Item
1. Condensed Consolidated Financial Statements.
Solis
Tek Inc.
Condensed
Consolidated Balance Sheets
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
194,129
|
|
|
$
|
275,783
|
|
Accounts
Receivable, net of allowance for doubtful accounts of $381,937 and $359,395
|
|
|
865,429
|
|
|
|
628,691
|
|
Inventories
|
|
|
1,769,638
|
|
|
|
2,880,804
|
|
Prepaid
expenses and other current assets
|
|
|
229,004
|
|
|
|
75,109
|
|
Total
current assets
|
|
|
3,058,200
|
|
|
|
3,860,387
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
155,025
|
|
|
|
204,936
|
|
Other
assets
|
|
|
37,154
|
|
|
|
32,071
|
|
TOTAL
ASSETS
|
|
$
|
3,250,379
|
|
|
$
|
4,097,394
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
939,628
|
|
|
$
|
552,057
|
|
Due
to related party vendor
|
|
|
398,656
|
|
|
|
1,083,764
|
|
Note
payable - related parties
|
|
|
545,000
|
|
|
|
265,000
|
|
Amount
due to related parties
|
|
|
160,153
|
|
|
|
134,086
|
|
Capital
lease obligations, current portion
|
|
|
12,871
|
|
|
|
13,711
|
|
Loans
payable, current portion
|
|
|
7,914
|
|
|
|
8,262
|
|
Total
Current Liabilities
|
|
|
2,064,222
|
|
|
|
2,056,880
|
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations, net of current portion
|
|
|
260
|
|
|
|
9,665
|
|
Loans
payable, net of current portion
|
|
|
20,159
|
|
|
|
25,958
|
|
Notes
payable related parties, net of current portion
|
|
|
600,000
|
|
|
|
600,000
|
|
Total
liabilities
|
|
|
2,684,641
|
|
|
|
2,692,503
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock, no par value, 20,000,000 shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized; 37,959,534 and 29,721,998 shares issued and outstanding at September
30, 2017 and December 31, 2016, respectively
|
|
|
37,959
|
|
|
|
29,722
|
|
Additional
paid-in-capital
|
|
|
8,778,651
|
|
|
|
2,795,842
|
|
Accumulated
deficit
|
|
|
(8,250,872
|
)
|
|
|
(1,420,673
|
)
|
Total
Shareholders’ Equity
|
|
|
565,738
|
|
|
|
1,404,891
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
3,250,379
|
|
|
$
|
4,097,394
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
Solis
Tek Inc.
Condensed
Consolidated Statements of Operations
|
|
Three
months ended
September 30,
|
|
|
Nine
months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Sales
|
|
$
|
1,993,865
|
|
|
$
|
1,877,000
|
|
|
$
|
7,336,980
|
|
|
$
|
6,587,498
|
|
Cost
of goods sold (1)
|
|
|
1,322,497
|
|
|
|
1,236,536
|
|
|
|
4,625,210
|
|
|
|
4,219,412
|
|
Gross
profit
|
|
|
671,368
|
|
|
|
640,464
|
|
|
|
2,711,770
|
|
|
|
2,368,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
2,050,189
|
|
|
|
767,239
|
|
|
|
9,206,076
|
|
|
|
2,286,464
|
|
Research
and development
|
|
|
82,500
|
|
|
|
57,500
|
|
|
|
247,770
|
|
|
|
172,500
|
|
Total
operating expenses
|
|
|
2,132,689
|
|
|
|
824,739
|
|
|
|
9,453,846
|
|
|
|
2,458,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,461,321
|
)
|
|
|
(184,275
|
)
|
|
|
(6,742,076
|
)
|
|
|
(90,878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(28,190
|
)
|
|
|
(26,885
|
)
|
|
|
(84,010
|
)
|
|
|
(77,279
|
)
|
Interest
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,500
|
|
Loss
before income taxes
|
|
|
(1,489,511
|
)
|
|
|
(211,160
|
)
|
|
|
(6,826,086
|
)
|
|
|
(163,657
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
(benefit) for income taxes
|
|
|
-
|
|
|
|
(37,700
|
)
|
|
|
4,113
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(1,489,511
|
)
|
|
$
|
(173,460
|
)
|
|
$
|
(6,830,199
|
)
|
|
$
|
(163,657
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED LOSS PER SHARE
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
- AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED
|
|
|
37,079,972
|
|
|
|
29,659,498
|
|
|
|
37,482,508
|
|
|
|
29,623,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Included in cost of goods sold are these amounts from related party
|
|
$
|
977,784
|
|
|
$
|
723,387
|
|
|
$
|
3,607,090
|
|
|
$
|
3,309,941
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
Solis
Tek Inc.
Condensed
Consolidated Statements of Shareholders’ Equity (Unaudited)
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2016
|
|
|
29,721,998
|
|
|
$
|
29,722
|
|
|
$
|
2,795,842
|
|
|
$
|
(1,420,673
|
)
|
|
$
|
1,404,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from the sale of common stock
|
|
|
511,957
|
|
|
|
512
|
|
|
|
454,488
|
|
|
|
|
|
|
|
455,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of common stock issued for services
|
|
|
1,467,000
|
|
|
|
1,467
|
|
|
|
2,095,130
|
|
|
|
|
|
|
|
2,096,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of common stock issued to employees
|
|
|
5,474,265
|
|
|
|
5,474
|
|
|
|
2,829,526
|
|
|
|
|
|
|
|
2,835,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of common stock purchased by officer
|
|
|
784,314
|
|
|
|
784
|
|
|
|
399,216
|
|
|
|
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value of vested options
|
|
|
-
|
|
|
|
-
|
|
|
|
204,449
|
|
|
|
|
|
|
|
204,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the nine months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,830,199
|
)
|
|
|
(6,830,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
September 30, 2017
|
|
|
37,959,534
|
|
|
$
|
37,959
|
|
|
$
|
8,778,651
|
|
|
$
|
(8,250,872
|
)
|
|
$
|
565,738
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
Solis
Tek, Inc.
Condensed
Consolidated Statements of Cash Flows
|
|
Nine
months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(6,830,199
|
)
|
|
$
|
(163,657
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for bad debt expense
|
|
|
75,333
|
|
|
|
39,472
|
|
Depreciation
and amortization
|
|
|
53,111
|
|
|
|
53,003
|
|
Amortization
of loan fees
|
|
|
-
|
|
|
|
28,370
|
|
Interest
expense on loans payable - related parties
|
|
|
26,067
|
|
|
|
38,831
|
|
Fair
value of common stock issued for services
|
|
|
2,096,597
|
|
|
|
-
|
|
Fair
value of common stock issued to employees
|
|
|
2,835,000
|
|
|
|
86,000
|
|
Fair
value of vested stock options
|
|
|
204,449
|
|
|
|
-
|
|
Common
stock purchased by officer at discount
|
|
|
300,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Changes
in Assets and Liabilities
|
|
|
|
|
|
|
|
|
(Increase)
Decrease in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(312,071
|
)
|
|
|
(382,700
|
)
|
Inventories
|
|
|
1,111,166
|
|
|
|
1,321,689
|
|
Prepaid
expenses and other
|
|
|
(158,978
|
)
|
|
|
(90,356
|
)
|
(Decrease)
Increase in:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
387,571
|
|
|
|
(136,111
|
)
|
Due
to related party vendor
|
|
|
(685,108
|
)
|
|
|
(281,808
|
)
|
Net
cash (used in) provided by operating activities
|
|
|
(897,062
|
)
|
|
|
512,733
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(3,200
|
)
|
|
|
(8,185
|
)
|
Net
cash used in investing activities
|
|
|
(3,200
|
)
|
|
|
(8,185
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock
|
|
|
455,000
|
|
|
|
-
|
|
Proceeds
from sale of common stock to officer
|
|
|
100,000
|
|
|
|
-
|
|
Repayment
of line of credit
|
|
|
-
|
|
|
|
(600,000
|
)
|
Payments
on capital lease obligations
|
|
|
(10,245
|
)
|
|
|
(9,548
|
)
|
Payments
on loans payable
|
|
|
(6,147
|
)
|
|
|
-
|
|
Proceeds
from notes payable related parties
|
|
|
300,000
|
|
|
|
710,000
|
|
Payments
on notes payable related parties
|
|
|
(20,000
|
)
|
|
|
(100,000
|
)
|
Payments
on notes payable
|
|
|
-
|
|
|
|
(375,425
|
)
|
Payments
on amounts due to related parties
|
|
|
-
|
|
|
|
(26,984
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
818,608
|
|
|
|
(401,957
|
)
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
(81,654
|
)
|
|
|
102,591
|
|
|
|
|
|
|
|
|
|
|
Cash
beginning of period
|
|
|
275,783
|
|
|
|
106,316
|
|
Cash
end of period
|
|
$
|
194,129
|
|
|
$
|
208,907
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
25,327
|
|
|
$
|
48,753
|
|
Taxes
paid
|
|
$
|
3,200
|
|
|
$
|
8,594
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
SOLIS
TEK INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
NOTE
1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements of Solis Tek Inc. and Subsidiaries (the “Company”)
have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion
of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Interim operating
results are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. These unaudited
condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements
as of and for the years ended December 31, 2016 and 2015, which are included in the Company’s Annual Report on Form 10-K
filed with SEC on March 31, 2017.
History
and Organization
Solis
Tek Inc. (the “Company”) was originally incorporated under the laws of the State of Nevada on March 2, 2007 as Cinjet,
Inc. (“Cinjet”). Effective September 1, 2015, Cinjet changed its corporate name to Solis Tek Inc. On June 23, 2015,
the Company entered into an Agreement of Merger and Plan of Reorganization (the “Agreement”) with Solis Tek Inc.,
a California corporation (“STI”), and CJA Acquisition Corp., a California corporation and a wholly owned subsidiary
of the Company (“Merger Sub”), providing for the merger of Merger Sub with and into STI (the “Merger”),
with STI surviving the Merger as a wholly-owned subsidiary of the Company. The Merger was accounted for as a recapitalization
of the Company with STI being deemed the accounting acquirer.
Overview
of Business
Solis
Tek Inc. is focused on the research, design, development and manufacturing of advanced, energy efficient indoor horticulture lighting
ancillary equipment and nutrients. Our vision is to apply the latest advances in high efficiency lighting and controls technology
as well as effective manufacturing techniques to deliver highly differentiated products with clear benefits at competitive prices
to the greenhouse and indoor horticulture markets.
The
Solis Tek, Inc. launched an organic solutions and nutrient line in 2016 through its newly formed subsidiary Zelda Horticulture,
Inc., (f.k.a. GrowPro Solutions, Inc.). Zelda’s in-house Research and Development department formulates unique plant nutrient
additives designed to create healthier plants which yield greater plant aroma, volume, and oil production and intensity in the
growing cycle. The end users of the new nutrient additive products are the same existing Solis Tek lighting clients, hence, the
company will leverage its existing sales and distribution channels to gain maximum efficiencies with this new subsidiary division.
Zelda’s nutrient products are trademark protected, proprietary of ingredients and is formulated and produced in our own
facility in Carson, CA.
Basis
of Consolidation
The
condensed consolidated financial statements include the accounts of the Company and three of its wholly owned subsidiaries; Solis
Tek Inc., a California corporation, Solis Tek East Corporation (“STE”), an entity incorporated under the laws of the
State of New Jersey; and Zelda Horticulture, Inc, (“Zelda”) (f.k.a. GrowPro Solutions, Inc)., an entity incorporated
under the laws of the State of California. Intercompany transactions and balances have been eliminated in consolidation.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Income
(Loss) Per Share Calculations
Basic
earnings (loss) per share are computed by dividing income (loss) available to common shareholders by the weighted-average number
of common shares available. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share
except that the denominator is increased to include the number of additional common shares that would have been outstanding if
the potential common shares had been issued and if the additional common shares were dilutive. Options to
acquire 3,000,000 shares of common stock have been excluded from the calculation of weighted average common shares outstanding
at September 30, 2017 as their effect would have been anti-dilutive.
SOLIS
TEK INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
Use
of Estimates
The
preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in
the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the
reporting period. Significant estimates are used in valuing our allowances for doubtful accounts and inventory valuations, among
others. Actual results could differ from these estimates.
Revenue
Recognition
The
Company recognizes revenue upon shipment of the Company’s products to its customers, provided that evidence of an arrangement
exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable
is reasonably assured. Title to the Company’s products primarily is transferred to the customer once the product is shipped
from the Company’s warehouses. Products are not shipped until there is a written agreement with the customer with a specified
payment arrangement. Any discounts that are offered are done as a reduction of the invoiced amount at the time of billing. Payments
received before all of the relevant criteria for revenue recognition are satisfied are recorded as customer deposits.
The
Company does not offer a general right of return on any of its sales and considers all sales as final. The Company generally provides
a three-year warranty on its ballasts. However, the Company does not maintain a warranty reserve as the Company is able to chargeback
its vendors for all warranty claims. As of September 30, 2017 and December 31, 2016, the Company recorded a reserve for returned
product in the amount of $45,410 and $45,410, respectively, which is included in the allowance for doubtful accounts as of those
dates.
Concentration
Risks
The
Company’s products require specific components that currently are available from a limited number of sources. The
Company purchases its key products and components from single vendors. During the three and nine months ended September 30,
2017 and 2016, its ballasts, lamps and reflectors, which comprised the vast majority of the Company’s purchases during
those periods, were each only purchased from one separate vendor. During the nine months ended September 30, 2017,
two of these vendor comprise 77% and 17% of total purchases. During the nine months ended September 30, 2016, two of these
vendor comprise 77% and 18% of total purchases. The ballast vendor is a related party (see Note 4).
The
Company performs a regular review of customer activity and associated credit risks and does not require collateral or other arrangements
from its customers. There were no customers that accounted for more than 10% of the Company’s revenue for the three
and nine months ended September 30, 2017 and 2016. Shipments to customers outside the United States comprised 0.1% and 0.9% for
the three months ended September 30, 2017 and 2016, respectively. Shipments to customers outside the United States comprised 2.6%
and 0.5% for the nine months ended September 30, 2017 and 2016, respectively.
As
of September 30, 2017, four customers accounted for 15.4%, 12.5%, 11.3% and 10.2% of the Company’s trade accounts
receivable balance and as of December 31, 2016, one customer accounted for 13% of the Company’s trade accounts receivable
balance.
SOLIS
TEK INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently
Issued Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts
with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition
guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09
will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract.
The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising
from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to
obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early
adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities
will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.
The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.
In
February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record
a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months.
ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted.
A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered
into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients
available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and
disclosures.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company’s present or future consolidated financial statements.
NOTE
3 - PROPERTY AND EQUIPMENT
Property
and equipment consists of the following at September 30, 2017 and December 31, 2016:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
$
|
234,706
|
|
|
$
|
231,506
|
|
Computer
equipment
|
|
|
12,448
|
|
|
|
12,448
|
|
Furniture
and fixtures
|
|
|
97,451
|
|
|
|
97,451
|
|
Leasehold
improvements
|
|
|
7,000
|
|
|
|
7,000
|
|
|
|
|
351,605
|
|
|
|
348,405
|
|
Less:
accumulated depreciation and amortization
|
|
|
(196,580
|
)
|
|
|
(143,469
|
)
|
Property
and equipment, net
|
|
$
|
155,025
|
|
|
$
|
204,936
|
|
Depreciation
and amortization expense for the three months ended September 30, 2017 and 2016 was $17,480 and $17,901, respectively.
Depreciation
and amortization expense for the nine months ended September 30, 2017 and 2016 was $53,111 and $53,003, respectively.
Property
and equipment include assets acquired under capital leases of $64,632 and $64,632 at September 30, 2017 and December 31, 2016,
respectively.
SOLIS
TEK INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
NOTE
4 - RELATED PARTY TRANSACTIONS
Supplier
An
extended family member of an officer/shareholder owns a minority interest in a company in China, which is the sole supplier of
ballasts to the Company. Purchases from the related party for the three months ended September 30, 2017 and 2016 totaled approximately
$1,411,000 and $859,000, respectively. Purchases from the related party for the nine months ended September 30, 2017 and 2016
totaled approximately $2,913,000 and $2,364,000, respectively. At September 30, 2017 and December 31, 2016, the Company owed the
related party $398,625 and $1,083,764, respectively.
Amounts
Due to Related Parties
As
of September 30, 2017 and December 31, 2016, the Company owed related parties $160,153 and $134,086, respectively. Included in
the balances were short-term loans from the two officers/shareholders to the Company totaling $3,297 as of September 30, 2017
and December 31, 2016, respectively. The balances are payable on demand, noninterest bearing and are unsecured. The balances also
included interest owed on the notes payable to related parties, which totaled to $125,856 and $68,470 at September 30, 2017 and
December 31, 2016, respectively. Also included is $31,000 and $62,319 of unpaid compensation, which was owed to the officers/shareholders
at September 30, 2017 and December 31, 2016, respectively.
NOTE
5 – NOTES PAYABLE TO RELATED PARTIES
Notes
payable to related parties consists of the following at September 30, 2017 and December 31, 2016:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Notes
payable to officers/shareholders (a)
|
|
$
|
195,000
|
|
|
$
|
195,000
|
|
Notes
payable to officers/shareholders (b)
|
|
|
600,000
|
|
|
|
600,000
|
|
Notes
payable to related parties (c)
|
|
|
300,000
|
|
|
|
-
|
|
Notes
payable to related parties (d)
|
|
|
50,000
|
|
|
|
70,000
|
|
|
|
|
1,145,000
|
|
|
|
865,000
|
|
Less:
current portion
|
|
|
(545,000
|
)
|
|
|
(265,000
|
)
|
Non-current
portion
|
|
$
|
600,000
|
|
|
$
|
600,000
|
|
|
a.
|
On
July 1, 2012, the Company entered into unsecured notes payable agreements with two of its officers/shareholders. The maximum
borrowings allowed under each individual note are $200,000. Through December 31, 2013, each note bore interest at 20% per
annum. Beginning on January 1, 2014, the interest rate on the notes was reduced to 8% per annum. The notes are due 30 days
after demand. Amounts owed on the combined note balances were $195,000 at September 30, 2017 and December 31, 2016, respectively.
|
|
|
|
|
b.
|
In
May 2016, the Company entered into two separate notes payable agreements with the aforementioned two officers/shareholders.
Under each of the agreements, the Company borrowed $300,000 from each of the officers/shareholders. The notes accrue interest
at 8% per annum, are unsecured and are due on or before May 31, 2018. A total of $600,000 was outstanding on the combined
notes at September 30, 2017, and December 31, 2016.
|
|
|
|
|
c.
|
In
February 2017, the Company executed two separate promissory notes and borrowed $300,000 from the relatives of one of the directors
of the Company. The notes are unsecured, payable on demand and carry an interest of 14% per annum. A total of $300,000 was
outstanding on the combined notes at September 30, 2017.
|
|
|
|
|
d.
|
The
Company entered into note agreements with the parents of one of the Company’s officer/shareholders. The loans accrue
interest at 10% per annum, are unsecured and were due on or before December 31, 2016. A total of $50,000 and $70,000 was due
on the loans as of September 30, 2017 and December 31, 2016, respectively. These loans were extended with the mutual consent.
|
SOLIS
TEK INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
NOTE
5 – NOTES PAYABLE TO RELATED PARTIES (CONTINUED)
Interest
expense on the notes to related parties for the three months ended September 30, 2017 and 2016 was $27,877 and $17,795, respectively.
Interest expense on the notes to related parties for the nine months ended September 30, 2017 and 2016 was $81,986 and $38,831,
respectively. Accrued interest included in Amounts due to related parties at September 30, 2017 and December 31, 2016 was $125,856
and $68,471, respectively.
NOTE
6 – LOANS PAYABLE
Loans
payable consist of the following at September 30, 2017 and December 31, 2016:
|
|
September
30, 2017
|
|
|
December
31,2016
|
|
|
|
|
|
|
|
|
Automobile
loans
|
|
|
28,073
|
|
|
|
34,220
|
|
Less:
current portion
|
|
|
(20,159
|
)
|
|
|
(8,262
|
)
|
Non-current
portion
|
|
$
|
7,914
|
|
|
$
|
25,958
|
|
In
2015, the Company entered into two loan agreements to purchase automobiles. The combined principal amount of the loans was $44,093
and they mature by November 2021. The loans require a combined monthly payment of principal and interest of $747. A total of $28,073
and $34,220 was owed on the loans as of September 30, 2017 and December 31, 2016, respectively.
NOTE
7 – SHAREHOLDERS’ EQUITY
Agreement
with Chief Executive Officer
On
January 6, 2017, the company extended an offer to Dennis G. Forchic to become CEO. Mr. Forchic accepted the offer and contracts
were executed on March 27, 2017. As part of the Employment Agreement, the Company issued a total of 5,411,765 shares valued at
$2,760,000. In addition, Mr. Forchic purchased an additional 784,314 shares valued at $400,000 for a consideration
of $100,000. The fair value of the shares on the date of grant over consideration received was $300,000, which was recorded
as stock compensation expense.
In
addition, Mr. Forchic was granted an option to purchase 3,000,000 shares at $0.60 per share, with 33.3% of these shares
vesting on the one year anniversary of the date of grant and the remainder vesting in equal installments at the end of each month
over the next three years. The options were valued at $835,767 using a Black Scholes options pricing model and will be amortized
as an expense over the vesting period. The amount amortized as stock based compensation during the three and nine months ended
September 30, 2017 were $69,648 and $204,449, respectively. The fair value of the options of $835,767 was based on a probability
effected Black-Scholes option pricing model with a stock price of $0.51, volatility of 198.3% and risk-free rates of 0.83% - 1.03%.
As of September 30, 2017, there was $631,318 of unvested stock compensation that will be amortized over the next twenty seven
months.
Other
issuances
During
2017, the Company entered into various consulting agreements with a third parties (“Consultants”) pursuant to which
these Consultants will provide services including but not limited to business development, sales promotion, introduction to new
business opportunities, strategic analysis, accounting, and, sales and marketing activities. In accordance with these agreements,
the Company agreed to issue an aggregate of 1,467,000 shares to the Consultants for the services rendered. The Company accounted
for the aggregate fair value of the shares of common stock issued to Consultants in accordance with current accounting guidelines,
and determined the aggregate fair value of these shares to be $2,096,597 based on the trading prices per share of the Company’s
stock at every issuance date. As there were no performance commitment and shares issued were nonrefundable, the Company recognized
the full amount of the fair value of the common stock issued as stock compensation expense on its statement of Operations for
the period ended September 30, 2017.
In
November 2015, the Company entered into a four year employment agreement with one of its employees in which the employee was granted
500,000 shares of the Company’s common stock. The shares vest equally in six month periods over the four years. The fair
value of the shares on the date of grant was $400,000, which is being amortized ratably over the four year service period. The
amount amortized as stock based compensation in each of the nine month periods ended September 30, 2017 and 2016 was $75,000 based
on 62,500 shares vested and issued.
SOLIS
TEK INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
NOTE
7 – SHAREHOLDERS’ EQUITY (CONTINUED)
Common
shares issued for cash
During
the nine months ended September 30, 2017, the Company issued 511,957 common shares for a total of $455,000 in a Private
Placement Offerings per Reg. D.
NOTE
8 –TECHNOLOGY LICENSE AGREEMENT
The
Company entered into a Technology License Agreement with a third party vendor for consulting services. Under the agreement, the
Company will pay the vendor a minimum consulting amount of $100,000 per year, plus a royalty of 7% of all net sales of the vendor’s
products above $1,428,571 per calendar year. For each of the three months ended September 30, 2017 and 2016, $25,000 was
recorded as research and development expense under the agreement on the condensed consolidated Statements of Operations related
to the minimum annual fee. For each of nine months ended September 30, 2017 and 2017, $75,000 was recorded as research and development
expense under the agreement on the condensed consolidated Statement of Operations related to minimum annual fee. A total of $24,616
and $15,063 of royalty fees were owed under the amended agreement for the nine months ended September 30, 2017 and 2016, respectively,
and were recorded in cost of goods sold on the condensed consolidated Statements of Operations. A total of $190,713 and $165,553
was owed under the amended agreement at September 30, 2017 and December 31, 2016, respectively.
NOTE
9 – COMMITMENTS
In
July 2017, the Company extended the lease of its principal executive offices and warehouse located at 16926 S. Keegan Avenue,
Unit A, Carson, California, which was expiring on August 31, 2017, for a period of three years and now ending on August 31, 2020
at a monthly rent of $14,676.
NOTE
10 – SUBSEQUENT EVENTS
In
October 2017, the Company engaged Garden State Securities to develop potential accredited investors to participate in the Company’s
private offering to raise up to $3,000,000 in convertible Preferred Series A stock. Each unit consisted of (i) three shares
of Series A Convertible Preferred Stock of the Company (the “Series A”) and (ii) a warrant
to purchase 1,936 shares of the Company’s common stock at $1.25 per share (the “Warrants). Each Series A share
is convertible into 1,000 shares of common stock of the Company. The minimum subscription amount was 84 Units
for $252,000, at $3,000 per unit. The purchase of the Series A have registration rights to have the Company register the
underlying common shares. October 24, 2017 an accredited investor purchased 117 Units
which consisted of 117 Series A and Warrants to purchase 226,512 shares of common stock for $351,000.
The Company received a total of $295,410 after fees and expenses. The conversion price of the stock is the lower of $1.00
or a potential 20% discount to the market price at the date of conversion. On November 8, 2017, the Company terminated
the Unit offering.
On November 8,
2017, the Company issued a secured convertible debenture (the “Note”) to Yorkville Advisors Global, LP
(“Yorkville”) in the principal amount of $1,750,000 with interest at 5% per annum (15% on default) and due 18
months from closing. The Note is secured by all the assets of the Company and its subsidiaries STI, STE and Zelda. The Note
Conversion Price are convertible into common stock of the Company at $1.00 per share (the “Conversion Price”).
The Conversion Price may be adjusted by Yorkville on the earlier of (a) the 90-day anniversary of the closing with
effectiveness of a registration statement or (b) the 180-day anniversary of the closing to a 20% discount to the lowest daily
VWAP over the prior 10 trading days, if lower than $1.00 per share (“Ownership Cap”). Subject to the Ownership
Cap, the Note will automatically convert if the Company’s stock has traded 250% above the Conversion Price for a period
of 20 consecutive trading days provided that the shares can be sold pursuant to an effective registration statement or Rule
144 without any limitations, and the Company’s common stock has an average daily trading value of $350,000 per day for
a period of 20 con
s
ecutive trading days. The Company will repay the outstanding principal of the Note in equal
installments of $250,000 per month starting on the 270-day anniversary of the closing date either in cash by paying the
installment amount plus the Redemption Premium or in kind through conversion into free trading common stock at a price equal
to the less of (i) the Fixed Conversion Price, or (ii) a 20% discount to the lowest daily VWAP of the Common Stock during the
10 trading days prior to the payment date (or any combination of cash and stock). The Company will not be required to make a
monthly amortization payment if the 10-day lowest VWAP is at or above 125% of the then effective Conversion Price. Yorkville
will have the option to defer any monthly amortization payment to the maturity date at is sole discretion. The stock
component of each monthly amortization payment will be limited to 300% of the average daily dollar traded value over
the previous 10 trading days. The Company may redeem in cash amounts owed under the Note prior to the maturity date by
provided Yorkville with 10 business days advance note provided that the common stock is trading below the conversion price at
the time of the redemption note. The Company shall pay the redemption premium equal to the percentage of the principal amount
being redeemed as follows: 10% for first 180 days following the closing, 15% for day 181 to 360 following the closing; and
20% for day 361 to the maturity date. The Company will grant Yorkville 5 years warrants to purchase 1,137,500 shares of the
Company at $1.10 per share. The Company shall pay 5% of aggregate funding as commitment fee to Yorkville and $15,000 towards
due diligence and structuring fee. The Company netted $1,647,500 after fee and expenses.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This
Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond
our control, which may include statements about our:
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●
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business
strategy;
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|
|
|
|
●
|
financial
strategy;
|
|
|
|
|
●
|
future
operating results; and
|
|
|
|
|
●
|
Plans,
objectives, expectations and intentions contained in this report that are not historical.
|
All
statements, other than statements of historical fact included in this report, regarding our strategy, intellectual property, future
operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management
are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,”
“intend,” “estimate,” “expect,” “project” and similar expressions are intended
to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking
statements speak only as of the date of this report. You should not place undue reliance on these forward-looking statements.
Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we
make in this report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. These
statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
as well as in this report generally. Actual events or results may differ materially from those discussed in forward-looking statements
as a result of various factors. In light of these risks and uncertainties, there can be no assurance that the forward-looking
statements contained in this filing will in fact occur.
Organizational
History
Solis
Tek Inc. (the “Company”) was originally incorporated under the laws of the State of Nevada on March 2, 2007 as Cinjet,
Inc. (“Cinjet”). Effective September 1, 2015, Cinjet changed its corporate name to Solis Tek Inc. On June 23, 2015,
the Company entered into an Agreement of Merger and Plan of Reorganization (the “Agreement”) with Solis Tek Inc.,
a California corporation (“STI”), and CJA Acquisition Corp., a California corporation and a wholly owned subsidiary
of the Company (“Merger Sub”), providing for the merger of Merger Sub with and into STI (the “Merger”),
with STI surviving the Merger as a wholly-owned subsidiary of the Company. The Merger Agreement was approved by the Company’s
Board of Directors and the sole Director of the Company, effective June 23, 2015. The Merger closed on June 23, 2015.
At
the effective time of the Merger, each share of STI common stock issued and outstanding was converted automatically into the right
to receive. 166 shares of the common stock of the Company, with an aggregate of 26,187,000 shares of the Company’s common
stock issued to the former shareholders of STI.
Upon
the closing of the Merger, STI paid a total of $22,500 to four shareholders of the Company for the cancellation of a total of
61,297,002 shares of the Company’s common stock. Also at the closing of the Merger, STI paid $198,100 to the Company to
settle and pay liabilities of $405,932, which represented all of the then current liabilities of the Company. After the closing,
a total of 29,551,998 shares of the Company were outstanding.
Upon
completion of the Merger, the former stockholders of STI owned approximately 89% of the outstanding shares of the Company’s
common stock and the holders of the outstanding shares of the Company’s common stock prior to the Merger owned the balance.
As the former owners and management of STI have voting and operating control of the Company after the Merger, the transaction
has been accounted for as a recapitalization with the STI deemed the acquiring companies for accounting purposes, and the Company
deemed the legal acquirer. Due to the change in control, the condensed consolidated financial statements reflect the historical
results of STI prior to the Merger, and that of the combined company following the Merger. Common stock and the corresponding
capital amounts of the Company pre-Merger have been retroactively restated as capital stock shares reflecting the exchange ratio
in the Merger. No step-up in basis or intangible assets or goodwill will be recorded in this transaction and the cash paid by
the Company of $248,980 (including $28,380 of transaction costs) has been reflected as a cost of the transaction.
Overview
of Business
The
Company is focused on the research, design, development and manufacturing of advanced, energy efficient indoor horticulture lighting
ancillary equipment and nutrients. Our vision is to apply the latest advances in high efficiency lighting and controls technology
as well as effective manufacturing techniques to deliver highly differentiated products with clear benefits at competitive prices
to the greenhouse and indoor horticulture markets.
The
Company, through two its three wholly owned lighting subsidiaries, Solis Tek Inc. a California corporation and Solis Tek East,
Corporation, an entity incorporated under the laws of the State of New Jersey, are in the operations of designing, developing
and sourcing a line of Solis Tek Digital Ballasts intended for use in high intensity lighting systems used for horticulture. An
electrical ballast is a device intended to limit the amount of current in an electric circuit. A familiar and widely used example
is the inductive ballast used in fluorescent lamps, to limit the current through the tube, which would otherwise rise to destructive
levels due to the tube’s negative resistance characteristic. Since the commencement of operations, our product line has
evolved from digital ballasts to a line of lighting products including a line of specialty ballasts ranging from 400 watts to
1,000 watts with various features, a line of specialty metal halide digital lamps, a line of reflectors, high intensity lighting
accessories.
The
Company, through its third wholly owned subsidiary, Zelda Horticulture, Inc. a California corporation, introduced an organic solutions
and nutrient line which was launched in 2016. Zelda’s in-house Research and Development department formulates unique plant
nutrient additives designed to create healthier plants which yield greater plant aroma, volume, and oil production and intensity
in the growing cycle. The end users of the new nutrient additive products are the same existing Solis Tek Inc. lighting clients,
hence, the company will leverage its existing sales and distribution channels to gain maximum efficiencies with this new subsidiary
division. Zelda’s nutrient products are trademark protected, created with 100% organic compounds, contain proprietary ingredients,
formulated and produced in our own facility in Carson, CA, and have been thoroughly vetted by our customers and tested by outside
independent third-party labs, consultants and growers. The nutrient additive products are typically used by our customers as a
part of their daily plant nutrient feed program, creating a much shorter transaction interval relationship with our client base
than the lighting division realizes due to those product lifecycles.
Critical
Accounting Policies
The
Securities and Exchange Commission (“SEC”) defines “critical accounting policies” as those that require
application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of the accounting policies
require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed
to be critical within the SEC definition.
Allowance
for Doubtful Accounts
The
allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company
regularly reviews the allowance by considering factors such as historical experience, the age of the accounts receivable balances,
credit quality, economic conditions that may affect a customer’s ability to pay and expected default frequency rates. Trade
receivables are written off at the point when they are considered uncollectible.
Inventories
The
Company provides inventory reserves based on excess and obsolete inventories determined primarily by future demand forecasts.
The write down amount is measured as the difference between the cost of the inventory and market based upon assumptions about
future demand and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition,
a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in
the restoration or increase in that newly established cost basis.
Recent
Accounting Pronouncements
See
Note 2 of the condensed financial statements for management’s discussion of recent accounting pronouncements.
Results
of Operations
Results
of Operations for the three months ended September 30, 2017 compared to the three months ended September 30, 2016.
Revenue
and Cost of Goods Sold
Revenue
for the three months ended September 30, 2017 and 2016 was $1,993,865 and $1,877,000, respectively, an increase of $116,865 or
6%. The increase was primarily due to more market penetration within our hydroponic customers and commercial cultivation facilities
during the third quarter of 2017, as compared to the third quarter of 2016.
Cost
of sales for the three months ended September 30, 2017 and 2016, was $1,322,497 and $1,236,536, respectively. Gross profit for
the three months ended September 30, 2017 and 2016, was $671,368 and $640,464, respectively. The increase in gross profit of $30,904,
or 5% was primarily due to increase in revenue. As a percentage of revenue, gross profit for the three months ended September
30, 2017 was 33.7% compared to 34.1% for the three months ended September 30, 2016, a slight decrease was due to product mix.
Selling,
General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses for the three months ended September 30, 2017 and 2016 was $2,050,189
and $767,239, respectively, an increase of $1,282,950 or 167%. The increase in SG&A expenses was due to increase in payroll,
marketing, travel, trade shows, consulting fee, outbound freight, and sales commission to support the increase in revenues and
stock compensation costs and increase in bad debt expenses. For the three months ended September 30, 2017 stock compensation expense
was $531,195 compared to $25,000 for the three months ended September 30, 2016.
Research
and Development Expenses
Research
and development (“R&D”) expenses for the three months ended September 30, 2017 and 2016 was $82,500 and $57,500,
respectively, an increase of $25,000 or 43%. The increase in R&D expenses was primarily due to fair value of common stock
($25,000) issued to an employee. The R&D expense was incurred for the improvement in existing products and development of
new products.
Net
Income (Loss)
Net
loss for the three months ended September 30, 2017 was $1,489,511 compared to net loss of $173,460 for the three months ended
September 30, 2016. The increase in net loss for the three months ended September 30, 2017 was due to noncash stock compensation
costs, and increased selling, general and administrative costs compared to the three months ended September 30, 2016. Noncash
stock compensation costs for three months ended September 30, 2017 was $556,195 compared to $25,000 for the three months ended
September 30, 2016.
Results
of Operations for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.
Revenue
and Cost of Goods Sold
Revenue
for the nine months ended September 30, 2017 and 2016 was $7,336,980 and $6,587,498, respectively, an increase of $749,482 or
11%. The increase was primarily due to more market penetration within our hydroponic customers and commercial facilities.
Cost
of sales for the nine months ended September 30, 2017 and 2016, was $4,625,210 and $4,219,412, respectively. Gross profit for
the nine months ended September 30, 2017 and 2016, was $2,711,770 and $2,368,086, respectively. The increase in gross profit of
$343,684 or 14.5% was primarily due to increase in revenue. As a percentage of revenue, gross profit for the nine months ended
September 30, 2017 was 37.0% compared to 35.9% for the nine months ended September 30, 2016. The increase in gross profit percentage
was due to higher revenue and product mix.
Selling,
General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses for the nine months ended September 30, 2017 and 2016 was $9,206,076
and $2,286,464, respectively, an increase of $6,919,612 or 303%. The increase in SG&A expenses was due to increase in payroll,
consulting, marketing, travel, trade shows, outbound freight, and sales commission to support the increase in revenues and stock
compensation costs and increase in bad debt expenses. For the nine months ended September 30, 2017 stock compensation expense
was $5,361,046 compared to $86,000 for the nine months ended September 30, 2016.
Research
and Development Expenses
Research
and development (“R&D”) expenses for the nine months ended September 30, 2017 and 2016 was $247,770 and $172,500,
respectively, an increase of $75,270 or 44%. The increase in R&D expenses was primarily due to fair value of common stock
($75,000) issued to an employee. The R&D expense was incurred for the improvement in existing products and development of
new products.
Net
Income (Loss)
Net
loss for the nine months ended September 30, 2017 was $6,830,199 compared to net loss of $163,657 for the nine months ended September
30, 2016. The net loss for the nine months ended September 30, 2017 was due to noncash stock compensation costs, and increased
selling, general, and administrative costs compared to the nine months ended September 30, 2016. Noncash stock compensation costs
for nine months ended September 30, 2017 was $5,436,046 compared to $86,000 for the nine months ended September 30, 2016.
Liquidity
and Capital Resources
Liquidity
is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise
operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts
receivable and accounts payable and capital expenditures.
Cash
flows (used in) provided by operating activities
During
the nine months ended September 30, 2017, the Company used $897,062 in operating activities, compared to cash provided by operating
activities of $512,733 during the nine months ended September 30, 2016. During the nine months ended September 30, 2017, cash
was primarily used in increase in accounts receivable to support higher revenue, reduction in related party vendor for inventory
purchases, advances to suppliers for inventory, prepaid expenses and was offset in part with reduction in inventory and increase
in accounts payable and accrued expenses.
Cash
flows used in investing activities
During
the nine months ended September 30, 2017, the Company used $3,200 in the property and equipment for purchase of certain molds.
Cash
flows provided by (used in) financing activities
During
the nine months ended September 30, 2017, the Company generated $818,608 from financing activities compared to cash used in financing
activities of $401,957 for the nine months ended September 30, 2016. For the nine months ended September 30, 2017, the Company
raised a $555,000 through an issuance of common stock, and proceeds from notes payable to related parties of $300,000 and part
of the proceeds were used to pay notes payable-related party of $20,000 and payments on loans payable and capital lease obligation.
We
estimate the Company currently has sufficient cash and liquidity to meet its anticipated working capital for the next twelve months.
Historically,
we have financed our operations primarily through private sales of common stock, a line of credit and loans from a third party
financial institution related parties, and operations. We anticipate that our primary capital source will be positive cash flow
from operations. If our sales goals do not materialize as planned, we believe that the Company can reduce its operating costs
and achieve positive cash flow from operations. However, we may not generate sufficient revenues from product sales in the future
to achieve profitable operations. If we are not able to achieve profitable operations at some point in the future, we may have
insufficient working capital to maintain our operations as we presently intend to conduct them or to fund our expansion, marketing,
and product development plans. There can be no assurance that we will be able to obtain such financing on acceptable terms, or
at all.
During
the nine months ended September 30, 2017, the Company has raised a total of $455,000 through an issuance of 511,957 shares
under Private Placement Offering to accredited investors pursuant to Regulation D. On September 3, 2017, the
Company closed the Private Placement Offering.
Non-GAAP
Measure – Adjusted EBITDA
In
addition to our GAAP results, we present Adjusted EBITDA as a supplemental measure of our performance. However, Adjusted EBITDA
is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations
or any other performance measure derived in accordance with GAAP or as an alternative to cash flow from operating activities as
a measure of liquidity. We define Adjusted EBITDA as net income (loss), plus interest expense, provision for income taxes, depreciation
and amortization, and stock-based compensation. Non-GAAP adjustments to our results prepared in accordance with GAAP are itemized
below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis.
In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to
some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that
our future results will be unaffected by unusual or non-recurring items.
Set
forth below is a reconciliation of Adjusted EBITDA to net loss for the three and nine months ended September 30, 2017 and 2016.
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,489,511
|
)
|
|
$
|
(173,460
|
)
|
|
$
|
(6,830,199
|
)
|
|
$
|
(163,657
|
)
|
Add
(subtract):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
28,190
|
|
|
|
26,885
|
|
|
|
84,010
|
|
|
|
72,779
|
|
Provision
for income taxes
|
|
|
|
|
|
|
(37,700
|
)
|
|
|
4,113
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
17,480
|
|
|
|
17,901
|
|
|
|
53,111
|
|
|
|
53,003
|
|
Stock-based
compensation
|
|
|
556,195
|
|
|
|
25,000
|
|
|
|
5,436,046
|
|
|
|
86,000
|
|
Adjusted
EBITDA
|
|
$
|
(887,646
|
)
|
|
$
|
(141,374
|
)
|
|
$
|
(1,252,919
|
)
|
|
$
|
48,125
|
|
We
present Adjusted EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods
on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Adjusted EBITDA
has limitations as an analytical tool, which includes, among others, the following:
|
●
|
Adjusted
EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
|
|
|
|
|
●
|
Adjusted
EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
|
|
|
|
|
●
|
Adjusted
EBITDA does not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on
our debts; and
|
|
|
|
|
●
|
although
depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced
in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements
|
Off-Balance
Sheet Arrangements
We
do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial
condition, revenues, and results of operations, liquidity or capital expenditures.