 30, 2017, management believes that generating revenues in the next six to twelve months is important to support our planned ongoing operations. However, we cannot guarantee that we will generate such growth. If we do not generate sufficient cash flow to support our operations over the next 12 to 18 months, we will need to raise additional capital by issuing capital stock in exchange for cash or obtain loans in order to continue as a going concern. There are no formal or informal agreements to attain such financing. We cannot assure you that any financing can be obtained or, if obtained, that it will be on reasonable terms. Without realization of additional capital, it would be unlikely for us to continue as a going concern. No adjustments have been made to the financial statements to reflect our doubt to continue as a going concern.


Our management does not expect to incur significant research and development costs in 2017.

On July 22, 2017, the Company entered into a purchase agreement for a property located at 808 A South Huntington Street, Syracuse, Indiana.  The agreement stipulates a purchase price of $255,000 of which $30,000 was paid on July 22, 2017 with the balance of $225,000 due 180 days after closing.  There is no interest payable on the balance due.  The square footage of the building itself is approximately 2,348.  The property also includes 27 storage units generating approximately $19,000 per year rental income.  The Company expects to close on the property in August 2017.

Critical Accounting Policies

The Company’s most critical accounting policies include (a) use of estimates, (b) revenue recognition, (c) going concern, and (d) share based payments. The methods, estimates and judgments the Company uses in applying these most critical accounting policies have a significant impact on the results the Company reports in its financial statements.

(a) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts or revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates, judgments and assumptions used in these consolidated financial statements include those related to revenues, accounts receivable and related allowances, contingencies, and the fair values of stock-based compensation. These estimates, judgments, and assumptions are reviewed periodically and the effects of material revisions in estimates are reflected in the financial statements prospectively from the date of any change in estimate.

 (b) Revenue Recognition

The Company accounts for revenue using the “completed contract method” in accordance with ASC 605-35. Under this method, contract costs are accumulated as deferred assets and billings and/or cash receipts are recorded to a deferred revenue liability account during the contract period but no revenues, costs or profits are recognized in operations until the completion of the contract. Costs include direct material, direct labor, subcontract labor and allocable indirect costs. All unallocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss when such loss is determined. A contract is considered complete when accepted by the customer. The Company quotes its customers the total costs of product installation and materials minus the expected rebates, if any, from a given utility. For projects larger than $10,000, rebates must be pre-approved by the utility.
 
(c) Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. As of June 30, 2017, while the Company has a working capital surplus of $837,599, the accumulated losses from operations aggregated $10,110,349 and it continues to experience operating losses. The Company intends to fund operations through equity financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements through June 2018.
 
The Company is dependent upon, among other things, obtaining additional financing to continue operations and to execute its business plan. In response to these problems, management intends to raise additional funds through public or private placement offerings. No assurances can be made that management will be successful in pursuing any of these strategies.

These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.


(d) Share-Based Payments

Certain employees, officers, directors, and consultants of the Company participate in incentive plans that provide for granting stock options and performance-based awards. Time based stock options generally vest in equal increments over a two -year period and expire on the third anniversary following the date of grant. Performance-based stock options vest once the applicable performance conditions are satisfied.

The Company recognizes stock-based compensation for equity awards granted to employees, officers, directors and consultants as compensation and benefits expense in the consolidated statements of operations. The fair value of stock options is estimated using a Black-Scholes valuation model on the date of grant. Stock-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period. For performance-based stock options, compensation is recognized once the applicable performance condition is satisfied.

The Company recognizes stock-based compensation for equity awards granted as selling, general and administrative expense in the consolidated statements of operations.

The fair value of restricted stock awards is equal to the closing price of the Company’s stock on the date of grant multiplied by the number of shares awarded. Stock-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period.

JOBS Act

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company,” we have the option to delay adoption of new or revised accounting standards until those standards would otherwise apply to private companies, until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period for complying with such new or revised accounting standards. We have elected to opt out of this extended transition period. As noted, this election is irrevocable.

Our significant accounting policies, as described in our financial statements in the Summary of Significant Accounting Policies included in our Form 10-K filing of December 31, 2016, should be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2014-09, Revenue From Contracts With Customers , or ASU 2014-09. Pursuant to this update, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this update are currently effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and are to be applied retrospectively, or on a modified retrospective basis. Early application is not permitted. In July 2015, the FASB approved a one-year deferral of the effective date for annual reporting periods beginning after December 15, 2017 with early adoption permitted for annual periods beginning after December 15, 2016. We are currently evaluating the impact of adopting ASU 2014-09 on our consolidated financial statements.

In August 2014, FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern , or ASU 2014-15. ASU 2014-15 explicitly requires a company’s management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The new standard became effective in the first annual period ending after December 15, 2016. Management has evaluated the potential impact of the adoption of this standard and believes its adoption has no material impact on our consolidated statements of financial position, results of operations or cash flows.

In July 2015, the FASB issued ASU No. 2015-11, (“ASU 2015-11”), Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 requires an entity to measure in scope inventory at the lower of cost and net realizable value. The amendment does not apply to inventory that is measured using the last-in, first-out or the retail inventory method. For public entities, ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, and is to be applied prospectively. Management has evaluated the impact of the adoption of this standard and believes its adoption has no material impact on our consolidated statements of financial position, results of operations or cash flows.


On February 24, 2016, the FASB issued ASU No. 2016-02, Leases, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

On March 30, 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies various aspects related to the accounting and presentation of share-based payments. The amendments require entities to record all tax effects related to share-based payments at settlement or expiration through the income statement and the windfall tax benefit to be recorded when it arises, subject to normal valuation allowance considerations. All tax-related cash flows resulting from share-based payments are required to be reported as operating activities in the statement of cash flows. The updates relating to the income tax effects of the share-based payments including the cash flow presentation may be adopted either prospectively or retrospectively. Further, the amendments allow the entities to make an accounting policy election to either estimate forfeitures or recognize forfeitures as they occur. If an election is made, the change to recognize forfeitures as they occur must be adopted using a modified retrospective approach with a cumulative effect adjustment recorded to opening retained earnings. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. Adoption of this standard did not have any effect on the Company’s financial statements.

The Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

Off-Balance Sheet Arrangements

None.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are the controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the principal executive and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.  Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

We have carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of the end of the period covered by this Quarterly Report.

Based upon that evaluation we have concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this report due to a material weakness in our internal control over financial reporting, which is described below.

Our management identified the following material weaknesses which are indicative of many small companies with small staff: (i) inadequate segregation of duties and effective risk assessment; and (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC guidelines.


Although we plan to take steps to enhance and improve the design of our internal control over financial reporting, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we hope to implement the following changes during our fiscal year ending December 31, 2017: (i) appoint additional qualified personnel to address inadequate segregation of duties and ineffective risk management; and (ii) adopt sufficient written policies and procedures for accounting and financial reporting. The remediation efforts set out in (i) and (ii) are largely dependent upon our securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected in a material manner.

Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 

 


PART II.                 OTHER INFORMATION

Item 1. Legal Proceedings

Other than described below, we know of no pending legal proceedings to which we are a party which are material or potentially material, either individually or in the aggregate. We are from time to time, during the normal course of our business operations, subject to various litigation claims and legal disputes. We do not believe that the ultimate disposition of any of these matters will have a material adverse effect on our consolidated financial position, results of operations or liquidity.

On September 26, 2016, the Company filed in the United States District Court for the Middle District of Florida a Complaint against defendants The Mazzal Trust, Nissim S. Trabelsi and Shawn Telsi (collectively the “Defendants”), seeking the disgorgement of profits obtained by Defendants and certain of their shareholder affiliates defined under Rule 16a-1(a)(1) under the Exchange Act defined below (collectively, the “Group”) through “short swing profits” in violation of Section 16(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Specifically, the Company alleged that the Group acted under the guidance and control of the Defendants, whose individual defendants had filed forms 3 and 4 with the Securities and Exchange Commission (the “SEC”, declaring themselves to be “insiders” for the purpose of Section 16(b). The Group owned 100% of the shares of the Company at the time that members of the group were engaged in the sale and purchase of such shares. The sales and purchases referenced all occurred with six months of other sales and purchases, subjecting Defendants to disgorge to the Company all profits made by the Group in such sales and purchases. As detailed in paragraphs 16-22 of the Complaint, the total profits received by the Group is $1,695,689. Accordingly, the Company has demanded the return of all such profits to Registrant plus the statutory payment of attorneys’ fees.

On January 26, 2017, the Company received an email from its transfer agent at that time, VStock Transfer, LLC, (“VStock”) informing the Company that it had been served with a Summons and Complaint (B2 Opportunity Fund (“B2”) v. Trabelsi et al. - Index No.:17-CV-10043, the “Claim”) and further stating that the Company was obligated to indemnify VStock for fees and expenses incurred in defending the Claim.  The Company responded on February 24, 2017 stating that (1) we reviewed the Transfer Agent and Registrar Agreement between Mazzal and VStock dated May 20, 2014 and that in Article VI(c) of that agreement it states that indemnification will not be offered if the acts of VStock constitute bad faith or gross negligence, (2) we reviewed the lawsuit filed by B2 against VStock and others and find that VStock’s actions constitute gross negligence and perhaps bad faith, and we therefore deny indemnification of VStock relating to the Claim, and (3) should VStock take any action to seek indemnification by Znergy in any manner, Znergy will either join B2 in its lawsuit or will file an action on its own. The Company terminated its agreement with VStock. Management cannot at this time estimate what, if any, financial impact this matter will have on the Company.

Item 5. Other Information.

Amendment of Articles of Incorporation; Name Change; Status

On May 31, 2016, the Company filed a definitive information statement on Schedule 14C to provide information to the Company’s stockholders relating to an action taken by the holders of a majority of the outstanding shares of common stock to amend the Company’s articles of incorporation to change the name of the Company from Mazzal Holding Company to Znergy, Inc. The Board of Directors of the Company approved the amendment and name change and recommended the amendment to the shareholders of the Company. On May 13, 2016, the holders of 94,498,335 shares of the Company’s common stock, constituting approximately 52.48% of the outstanding shares, approved the amendment and the name change. On July 15, 2016, the Company filed its Amended and Restated Articles of Incorporation with the State of Nevada to effectuate the name change.


Item 6. Exhibits

(a)          Exhibits

Exhibit No.
 
Description
3.1
 
Articles of Incorporation for BIDC (previously filed as an exhibit to the Company’s registration statement on Form S-1, filed with the Commission on June 10, 2013)
3.2
 
Bylaws of BIDC (previously filed as an exhibit to the Company’s registration statement on Form S-1, filed with the Commission on June 10, 2013)
3.3
 
Amended and Restated Articles of Incorporation, as filed with the Nevada Secretary of State on July 15, 2016
10.1
 
Share Exchange Agreement, dated as of October 26, 2015 (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Commission on  October 27, 2015)
10.2
 
Master Stock Purchase Agreement (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Commission on February 12, 2016)
10.3
 
Employment Agreement with Dave Baker (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Commission on October 4, 2016)
10.4
 
Employment Agreement with Dave Baker (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Commission on May 15, 2017)
10.5
 
Employment Agreement with Christopher Floyd (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Commission on May 15, 2017)
31.1
 
31.2
 
32.1
 
32.2
 
101 INS
 
XBRL Instance Document*
101 SCH
 
XBRL Schema Document*
101 CAL
 
XBRL Calculation Linkbase Document*
101 DEF
 
XBRL Definition Linkbase Document*
101 LAB
 
XBRL Labels Linkbase Document*
101 PRE
 
XBRL Presentation Linkbase Document*


 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


ZNERGY, INC.

By: /s/ Dave Baker
 
 
Dave Baker
Chief Executive Officer and Director
(Principal Executive Officer)
Date: August 14, 2017
 


By: /s/ Christopher J. Floyd
 
 
Christopher J. Floyd
Chief Financial Officer and Director
(Principal Financial Officer)
Date: August 14, 2017
 

 
 
 
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