Note 1 Organization and Nature of Operations
SQL Technologies Corp. (f/k/a Safety Quick
Lighting & Fans Corp.), a Florida corporation (the “Company”), was originally organized in May 2004 as a limited
liability company under the name of Safety Quick Light, LLC. The Company was converted to corporation on November 6, 2012. Effective
August 12, 2016, the Company changed its name from “Safety Quick Lighting & Fans Corp.” to “SQL Technologies
Corp.” The Company holds a number of worldwide patents, and has received a variety of final electrical code approvals, including
UL Listing and CSA approval (for the United States and Canadian Markets), and CE (for the European market). The Company maintains
offices in Georgia, Florida and in Foshan, Peoples Republic of China.
The Company is engaged in the business
of developing proprietary technology that enables a quick and safe installation of electrical fixtures, such as light fixtures
and ceiling fans, by the use of a power plug installed in ceiling and wall electrical junction boxes. The Company’s main
technology consists of a weight bearing, fixable socket and a revolving plug for conducting electric power and supporting an electrical
appliance attached to a wall or ceiling. The socket is comprised of a nonconductive body that houses conductive rings connectable
to an electric power supply through terminals in its side exterior.
The plug is also comprised of a nonconductive
body that houses corresponding conductive rings, attaches to the socket via a male post and is capable of feeding electric power
to an appliance. The plug includes a second structural element allowing it to revolve and a releasable latching which, when engaged,
provides a retention force between the socket and the plug to prevent disengagement. The socket and plug can be detached by releasing
the latch, thereby disengaging the electric power from the plug. The socket is designed to replace the support bar incorporated
in electric junction boxes, and the plug can be installed in light fixtures, ceiling fans and wall sconce fixtures.
The Company markets consumer friendly,
energy saving “plugin” ceiling fans and light fixtures under the General Electric Company (“GE” or “General
Electric”) brand as well as “conventional” ceiling lights and fans carrying the GE brand. The Company also owns
98.8% of SQL Lighting& Fans LLC (the “Subsidiary”). The Subsidiary was formed in Florida on April 27, 2011, and
is in the business of manufacturing the patented device that the Company owns. The Subsidiary had no activity during the periods
presented.
The Company’s fiscal year end is
December 31.
Note 2 Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial
statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of
America (U.S. GAAP) under the accrual basis of accounting.
Use of Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes.
Such estimates and assumptions impact both
assets and liabilities, including but not limited to: net realizable value of accounts receivable and inventory, estimated useful
lives and potential impairment of property and equipment, the valuation of intangible assets, estimate of fair value of share based
payments and derivative liabilities, estimates of fair value of warrants issued and recorded as debt discount, estimates of tax
liabilities and estimates of the probability and potential magnitude of contingent liabilities.
Making estimates requires management to
exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or
set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate
could change in the near term due to one or more future nonconforming events. Accordingly, actual results could differ significantly
from estimates.
Risks and Uncertainties
The Company’s operations are subject
to risk and uncertainties including financial, operational, regulatory and other risks including the potential risk of business
failure.
The Company has experienced, and in the
future expects to continue to experience, variability in its sales and earnings. The factors expected to contribute to this variability
include, among others, (i) the uncertainty associated with the commercialization and ultimate success of the product, (ii) competition
inherent at large national retail chains where product is expected to be sold (iii) general economic conditions and (iv) the related
volatility of prices pertaining to the cost of sales.
Principles of Consolidation
The consolidated financial statements include
the accounts of SQL Technologies Corp. (f/k/a Safety Quick Lighting and Fans Corp.) and the Subsidiary, SQL Lighting & Fans
LLC. All intercompany accounts and transactions have been eliminated in consolidation.
Non-controlling Interest
In May 2012, in connection with the sale
of the Company’s membership units in the Subsidiary, the Company’s ownership percentage in the Subsidiary decreased
from 98.8% to 94.35%. The Company then reacquired these membership units in September 2013, increasing the ownership percentage
from 94.35% back to 98.8%. During the six-month ended June 30, 2017 and the twelve-months ended December 31, 2016, there was no
activity in the Subsidiary.
Cash and Cash Equivalents
Cash and cash equivalents are carried
at cost and represent cash on hand, demand deposits placed with banks or other financial institutions, and all highly liquid
investments with an original maturity of three months or less. The Company had $7,200,560 and $4,125,888 in money market as
of June 30, 2017, and December 31, 2016, respectively. The Company has deposits in financial institutions which exceeds the
amount insured by the FDIC. The amount of uninsured deposits was $6,700,557 at June 30, 2017.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the
invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business
but mitigates the associated risks by performing credit checks and actively pursuing past due accounts.
The Company recognizes an allowance for
losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on
an analysis of historical bad debt experience, current receivables aging, and expected future bad debts, as well as an assessment
of specific identifiable customer accounts considered at risk or uncollectible.
The Company’s net balance of accounts
receivable for the six-months ended June 30, 2017 and December 31, 2016 was as follows:
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June 30, 2017
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December 31, 2016
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(Unaudited)
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(Audited)
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Accounts Receivable
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$
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1,301,788
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$
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796,824
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Allowance for Doubtful Accounts
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(18,996
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)
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—
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Net Accounts Receivable
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$
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1,282,792
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$
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796,824
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For the six-months ended June 30, 2017,
the Company increased the Allowance for Doubtful Accounts to $18,996 reflecting amounts deemed potentially uncollectable. For
the three and six-months ended June 30, 2017 the Company recorded $18,996 in bad debt expense. The Company recorded no bad debt
expense in 2016.
Inventory
Inventory consists of finished goods purchased,
which are valued at the lower of cost or market value, with cost being determined on the first in, first out (FIFO) method. The
Company periodically reviews historical sales activity to determine potentially obsolete items and also evaluates the impact of
any anticipated changes in future demand.
At June 30, 2017 and December 31, 2016,
the Company had $2,627,381 and $2,401,048 in inventory, respectively. The Company will maintain an allowance based on specific
inventory items that have shown no activity over a twenty-four month period. The Company tracks inventory as it is disposed, scrapped
or sold at below cost to determine whether additional items on hand should be reduced in value through an allowance method. As
of June 30, 2017, and December 31, 2016, the Company has determined that no allowance was required.
Valuation of Long-lived Assets and Identifiable Intangible Assets
The Company reviews for impairment of long-lived
assets and certain identifiable intangible assets whenever events or changes in circumstances indicate that the carrying amount
of any asset may not be recoverable. In the event of impairment, the asset is written down to its fair market value. The Company
determined no impairment adjustment was necessary for the periods presented.
Property and Equipment
Property and equipment is stated at cost,
less accumulated depreciation, and is reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
Depreciation of property and equipment
is provided utilizing the straight-line method over the estimated useful lives, ranging from 3 to 7 years of the respective assets.
Expenditures for maintenance and repairs are charged to expense as incurred.
Upon sale or retirement of property and
equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the
statements of operations.
Intangible Asset Patent
The Company developed a patent for an installation
device used in light fixtures and ceiling fans. Costs incurred for submitting the applications to the United States Patent and
Trademark Office for these patents have been capitalized. Patent costs are being amortized using the straight-line method over
the related 15-year lives. The Company begins amortizing patent costs once a filing receipt is received stating the patent serial
number and filing date from the Patent Office.
The Company incurs certain legal and related
costs in connection with patent applications. The Company capitalizes such costs to be amortized over the expected life of the
patent to the extent that an economic benefit is anticipated from the resulting patent or alternative future use is available to
the Company. The Company also capitalizes legal costs incurred in the defense of the Company’s patents when it is believed
that the future economic benefit of the patent will be maintained or increased and a successful defense is probable. Capitalized
patent defense costs are amortized over the remaining expected life of the related patent. The Company’s assessment of future
economic benefit or a successful defense of its patents involves considerable management judgment, and an unfavorable outcome of
litigation could result in a material impairment charge up to the carrying value of these assets.
GE Trademark Licensing Agreement
The Company entered into a Trademark License
Agreement with General Electric on September, 2011 (the “License Agreement”) allowing the Company to utilize the “GE
trademark” on products which meet the stringent manufacturing and quality requirements of General Electric (the “GE
Trademark License”). As described further in Note 5 to these financial statements, the Company and General Electric amended
the License Agreement in August 2014. As a result of that amendment, the Company is required to pay a minimum trademark licensing
fee (the “Royalty Obligation”) to General Electric of $12,000,000. The repayment schedule is based on a percent of
sales, with any unpaid balance due in November 2018. Under SFAS 142 “Accounting for Certain Intangible Assets” the
Company has recorded the value of the Licensing Agreement and will amortize it over the life of the License Agreement, which is
60 months.
Fair Value of Financial Instruments
The Company measures assets and liabilities
at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents
the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction
between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset
or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value
on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The following are the hierarchical levels
of inputs to measure fair value:
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Level 1 – Observable inputs that reflect quoted market prices in active markets for identical
assets or liabilities.
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●
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Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are
not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are
observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market
data by correlation or other means.
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●
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Level 3 – Unobservable inputs reflecting the Company’s assumptions incorporated in
valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions
that are reasonably available.
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The carrying amounts of the Company’s
financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts payable & accrued expenses,
certain notes payable and notes payable – related party, approximate their fair values because of the short maturity of these
instruments.
The Company accounts for its derivative
liabilities, at fair value, on a recurring basis under Level 3. See Note 9.
Embedded Conversion Features
The Company evaluates embedded conversion
features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion
feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value
recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated
under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion features.
Derivative Financial Instruments
The Company does not use derivative instruments
to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of it financial instruments, including
stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives.
For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at
its fair value and is then revalued at each reporting date, with changes in the fair value reported as charges or credits to income.
For option based simple derivative financial
instruments, the Company uses the Black Scholes option pricing model to value the derivative instruments at inception and subsequent
valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities
or as equity, is reassessed at the end of each reporting period.
Beneficial Conversion Feature
For conventional convertible debt where
the rate of conversion is below market value, the Company records a “beneficial conversion feature” (“BCF”)
and related debt discount.
When the Company records a BCF, the relative
fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument (offset to additional
paid in capital) and amortized to interest expense over the life of the debt.
Debt Issue Costs and Debt Discount
The Company may record debt issue costs
and/or debt discounts in connection with raising funds through the issuance of debt. These costs may be paid in the form of cash,
or equity (such as warrants). These costs are amortized to interest expense over the life of the debt. If a conversion of the underlying
debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
Original Issue Discount
For certain convertible debt issued, the
Company may provide the debt holder with an original issue discount. The original issue discount would be recorded to debt discount,
reducing the face amount of the note and is amortized to interest expense over the life of the debt.
Extinguishments of Liabilities
The Company accounts for extinguishments
of liabilities in accordance with ASC 860-10 (formerly SFAS 140) “Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities”. When the conditions are met for extinguishment accounting, the liabilities are derecognized
and the gain or loss on the sale is recognized.
Stock Based Compensation – Employees
The Company accounts for its stock based
compensation in which the Company obtains employee services in share based payment transactions under the recognition and measurement
principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification. Pursuant
to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the
fair value of the equity instrument issued, whichever is more reliably measurable.
The measurement date used to determine
the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which
it is probable that performance will occur.
If the Company is a newly formed corporation
or shares of the Company are thinly traded, the use of share prices established in the Company’s most recent private placement
memorandum (based on sales to third parties), or weekly or monthly price observations would generally be more appropriate than
the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked
quotes and lack of consistent trading in the market.
The fair value of share options and similar
instruments is estimated on the date of grant using a Black Scholes option pricing valuation model. The ranges of assumptions for
inputs are as follows:
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Expected term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i)
of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period
of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of
the instruments and holder’s expected exercise behavior into the fair value (or calculated value) of the instruments. The
Company uses historical data to estimate holder’s expected exercise behavior. If the Company is a newly formed corporation
or shares of the Company are thinly traded the contractual term of the share options and similar instruments is used as the expected
term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable
basis upon which to estimate expected term.
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●
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Expected volatility of the entity’s shares and the method used to estimate it. Pursuant to
ASC Paragraph 718-10-50-2(f) (2)(ii) a thinly traded or nonpublic entity that uses the calculated value method shall disclose the
reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry
sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility
using that index. The Company uses the average historical volatility of the comparable companies over the expected contractual
life of the share options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of
weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility
calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and
asked quotes and lack of consistent trading in the market.
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●
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Expected annual rate of quarterly dividends. An entity that uses a method that employs different
dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted average expected
dividends. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected
dividend yield for periods within the expected term of the share options and similar instruments.
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●
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Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose
the range of risk-free rates used. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time
of grant for periods within the expected term of the share options and similar instruments.
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Generally, all forms of share based payments, including stock
option grants, warrants and restricted stock grants and stock appreciation rights are measured at their fair value on the awards’
grant date, based on estimated number of awards that are ultimately expected to vest.
The expense resulting from share based payments is recorded
in general and administrative expense in the statements of operations.
Stock Based Compensation – Nonemployees
Equity Issued to Parties Other Than Employees for Acquiring
Goods or Services
The Company accounts for equity instruments
issued to parties other than employees for acquiring goods or services under guidance of Subtopic 505-50 of the FASB Accounting
Standards Codification (“Subtopic 505-50”).
Pursuant to ASC Section 505-50-30, all
transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably
measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on
which the performance is complete or the date on which it is probable that performance will occur. If the Company is a newly formed
corporation or shares of the Company are thinly traded the use of share prices established in the Company’s most recent private
placement memorandum, or weekly or monthly price observations would generally be more appropriate than the use of daily price observations
as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading
in the market.
The fair value of share options and similar
instruments is estimated on the date of grant using a Black Scholes option pricing valuation model. The ranges of assumptions for
inputs are as follows:
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Expected term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i)
of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period
of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of
the instruments and holder’s expected exercise behavior into the fair value (or calculated value) of the instruments. The
Company uses historical data to estimate holder’s expected exercise behavior. If the Company is a newly formed corporation
or shares of the Company are thinly traded the contractual term of the share options and similar instruments is used as the expected
term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable
basis upon which to estimate expected term.
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●
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Expected volatility of the entity’s shares and the method used to estimate it. Pursuant to
ASC Paragraph 718-10-50-2(f) (2)(ii) a thinly traded or nonpublic entity that uses the calculated value method shall disclose the
reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry
sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility
using that index. The Company uses the average historical volatility of the comparable companies over the expected contractual
life of the share options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of
weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility
calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and
asked quotes and lack of consistent trading in the market.
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●
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Expected annual rate of quarterly dividends. An entity that uses a method that employs different
dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted average expected
dividends. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected
dividend yield for periods within the expected term of the share options and similar instruments.
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●
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Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose
the range of risk-free rates used. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time
of grant for periods within the expected term of the share options and similar instruments.
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Pursuant to ASC paragraph 505-50-257, if
fully vested, no forfeitable equity instruments are issued at the date the grantor and grantee enter an agreement for goods or
services (no specific performance is required by the grantee to retain those equity instruments), then, because of the elimination
of any obligation on the part of the counterparty to earn the equity instruments, a measurement date has been reached. A grantor
shall recognize the equity instruments when they are issued (in most cases, when the agreement is entered). Whether the corresponding
cost is an immediate expense or a prepaid asset (or whether the debit should be characterized as contra equity under the requirements
of paragraph 505-50-45-1) depends on the specific facts and circumstances. Pursuant to ASC paragraph 505-50-45-1, a grantor may
conclude that an asset (other than a note or a receivable) has been received in return for fully vested, non-forfeitable equity
instruments that are issued at the date the grantor and grantee enter an agreement for goods or services (and no specific performance
is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra equity
by the grantor of the equity instruments.
The transferability (or lack thereof) of
the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited to transactions in which
equity instruments are transferred to other than employees in exchange for goods or services. Section 505-50-30 provides guidance
on the determination of the measurement date for transactions that are within the scope of this Subtopic.
Pursuant to Paragraphs 505-50-25-8 and
505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable by the grantee only after
a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee achieves specified performance
conditions. Any measured cost of the transaction shall be recognized in the same period(s) and in the same manner as if the entity
had paid cash for the goods or services or used cash rebates as a sales discount instead of paying with, or using, the equity instruments.
A recognized asset, expense, or sales discount shall not be reversed if a share option and similar instrument that the counterparty
has the right to exercise expires unexercised.
Pursuant to ASC paragraph 505-50-30-S99-1,
if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity
instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are
not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should
be recorded.
Revenue Recognition
The Company derives revenues from the sale
of GE branded fans and lighting fixtures to large retailers through retail and online sales.
Revenue is recorded when all of the following
have occurred: (1) persuasive evidence of an arrangement exists, (2) asset is transferred to the customer without further obligation,
(3) the sales price to the customer is fixed or determinable, and (4) collectability is reasonably assured.
Cost of Sales
Cost of sales represents costs directly
related to the production and third-party manufacturing of the Company’s products.
Product sold is typically shipped directly
to the customer from the third-party manufacturer; costs associated with shipping and handling is shown as a component of
cost of sales.
Earnings (Loss) Per Share
Basic net earnings (loss) per share is
computed by dividing net income (loss) for the period by the weighted average number of common stock outstanding during each period.
Diluted earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common
stock, common stock equivalents and potentially dilutive securities outstanding during each period.
The Company uses the “treasury stock”
method to determine whether there is a dilutive effect of outstanding convertible debt, option and warrant contracts. For the six-month
ended June 30, 2017 and 2016, the Company reflected net loss and a dilutive net loss, and the effect of considering any common
stock equivalents would have been antidilutive for the period. Therefore, separate computation of diluted earnings (loss) per share
is not presented for the periods presented.
The Company has the following common stock
equivalents at June 30, 2017 and December 31, 2016:
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June
30, 2017
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December
31, 2016
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(Unaudited)
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|
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(Audited)
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Convertible
Debt (Exercise price $0.25/share)
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—
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800,000
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Stock Warrants (Exercise price $0.001 - $3.00/share)
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11,948,984
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13,555,651
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Stock Options (Exercise price $0.375 - $3.00/share)
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3,725,000
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1,350,000
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Total
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15,673,984
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15,705,651
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Related Parties
The Company
follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure
of related party transactions.
Pursuant
to Section 850-10-20 the related parties include (a) Affiliates of the Company; (b) Entities for which investments in their
equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section
825–10–15, to be accounted for by the equity method by the investing entity; (c) Trusts for the benefit of employees,
such as pension and profit sharing trusts that are managed by or under the trusteeship of management; (d) Principal owners
of the Company; (e) Management of the Company; (f) Other parties with which the Company may deal if one party controls
or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties
might be prevented from fully pursuing its own separate interests; and (g) Other parties that can significantly influence
the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties
and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully
pursuing its own separate interests.
The consolidated
financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense
allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated
in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall
include: (a). the nature of the relationship(s) involved; (b). a description of the transactions, including transactions
to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such
other information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c).
the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change
in the method of establishing the terms from that used in the preceding period; and (d). amounts due from or to related parties
as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Contingencies
The Company
follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions
may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which
will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings
that are pending against the Company or un-asserted claims that may result in such proceedings, the Company evaluates the perceived
merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected
to be sought therein.
If the assessment
of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated,
then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a
potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then
the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be
disclosed.
Loss contingencies
considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
However, there is no assurance that such matters will not materially and adversely affect the Company’s business, consolidated
financial position, and consolidated results of operations or consolidated cash flows.
Subsequent Events
The Company
follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events.
The Company will evaluate subsequent events through the date when the financial statements are issued.
Pursuant
to ASU 201009 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued
when they are widely distributed to users, such as through filing them on EDGAR.
Recently Issued Accounting
Pronouncements
In March
2016, the FASB issued ASU 2016-09, Stock Compensation, which is intended to simplify the accounting for share based payment award
transactions. The new standard will modify several aspects of the accounting and reporting for employee share based payments and
related tax accounting impacts, including the presentation in the statements of operations and cash flows of certain tax benefits
or deficiencies and employee tax withholdings, as well as the accounting for award forfeitures over the vesting period. The guidance
is effective for fiscal years beginning after December 15, 2016, including interim periods within that year, and will be adopted
by the Company in the first quarter of fiscal 2017. The Company anticipates the new standard will result in an increase in the
number of shares used in the calculation of diluted earnings per share and will add volatility to the Company’s effective
tax rate and income tax expense. The magnitude of such impacts will depend in part on whether significant employee stock option
exercises occur.
In April
2015, the FASB issued Accounting Standards Update No. 2015-03, Interest—Imputation of Interest (Topic 83530): Simplifying
the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to
a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by ASU 2015-03.
ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods
within those fiscal years. The Company has reclassified debt issuance costs from prepaid expenses and other current assets and
other assets as a reduction to debt in the condensed consolidated balance sheets.
In July
2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-11, Inventory
(Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”), which applies guidance on the subsequent measurement
of inventory. ASU 2015-11 states that an entity should measure inventory at the lower of cost and net realizable value. Net realizable
value is the estimated selling price in the ordinary course of business, less reasonable predictable costs of completion, disposal
and transportation. The guidance excludes inventory measured using last in, first out or the retail inventory method. ASU 2015-11
is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company
is not planning to early adopt ASU 2015-11 and is currently evaluating ASU 2015-11 to determine the potential impact to its condensed
consolidated financial statements and related disclosures.
Other pronouncements
issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or
are not expected to be significant to the Company’s financial position, results of operations or cash flows.
Note 3 Furniture and Equipment
Property
and equipment consisted of the following at June 30, 2017 and December 31, 2016:
|
|
June 30, 2017
|
|
|
December 31, 2017
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
Office Equipment
|
|
$
|
9,327
|
|
|
$
|
9,327
|
|
Furniture and Fixtures
|
|
|
33,578
|
|
|
|
33,578
|
|
Tooling and Production
|
|
|
178,975
|
|
|
|
136,835
|
|
Leasehold Improvements
|
|
|
26,680
|
|
|
|
—
|
|
Total
|
|
|
248,560
|
|
|
|
179,740
|
|
Less: Accumulated Depreciation
|
|
|
(81,539
|
)
|
|
|
(66,135
|
)
|
Property and Equipment net
|
|
$
|
167,021
|
|
|
$
|
113,605
|
|
Depreciation expense amounted to $8,857
and $15,404 for the three and six-month ended June 30, 2017, respectively; and $6,593 and $13,006 for the three-months and six-months
ended June 30, 2016, respectively.
Note 4 Intangible Assets
Intangible
assets (patents) consisted of the following at June 30, 2017 and December 31, 2016:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
171,354
|
|
|
$
|
134,919
|
|
Less: Impairment Charges
|
|
|
—
|
|
|
|
—
|
|
Less: Accumulated Amortization
|
|
|
(33,681
|
)
|
|
|
(28,577
|
)
|
Patents net
|
|
$
|
137,673
|
|
|
$
|
106,342
|
|
Amortization expense associated with patents
amounted to $2,828 and $5,105 for the three-months and six-months ended June 30, 2017, respectively; and $1,902 and $3,679 for
the six-months ended June 30, 2016, respectively.
At June 30, 2017, future amortization
of intangible assets for the years ending follows:
Year
Ending December 31:
|
|
|
|
|
2017
|
|
|
$
|
5,759
|
|
2018
|
|
|
|
11,424
|
|
2019
|
|
|
|
11,424
|
|
2020
|
|
|
|
11,455
|
|
2021
|
|
|
|
11,424
|
|
|
2022
and Thereafter
|
|
|
86,187
|
|
|
|
|
$
|
137,673
|
|
Actual amortization
expense in future periods could differ from these estimates as a result of future acquisitions, divestitures, impairments and
other factors.
Note 5 GE Trademark License Agreement
The Company entered into an amended License Agreement with
General Electric regarding the GE Trademark License. The License Agreement is amortized through its expiration in November 2018.
|
|
June 30, 2017 (Unaudited)
|
|
|
December 31, 2016
(Audited)
|
|
|
|
|
|
|
|
|
GE Trademark License
|
|
$
|
12,000,000
|
|
|
$
|
12,000,000
|
|
Less: Impairments
|
|
|
—
|
|
|
|
—
|
|
Less: Accumulated Amortization
|
|
|
(8,537,460
|
)
|
|
|
(7,324,415
|
)
|
GE Trademark License – net
|
|
$
|
3,462,540
|
|
|
$
|
4,675,585
|
|
Amortization expense associated with the GE Trademark License
amounted to $611,037 and $1,213,043 for the three-months and six-months ended June 30, 2017 and $608,695 and $1,217,391 for the
three-months and six-months ended 2016, respectively.
At June 30, 2017, future amortization of intangible assets is as
follows for the remaining:
Year Ending December 31:
|
|
|
|
|
2017
|
|
|
$
|
1,222,074
|
|
2018
|
|
|
|
2,240,466
|
|
|
|
|
$
|
3,462,540
|
|
Note 6 Deferred Lease Credits
Cash or rent abatements received upon
entering into certain office leases are recognized on a straight-line basis as a reduction to rent expense over the lease term.
The unamortized portion is included in Deferred Lease Credits, which are included in other long-term liabilities. As of June 30,
2017, and December 31, 2016 the long-term deferred credits were $29,707 and $13,034 respectively. Deferred Rent amortization was
$3,875 and $(16,673) for the three-months and six-months ended June 30, 2017 and $2,292 and $4,584 for the three-months and six-months
ended 2016, respectively.
Note 7 Notes Payable
At June 30, 2017 and December 31,
2016, the Company had a note payable to a bank in the amount of $128,581 and $186,823, respectively. The note bears interest at
prime plus 1.5% (5.5% as of June 30, 2017) and matures on August 28, 2018. The note is secured by the assets of the Company and
personal guarantees by a shareholder and an officer of the Company.
On April 13, 2016, the Company entered in to
an agreement with a third party for a $10,000,000 line of credit. The primary purpose of this line of credit is to fund manufacturing
and product related obligations. The amounts outstanding under the line of credit promissory note carries interest of 8%, due monthly
with principal and unpaid interest due December 31, 2017. The note is secured by the assets of the Company. The outstanding balance
on this note was $3,337,889 and $3,112,737 at June 30, 2017 and December 31, 2016, respectively.
The Company received a $500,000 loan from a
related party in January 2016. The note is on demand and carries interest of 12% and carried a balance of $200,000 at June 30,
2017 and December 31, 2016, respectively.
Principal payments due under the terms of the
notes described above are as follows:
Principal Due in Next 12 Months
|
|
|
|
|
2017
|
|
|
$
|
3,623,793
|
|
2018
|
|
|
|
42,677
|
|
|
|
|
$
|
3,666,470
|
|
Interest expense under the above
agreements amounted to $72,644 and $130,644 for the three-months and six-months ended June 30, 2017, respectively and $193,358
and $273,879 for the three-months and six-months ended June 30, 2016, respectively.
Note 8 Convertible Debt Net
The Company has recorded derivative
liabilities associated with convertible debt instruments, as more fully discussed at Note 9.
|
|
Third Party
|
|
|
Related Party
|
|
|
Totals
|
|
Balance December 31, 2015
|
|
$
|
3,989,950
|
|
|
$
|
50,000
|
|
|
$
|
4,039,950
|
|
Add: Amortization of Debt Discount
|
|
|
474,283
|
|
|
|
0
|
|
|
|
474,283
|
|
Less Repayments/Conversions
|
|
|
(4,314,233
|
)
|
|
|
—
|
|
|
|
—
|
|
Balance December 31, 2016
|
|
|
150,000
|
|
|
|
50,000
|
|
|
|
200,000
|
|
Add: Amortization of Debt Discount
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Less Repayments/Conversions
|
|
|
(150,000
|
)
|
|
|
(50,000
|
)
|
|
|
(200,000
|
)
|
Balance June 30, 2017
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On November 26, 2013, May 8, 2014 and September
25, 2014 the Company completed closings in connection with its offering (the “Notes Offering”) of its 12% Secured
Convertible Promissory Notes (the “12% Notes”) in the aggregate principal amount of $4,240,100 and/or its 15% Secured
Convertible Promissory Notes in the aggregate principal amount of $30,000 (the “15% Notes”, and together with the
12% Notes, each a “Note” and collectively, the “Notes”), as applicable, with certain “accredited
investors” (the “Investors”), as defined under Regulation D, Rule 501 of the Securities Act. Pursuant to the
Notes Offering, the Company received $1,752,803, $1,400,000 and $800,500 in net proceeds on November 26, 2013, May 8, 2014 and
September 25, 2014, respectively.
In addition to the terms customarily included
in such instruments, the Notes began accruing interest on the date that each Investor submitted the principal balance of such Investor’s
Note, with the interest thereon becoming due and payable on the one-year anniversary, and quarterly thereafter. Upon a default
of the Notes, the interest rate will increase by 2% for each 30-day period until cured. The principal balance of each Note and
all unpaid interest became payable twenty-four (24) months after the date of issuance. The principal and outstanding interest under
the Notes are convertible into shares of the Company’s common stock at $0.25 per share and are secured by a first priority
lien (subject only to an existing note with Signature Bank of Georgia on the Company’s intellectual property and all substitutes,
replacements and proceeds of such intellectual property) pursuant to the terms of a Security Purchase Agreement, dated as of November
26, 2013, May 8, 2014 and September 25, 2014, as applicable, by and between the Company and each Investor.
Pursuant to the Notes Offering, each Investor
also received five (5) year common stock warrants to purchase the Company’s common stock at $0.375 per share (each a “Warrant”
and collectively, the “Warrants”). Investors of the 12% Notes received Warrants with 25% coverage based on a predetermined
valuation of the Company. Investors of the 15% Notes received Warrants with 15% coverage based on the predetermined valuation of
the Company. Investors with a principal investment amount equal to or greater than $250,000 received Warrants with a bonus 40%
coverage (“Bonus Coverage”); however, if an Investor previously invested $250,000 or more in the Notes Offering,
such Investor received Bonus Coverage if such Investor subsequently invested $100,000 or more in the Notes Offering. In addition
to the terms customarily included in such instruments, the Warrants may be exercised by the Investors by providing to the Company
a notice of exercise, payment and surrender of the Warrant.
The Notes and Warrants were treated as derivative
liabilities.
In connection with the Notes Offering, the
Company entered into Registration Rights Agreements, each dated as of November 26, 2013, May 8, 2014 and September 25, 2014, and
each by and between the Company and each of the Investors (collectively, the “Registration Rights Agreements”), whereby
the Company agreed to prepare and file a registration statement with the SEC within sixty (60) days after execution of the applicable
Registration Rights Agreement and to have the registration statement declared effective by the SEC within ninety (90) days thereafter.
Because the Company was unable to file a registration
statement pursuant to the terms of each Registration Rights Agreements dated as of November 26, 2013 or May 8, 2014, the Company
was in default under such Registration Rights Agreements (the “Filing Default Damages”), and because the Company was
unable to have a registration statement declared effective pursuant to the terms of the Registration Rights Agreements dated as
of November 26, 2013, the Company was in default under such Registration Rights agreements (the “Effectiveness Default Damages”).
The Filing Default Damages stopped accruing on the date such registration statement was filed, and the Effectiveness Default Damages
stopped accruing on the date it was declared effective.
The Company invited the Investors
holding Notes dated November 26, 2013 to extend the first interest payment that was scheduled to be paid pursuant to the Notes
dated November 26, 2013 (the “Interest Due”) to February 24, 2015 and in exchange offered to capitalize the Interest
Due at a rate of 12% through payment (the “Additional Interest”), all of which was convertible into the Company’s
common stock at a price of $0.25 per share (the “Agreement and Waiver and Agreement to Convert”). Through December
31, 2016, the Company has issued in total 2,343,191 shares of its common stock representing $585,798 in Additional Interest, Interest
Due, Filing Default Damages and Effectiveness Default Damages. As of December 31, 2016, all Additional Interest, Interest Due,
Filing Default Damages and Effectiveness Default Damages was repaid by the Company.
During 2015, five Investors requested that
the Company withhold payments of interest due under their Notes at no cost to the Company, to allow the Company to address working
capital needs. Such interest due has been or will be paid to the five Investors in cash or simple non-interest bearing promissory
notes, and none of such amounts have been or will be paid in shares of the Company’s capital stock.
In November 2015, the Company invited the
holders of Notes dated November 26, 2013, with respect to outstanding principal and interest due under their respective Notes,
to (i) receive payment in cash, (ii) convert their Notes into shares of the Company’s common stock, or (iii) forbear an
election for three (3) months, or until February 26, 2016, pursuant to a forbearance agreement, during such time interest under
their respective Notes would continue to accrue. In February 2016, the Company invited the same holders to extend their forbearance
period to make an election to convert or redeem their Notes for an additional three months, or until May 26, 2016, under the same
terms as the first forbearance agreements.
In May 2016, the Company invited the holders
of all Notes, where such holders had not already made an election to redeem or convert their Notes, to forbear or extend their
forbearance period to make an election to convert or redeem their Notes until July 31, 2016, which the Company thereafter extended
to August 15, 2016 (the “August 2016 Election”). This also provided a third option to all noteholders, whereby such
holders could convert their respective Note(s) into shares of Series A Convertible Preferred Stock (“Preferred Stock”).
(See Note 8(B)).
Prior to the August 2016 Election, several
Investors had previously elected to receive payment in cash, or convert their Notes into shares of the Company’s common stock,
but most Notes remained outstanding.
For the six-months ended June 30, 2017, one
Investor redeemed $50,000 in principal balance of one Note and one Investor was issued 200,000 shares of Preferred Stock in connection
with its August 2016 Election. Pursuant to the August 2016 Elections received and effective as of August 15, 2016, through June
30, 2017 the Company redeemed or issued shares of the Company’s common stock or Preferred Stock, as applicable, in exchange
for the principal balance of the Notes, as follows: (i) the payment of, in the aggregate, $50,000 in principal balance of one Note;
(ii) the issuance of 240,000 shares of the Company’s common stock, representing $60,000 in outstanding Note principal balance;
and (iii) the issuance of 13,456,936 shares of Preferred Stock, representing $3,364,234 in outstanding Note principal balance.
As of June 30, 2017, all Notes have
either been re-paid in cash, separate debt obligation or by conversion, and all such Notes have been terminated. All
issuances of capital stock in the August 2016 Election were made only for principal balances due under the Notes, and all
interest was paid directly to the Investors.
The debt carries interest between 12% and 15%,
and was due in November 2015, May 2016 and September 2016, as extended to July 31, 2016 pursuant to certain forbearance agreements.
All Notes and Warrants issued in connection
with the Notes Offering are convertible at $0.25 and $0.375 per share, respectively, subject to the existence of a “ratchet
feature”, which allows for a lower offering price if the Company offers shares to the public at a lower price.
(B) Offer to Convert Debt to Preferred
Shares
By letter to each holder of the Notes,
dated July 22, 2016, the Company requested that each holder indicate its election to (i) redeem its Note, (ii) convert its Note
into the Company’s common stock or (iii) elect to convert its Note into shares of Preferred Stock (the “Preferred Option”),
in each case by August 15, 2016.
For those holders electing the Preferred
Option, each holder has received shares of the Preferred Stock on a 1 to 1 ratio to the number of shares of the Company’s
common stock which are then convertible under such holder’s respective Note. With respect to interest on junior securities,
dividends, distributions or liquidation preference, shares of Preferred Stock will rank senior to shares of the Company’s
common stock or other junior securities. Along with other terms customary for a class of convertible preferred stock, the Preferred
Stock will be convertible into shares of the Company’s common stock at the same conversion price as the Notes (i.e., USD
$0.25 per share), and will pay interest quarterly at a rate of six percent (6%). The Preferred Stock will be convertible upon the
election of the holder thereof. Shares of the Preferred Stock may be repurchased by the Company upon 30 days’ prior written
notice, in whole or in part, for USD $3.50 per share, provided that during such notice period the holder will continue to have
the option and right to convert its shares of Preferred Stock into shares of the Company’s common stock. Holders will also
have a put option, allowing them to sell their shares of Preferred Stock back to the Company at USD $0.25 per share, the Note conversion
price.
Each holder electing the Preferred Option
was required to enter into an amendment to its Note, providing that the Note will be convertible into the Preferred Stock rather
than the Company’s common stock, and to thereafter elect to convert their Note, as amended, into Preferred Stock. In addition,
each holder entered into a lockup agreement, whereby the holder agreed not to offer, sell, contract to sell, pledge, give, donate,
transfer or otherwise dispose of (i) the shares of the Company’s common stock it then holds, (ii) the shares of Preferred
Stock obtained upon conversion of its Note, and (iii) the shares of the Company’s common stock underlying the Preferred Stock,
for a period of twelve (12) months following the date of such agreement. The Note amendments, conversion to Preferred Stock and
lockup agreement have been entered into on August 15, 2016. The Note amendments were approved by a majority of the holders of the
then outstanding Notes. See above for more details related to the results of that offering
Note 9 Derivative Liabilities
The fair value at the commitment and re-measurement
dates for the Company’s derivative liabilities were based upon the following management assumptions as:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Unaudited
|
|
|
Audited
|
|
|
|
|
|
|
|
|
Balance Beginning of period
|
|
$
|
24,083,313
|
|
|
$
|
24,157,837
|
|
Fair value mark to market adjustment - stock options
|
|
|
1,761,071
|
|
|
|
(268,098
|
)
|
Fair value at the commitment date for options granted
|
|
|
778,902
|
|
|
|
4,625,002
|
|
Fair value mark to market adjustment - convertible debt
|
|
|
8,482,239
|
|
|
|
42,664,939
|
|
Fair value mark to market adjustment - warrants
|
|
|
2,771,860
|
|
|
|
(1,972,844
|
)
|
Fair value at commitment date for warrants issued
|
|
|
1,480,126
|
|
|
|
5,053,387
|
|
Debt settlement on the derivative liability associated with interest
|
|
|
—
|
|
|
|
3,204,363
|
|
Reclassification of derivative liability to Additional Paid-in-Capital due to share reservation
|
|
|
(7,061,433
|
)
|
|
|
(50,431,559
|
)
|
Gain on Settlement of Debt
|
|
|
—
|
|
|
|
(2,949,714
|
)
|
Balance at end of period
|
|
$
|
32,296,078
|
|
|
$
|
24,083,313
|
|
The Company recorded a change in the
value of embedded derivative liabilities income/(expense) of $502,252 and $(13,015,170) for the three-months and six-months ended
June 30, 2017, respectively;and $(37,458,479) and $(35,461,616) for the three-months and six-months ended June 30, 2016, respectively
.
|
|
Commitment Date
|
|
|
Recommitment
Date
|
|
Expected dividends
|
|
|
0%
|
|
|
|
0%
|
|
Expected volatility
|
|
|
150%
|
|
|
|
150%
|
|
Expected term
|
|
|
2-5 years
|
|
|
|
1.41 – 4.76 years
|
|
Risk Free Interest Rate
|
|
|
0.29%-2.61%
|
|
|
|
1.38%-1.89%
|
|
The Company recorded derivative expense of
$(197,869) and $(4,963,451) for the three-months and six-months ended June 30, 2017 and $(2,259,028) and $(4,963,451) for the
three-months and six-months ended June 30, 2016, respectively.
The Company recorded loss on disposition of
debt as a result of conversion to the Company’s common stock and Preferred Stock of $(1,260,000) during the six-months ended
June 30, 2017. The loss was a result of the conversion value of the shares received exceeded the face value of the note.
Note 10 Debt Discount
The Company recorded the debt discount to the
extent of the gross proceeds raised, and expensed immediately the remaining fair value of the derivative liability, as it exceeded
the gross proceeds of the note.
Accumulated amortization of derivative discount
amounted to $4,402,773 as of June 30, 2017 and December 31, 2016.
The Company recorded $197,332 and $474,283
amortization of debt discount expense for the three-months and six-months ended June 30 2016, respectively. The Debt Discount was
fully amortized as of June 30, 2017 and no expense was incurred for the periods presented.
Note 11 Debt Issue Costs
|
|
|
|
|
|
|
|
|
June 30, 2017
(Unaudited)
|
|
|
December 31, 2016
(Audited)
|
|
|
|
|
|
|
|
|
Debt Issuance Costs
|
|
$
|
316,797
|
|
|
$
|
316,797
|
|
Total
|
|
|
316,797
|
|
|
|
316,797
|
|
Less: Accumulated Amortization
|
|
|
(316,797
|
)
|
|
|
(316,797
|
)
|
Debt Issuance Costs net
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company recorded amortization
expense of $0 for the three-months and six-months ended June 30, 2017 and $ $8,569, and $14,609 for three-months and six-months
ended June 30, 2016, respectively.
Note 12 GE Royalty Obligation
In 2011, the Company executed a Trademark
Licensing Agreement with General Electric, which allows the Company the right to market certain ceiling light and fan fixtures
displaying the GE brand. The License Agreement imposes certain manufacturing and quality control conditions that the Company must
maintain in order to continue to use the GE brand.
The License Agreement is nontransferable and
cannot be sublicensed. Various termination clauses are applicable; however, none were applicable as of the periods presented.
In August 2014, the Company entered into a
second amendment to the License Agreement pertaining to its royalty obligations. Under the terms of the amendment, the Company
agreed to pay a total of $12,000,000 by November 2018 for the rights assigned in the original contract. In case the Company does
not pay GE a total of at least $12,000,000 in cumulative royalties over the term of the License Agreement, the difference between
$12,000,000 and the amount of royalties actually paid to GE is owed in December 2018. As of June 30, 2017, and December 31, 2016
there was $10,946,406 and $11,302,423 outstanding under the License Agreement, respectively.
Payments are due quarterly based upon
the prior quarters’ sales. The Company made payments of $218,933 and $356,016 for the three-months and six-months ended June
30, 2017, respectively, and $127,570 and $220,483 for the three-months and six-months ended June 30, 2016, respectively.
The License Agreement obligation will be paid
from sales of GE branded product subject to the following repayment schedule:
Net Sales in Contract Year
|
|
Percentage of Contract Year Net Sales owed to GE
|
|
$0 $50,000,000
|
|
|
7
|
%
|
$50,000,001 $100,000,000
|
|
|
6
|
%
|
$100,000,000+
|
|
|
5
|
%
|
The Company has limited operating history and
does not have the ability to estimate the sales of GE branded product, the liability is classified as long-term. As sales are recognized,
the Company will estimate the portion it expects to pay in the current year and classify as current.
Note 13 Stockholders Deficit
For the six-months ended June 30, 2017 and
twelve-months ended December 31 2016, the Company issued the following common stock:
Transaction Type
|
|
|
|
|
Quantity
(shares)
|
|
|
Valuation
($)
|
|
|
Range of Value
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Equity Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued Board of Directors Compensation
|
|
|
(1)
|
|
|
|
62,000
|
|
|
$
|
42,000
|
|
|
|
0.60-1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued per Agreement and Waiver and Agreement to Convert
|
|
|
(2)
|
|
|
|
1,790,092
|
|
|
|
822,524
|
|
|
|
0.25-.625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Offering
|
|
|
(3)
|
|
|
|
3,155,000
|
|
|
|
7,538,000
|
|
|
|
1.00-2.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Award
|
|
|
(4)
|
|
|
|
25,000
|
|
|
|
15,000
|
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Issued for Services
|
|
|
(5)
|
|
|
|
300,000
|
|
|
|
136,250
|
|
|
|
0.25-1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Issued for Conversion of Debt
|
|
|
(6)
|
|
|
|
443,156
|
|
|
|
110,789
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2016 Equity Transactions
|
|
|
|
|
|
|
5,775,248
|
|
|
$
|
8,664,563
|
|
|
|
0.25-2.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Equity Transactions (through June 30, 2017)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Offering
|
|
|
(7)
|
|
|
|
69,667
|
|
|
$
|
209,000
|
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commons Stock Issued per Exercise of Warrants
|
|
|
(8)
|
|
|
|
1,666,667
|
|
|
|
5,000,000
|
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Issued per Exercise of Options
|
|
|
(9)
|
|
|
|
30,000
|
|
|
|
78,000
|
|
|
|
2.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2017 Equity Transactions (through June 30, 2017)
|
|
|
|
|
|
|
1,766,334
|
|
|
$
|
5,287,000
|
|
|
$
|
2.60-3.00
|
|
The following is a more detailed description
of the Company’s stock issuance from the table above:
|
(1)
|
Shares Issued to Board of Directors
|
The Company appointed a new director in November
2015. Pursuant to the Company’s Director Compensation Policy (the “Director Compensation Policy”), the Company
issued the director 50,000 shares of the its common stock valued at $0.60 per share in connection with the director’s appointment.
The stock award was granted on November 15, 2015, but the shares were not issued by the Company until February 2016. In January
2016, this director agreed to serve as the Company’s Audit Committee Chair, and the Company issued the director 12,000 shares
of the its common stock valued at $1.00 per share as compensation for the additional responsibilities, pursuant to the Director
Compensation Policy.
|
(2)
|
Shares Issued in Connection with the Notes or Agreements
to Convert
|
In connection with the Agreement and Waiver
and Agreement to Convert, as of the twelve-months ended December 31, 2016, the Company issued an additional 2,343,191 shares of
its common stock as payment for Additional Interest, Interest Due, Filing Default Damages and Effectiveness Default Damages, representing
payment to Investors of $1,210,798. Of this amount, $625,000 represents prior year stock awards/grants that were not issued until
2016.
|
(3)
|
Shares Issued in Connection with Offering
|
On February 19, 2016, the Company completed
a second closing of its offering of shares of its common stock, which first closed on December 24, 2015, representing aggregate
gross proceeds to the Company of $300,000, and thereafter issued 300,000 shares of its common stock.
In April 2016, the Company completed an offering
of 2,000,000 shares of its common stock at an offering price of $2.50 per share, and 1,666,667 in warrants having a conversion
price of $3.00 per share.
In May 2016, the Company completed an offering
of 675,000 shares of its common stock at an offering price of $2.60 per share, and 1,350,000 of warrants having conversion price
between $3.00 and $3.50 over the next three anniversary dates.
In July 2016, the Company completed an offering
of 30,000 shares of its common stock at an offering price of $2.60 per share, and an additional 150,000 shares of its common stock
at $2.70 per share in two separate offerings.
|
(4)
|
Shares Issued Pursuant to Stock Awards.
|
In September 2016, the Company issued 25,000
shares of its common stock in stock awards granted on November 15, 2015, at $0.60 per share.
|
(5)
|
Shares Issued for Services
|
In September 2016, the Company issued 300,000
shares of its common stock representing $136,250 in services received in 2015. The share conversions were in a range of valuations
between $0.25 and $1.00 per share, based on the dates of the agreements and when the services were rendered.
|
(6)
|
Shares Issued in Conjunction with Retirement of Debt
|
In accordance with the Notes, the Company issued
443,156 shares of its common stock for the retirement of debt during the year-ended December 31, 2016.
|
(7)
|
Shares Issued for Common Stock
|
During the six-months ended June 30, 2017,
the Company received gross proceeds of $209,000 from the issuance of 69,667 shares of its common stock to three individuals at
$3.00 per share. In connection therewith, the Company issued five-year options to purchase up to 315,000 shares of its common stock
at an exercise price of $3.00 per share.
|
(8)
|
Shares Issued Pursuant to Warrants Exercised
|
In March 2017, the Company issued 1,666,667
shares of its common stock upon exercise in full of a warrant having an exercise price of $3.00 per share, and the Company received
gross proceeds of $5,000,000.
|
(9)
|
Shares Issued Pursuant to Options Exercised
|
In April 2017, the Company issued 30,000 shares
of its common stock upon exercise in full of an option having an exercise price of $2.60 per share, and the Company received gross
proceeds of $78,000.
The following is a summary of the Company’s Preferred Stock
Activity:
Transaction Type
|
|
Quantity
|
|
|
Valuation
|
|
|
Range of
Value per
Share
|
|
|
|
|
|
|
|
|
|
|
|
2016 Preferred Stock Transactions
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Issued per August 2016 Election
|
|
|
13,056,932
|
|
|
$
|
44,393,569
|
|
|
$
|
3.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2016 Preferred Stock Transactions
|
|
|
13,056,932
|
|
|
$
|
44,393,569
|
|
|
$
|
3.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Preferred Stock Transactions (through June 30, 2017)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Issued per August 2016 Election
|
|
|
400,000
|
|
|
$
|
1,360,000
|
|
|
$
|
3.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2017 Preferred Stock Transactions (through June 30, 2017)
|
|
|
400,000
|
|
|
$
|
1,360,000
|
|
|
|
3.40
|
|
In accordance with the August 2016 Elections (see Note 8(B)), the Company has issued 13,456,932 shares
of 6% Preferred Stock in exchange for Notes having a principal balance of $3,364,234. The Preferred Stock will be convertible upon
the election of the holder thereof. Shares of the Preferred Stock may be repurchased by the Company upon 30 days’ prior written
notice, in whole or in part, for USD $3.50 per share, provided that during such notice period the holder will continue to have
the option and right to convert its shares of Preferred Stock into shares of the Company’s common stock. Holders will also
have a put option, allowing them to sell their shares of Preferred Stock back to the Company at USD $0.25 per share, the Note conversion
price, and therefore the stock is classified as Mezzanine equity rather than permanent equity. The stock was valued based upon
the value of Common Shares publicly traded nearest the conversion date. During the six-month ended June 30, 2017 the Company paid
dividends in the amount of $85,745 to the Preferred Stock shareholders.
The following is a summary of the Company’s
stock option activity:
|
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
Average
Remaining
Contractual Life
|
|
|
Aggregate
Intrinsic
|
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
(In Years)
|
|
|
Value
|
|
2016 Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
|
1,150,000
|
|
|
|
0.835
|
|
|
|
10.00
|
|
|
|
3,404,000
|
|
Forfeited/Cancelled
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance- December 31, 2016
|
|
|
|
1,150,000
|
|
|
|
0.835
|
|
|
|
8.16
|
|
|
$
|
3,404,000
|
|
Exercised
|
|
|
|
(30,000
|
)
|
|
|
2.60
|
|
|
|
—
|
|
|
|
(78,000
|
)
|
Granted
|
|
|
|
3,105,000
|
|
|
|
0.883
|
|
|
|
8.38
|
|
|
$
|
6,220,850
|
|
Forfeited/Cancelled
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance- June 30, 2017
|
|
|
|
3,075,000
|
|
|
$
|
0.883
|
|
|
|
8.00
|
|
|
$
|
6,142,850
|
|
The Company has issued options that
have vested to purchase stock through our Incentive Plan. The Company has issued 4,425,000 common stock options in conjunction
with all option plans. The Company has reserved 4,140,000 shares with the transfer agent for the future issuance for shares associated
with common stock options issued. As a result, 285,000 shares have not been reserved and are included in the calculation of derivative
liability (See Note 9).
The following is a summary of the Company’s stock warrant
activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Warrants
|
|
|
Weighted
Average Exercise
Price
|
|
|
Weighted Average Remaining Contractual Life (in Years)
|
|
Balance, December 31, 2015
|
|
|
|
9,728,984
|
|
|
$
|
0.289
|
|
|
|
1.7
|
|
Issued
|
|
|
|
3,826,667
|
|
|
|
3.28
|
|
|
|
1.8
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cancelled/Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance, December 31, 2016
|
|
|
|
13,555,651
|
|
|
$
|
0.72
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
60,000
|
|
|
|
3.00
|
|
|
|
2.9
|
|
Exercised
|
|
|
|
(1,666,667
|
)
|
|
|
3.00
|
|
|
|
—
|
|
Cancelled/Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance, June 30, 2017
|
|
|
|
11,948,984
|
|
|
$
|
0.83
|
|
|
|
1.9
|
|
During 2016, the Company issued warrants to four (4) different
groups totaling 3,826,667. These warrants had lives ranging from one to five years at strike prices between $3.00 and $3.50 per
share.
In March 2017, 1,666,667 warrants were exercised at $3.00 per share.
In May 2017, 60,000 warrants were issued at price between $3.00
and $3.50 per share contingent on the date of exercise.
|
(E)
|
2015 Stock Incentive Plan
|
On April 27, 2015, the Board approved the Company’s
2015 Stock Incentive Plan (the “Incentive Plan”). Under the Incentive Plan, the Board has the sole authority to implement,
interpret, and/or administer the Incentive Plan unless the Board delegates all or any portion of its authority to implement, interpret,
and/or administer the Incentive Plan to a committee of the Board, or (ii) the authority to grant and administer awards under the
Incentive Plan to an officer of the Company. The Incentive Plan relates to the issuance of up to 5,000,000 shares of the Company’s
common stock, subject to adjustment, and shall be effective for ten (10) years, unless earlier terminated. Certain options to be
granted to employees under the Incentive Plan are intended to qualify as Incentive Stock Options (“ISOs”) pursuant
to Section 422 of the Internal Revenue Code of 1986, as amended, while other options granted under the Incentive Plan will be nonqualified
options not intended to qualify as Incentive Stock Options ISOs (“Nonqualified Options”), either or both as provided
in the agreements evidencing the options described.
Note 14 Commitments
In January 2014, the Company executed a thirty-nine
month lease for a corporate headquarters. The Company paid a security deposit of $27,020. The lease expires in April 2017
In October 2014, the Company executed a fifty-three
month lease for a new corporate headquarters with a base rent of $97,266 escalating annually through 2019. The Company paid a security
deposit of $1,914.
In September 2015, the Company amended the
current lease for a smaller space at the same terms.
In October 2014, the Company entered into a
sublease agreement to sublease its previous office space through November 2016. In connection with the sublease, the Company collected
$34,981 as a security deposit.
One June 20, 2017, the Company extended the
operating lease for its corporate headquarters in conjunction with the acquisition of additional space. The new lease is effective
on July 1, 2017 and expires on September 30, 2020.
The minimum rent obligations are approximately as follows:
|
|
|
Minimum
|
|
Year
|
|
|
Obligation
|
|
2017
|
|
|
$
|
18,764
|
|
2018
|
|
|
|
76,179
|
|
2019
|
|
|
|
78,467
|
|
2020
|
|
|
|
60,320
|
|
|
|
|
$
|
233,731
|
|
|
(B)
|
Chief Executive Officer Agreement
|
In November 2014, the Company entered into
an employment agreement with John Campi, its Chief Executive Officer. In addition to salary, the agreement provided for the issuance
of 750,000 restricted shares of the Company’s common stock to him, which vested and were issued as follows: 250,000 shares
after the first 6 months of employment and 500,000 additional shares at December 31, 2015. Under terms of the agreement the executive
would receive additional compensation in the form of stock options to purchase shares of Company stock equal to 0.5% of quarterly
net income. The strike price of the options will be established at the time of the grant. The options will vest in twelve months
and expire after sixty months. In addition to the stock options compensation, the executive will receive cash compensation equal
to 0.5% of annual sales up to $20 million and 0.25% for annual sales $20 million and 3% of annual net income. The 750,000 shares
were issued in 2016 and valued at $0.625 per share.
On September 1, 2016, the Company entered into
a new employment agreement with its Chief Executive Officer. The agreement provides for a base salary of $150,000; 120,000
shares of The Company’s common stock in a “Sign on Bonus” which will vest December 31, 2017; 0.25% of annual
gross sales and 3% of annual adjusted gross income in cash compensation and 0.50% of quarterly net income in options, the strike
price to be determined at the time of grant. Such options will expire 5 years after issuance.
For the three-months and six-months ended
June 30, 2017 Mr. Campi earned approximately $4,660 and $10,990, respectively, and for the three-months and six-months ended June
30, 2016 $9,112 and $17,575, respectively, under this and the predecessor agreement associated with performance pay as noted above.
|
(C)
|
Executive Chairman Agreement
|
The Company entered into a three year consulting agreement with a director which was terminated effective
September 1, 2016, and carries an annual payment of $150,000 cash, stock or five year options equal to 0.5% of the Company’s
annual net sales. For the three-months and six-months ended June 30, 2017, Mr. Kohen earned approximately $9,321 and $21,981, respectively,
and for the three-months and six-months ended June 30, 2016, he earned $9,112 and $17,575, respectively, under this and the predecessor
agreement associated with performance pay as noted above. No stock or options have been issued in association with this agreement.
On September 1, 2016, the Company modified
the above consulting agreement. The compensation was changed to $250,000 per annum, an annual grant of 340,000 shares of the Company’s
common stock, which vest in its entirety January 1, 2019, and stock options equal to 0.50% of the Company’s gross revenue
with five year vesting. In addition, the Chairman was granted a “Sign on Bonus” of 120,000 shares of the Company’s
common stock which will vest January 1, 2020, and a supplemental bonus of options which is tied to the performance of the Company’s
common stock.
|
(D)
|
Employee Agreement – President
|
On August 17, 2016, the Company entered into an Employment Agreement with Mark Wells, its President. Mr.
Wells receives a salary of $250,000; 1,025,000 shares in the Company’s common stock which will vest in its entirety
January 1, 2019; 0.25% of the Company’s net revenue and a “Sign-on Bonus” of 120,000 shares of the Company’s
common stock which vests January 1, 2018. Mr. Wells earned $4,660 and $10,990 for the three-months and six-months ended June 30,
2017, respectively, under this employment agreement associated with performance pay as noted above.
|
(E)
|
Employee Agreement – Chief Operating Officer
|
Effective July 1, 2016, the Company entered
into an Executive Employment Agreement with Patricia Barron, its Chief Operations Officer. Ms. Barron receives a base salary of
$120,000 per year and incentive compensation equal to 0.25% of the Company’s net revenue paid in cash. Ms. Barron earned
approximately $4,660 and $10,990 for the three-months and six-months ended June 30, 2017, respectively associated, with performance
pay as noted above.
Note 15 Subsequent Events
On April 19, 2017, the Company’s Board of
Directors authorized the Company to grant certain securities under the Company’s 2015 Incentive Plan, or any successor plan,
consisting of, in the aggregate, options to purchase up to 2,150,000 shares of our common stock at exercise prices ranging from
$3.00 per share to $5.00 per share, vesting on June 30, 2017, December 31, 2017, December 31, 2018 and December 31, 2019. As of
June 30, 2017, the Company had not yet entered into award agreements with the grantees of such grants, and therefore had not
issued options to purchase shares of the Company’s common stock pursuant to such grants. On August 2, 2017, the Company
entered into Stock Option Agreements with two of the grantees thereby issuing, in the aggregate, options to purchase up to 350,000
shares of the Company’s common stock, with 175,000 of such options vested and having an exercise price of $3.00 per share
and 175,000 of such options vesting on December 31, 2017 and having an exercise price of $4.00 per share. As of August 11, 2017,
the Company had not yet entered into Stock Option Agreements with the other grantees.