NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 – DESCRIPTION OF BUSINESS
Sports
Field Holdings, Inc. (the “Company”, “Sports Field Holdings”, “we”, “our”, or
“us”) is a Nevada corporation engaged in product development, engineering, manufacturing, and the construction, design
and building of athletic facilities, as well as supplying its own proprietary high end synthetic turf products to the sports industry.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do
not include all of the information and disclosures required by GAAP for annual financial statements. In the opinion of management,
such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair
presentation of the condensed financial position of the Company as of September 30, 2017, and the results of operations for the
nine months ended September 30, 2017 and cash flows for the nine months ended September 30, 2017. The results of operations for
the nine ended September 30, 2017 are not necessarily indicative of the operating results for the full year ending December 31,
2017 or any other period.
These
condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related
disclosures of the Company as of December 31, 2016 and for the year then ended, which were filed with the Securities and Exchange
Commission (“SEC”) on Form 10-K on March 31, 2017.
NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying condensed consolidated financial statements include the accounts of Sports Field Holdings, Inc. and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported
amounts of revenue and expenses during the periods. Actual results could differ from those estimates. The Company’s significant
estimates and assumptions include the accounts receivable allowance for doubtful accounts, percentage of completion revenue recognition
method, the useful life of fixed assets and assumptions used in the fair value of stock-based compensation and derivative liabilities.
Revenues
and Cost Recognition
Revenues
from construction contracts are included in contract revenue in the condensed consolidated statements of operations and are recognized
under the percentage-of-completion accounting method. The percent complete is measured by the cost incurred to date compared to
the estimated total cost of each project. This method is used as management considers expended cost to be the best available measure
of progress on these contracts, the majority of which are completed within one year, but may occasionally extend beyond one year.
Inherent uncertainties in estimating costs make it at least reasonably possible that the estimates used will change within the
near term and over the life of the contracts.
Contract
costs include all direct material and labor costs and those indirect costs related to contract performance and completion. Provisions
for estimated losses on uncompleted contracts are made in the period in which such losses are determined. General and administrative
costs are charged to expense as incurred.
Changes
in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final
contract settlements, may result in revisions to costs and income. Such revisions are recognized in the period in which they are
determined.
Costs
and estimated earnings in excess of billings are comprised principally of revenue recognized on contracts (on the percentage-of-completion
method) for which billings had not been presented to customers because the amounts were not billable under the contract terms
at the balance sheet date. In accordance with the contract terms, any unbilled receivables at period end will be billed subsequently.
Amounts are billed based on contractual terms. Billings in excess of costs and estimated earnings represent billings in excess
of revenues recognized.
Inventory
Inventory
is stated at the lower of cost (first-in, first out) or net realizable value and consists primarily of construction materials.
Stock-Based
Compensation
The
Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award.
For employees, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is
generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. The fair value
amount is then recognized over the period during which services are required to be provided in exchange for the award, usually
the vesting period. Awards granted to directors are treated on the same basis as awards granted to employees.
Concentrations
of Credit Risk
Financial
instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash
and cash equivalents. The Company places its cash and temporary cash investments with credit quality institutions. At times, such
amounts may be in excess of the FDIC insurance limit.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require
collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the
outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if
receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management.
The maximum accounting loss from the credit risk associated with accounts receivable is the amount of the receivable recorded,
which is the face amount of the receivable, net of the allowance for doubtful accounts. As of September 30, 2017, and December
31, 2016, the Company’s accounts receivable balance was $863,637 and $354,159, respectively, and the allowance for doubtful
accounts is $0 in each period.
Warranty
Costs
The
Company generally provides a warranty on the products installed for up to 8 years with certain limitations and exclusions based
upon the manufacturer’s product warranty. However, based upon historical warranty issues, the Company has established a
warranty reserve.
Fair
Value of Financial Instruments
Accounting
Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value
of certain financial instruments. The carrying value of cash and cash equivalents, accounts payable and accrued liabilities, and
short-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these
instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized
or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future
cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities
have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.
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 would be recorded as a debt discount against the face amount of the
respective debt instrument. The debt discount attributable to the BCF is amortized over the period from issuance to the date that
the debt matures.
Derivative
Instruments
The
Company evaluates its convertible debt, warrants or other contracts to determine if those contracts or embedded components of
those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-15. The result of this accounting
treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability.
In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations
as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at
the conversion date and then that fair value is reclassified to equity.
In
circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also
other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative
instruments are accounted for as a single, compound derivative instrument.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject
to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date.
Net
Income (Loss) Per Common Share
The
Company computes basic net income (loss) per share by dividing net income (loss) per share available to common stockholders by
the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities.
Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially
dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable.
The computation of diluted loss per share excludes potentially dilutive securities because their inclusion would be anti-dilutive. Anti-dilutive
securities excluded from the computation of basic and diluted net loss per share for the nine months ended September 30, 2017
and 2016, respectively, are as follows:
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock
|
|
|
679,588
|
|
|
|
679,588
|
|
Options to purchase common stock
|
|
|
1,297,500
|
|
|
|
622,500
|
|
Unvested restricted common shares
|
|
|
-
|
|
|
|
217,593
|
|
Convertible Notes
|
|
|
1,889,423
|
|
|
|
2,102,615
|
|
Totals
|
|
|
3,866,511
|
|
|
|
3,622,296
|
|
Significant
Customers
The
Company’s business focuses on securing a smaller number of high quality, highly profitable projects, which sometimes results
in having a concentration of sales and accounts receivable among a few customers. This concentration is customary among the design
and build industry for a company of our size. As we continue to grow and are awarded more projects, this concentration will continue
to decrease.
At September 30, 2017, the Company had 2 customers
representing 50% and 35% of the total accounts receivable balance, respectively.
At December 31, 2016, the Company
had 1 customer representing 91% of the total accounts receivable balance.
For the three months ended September
30, 2017, the Company had 3 customers that represented 41%, 37% and 15%, respectively, of the total revenues and for the three
months ended September 30, 2016, the Company had 4 customers that represented 10%, 17%, 28% and 43%, respectively, of the total
revenues.
For the nine months ended September
30, 2017, the Company had 2 customers that represented 54% and 32%, respectively, of the total revenues and for the nine months
ended September 30, 2016, the Company had 5 customers that represented 15%, 33%, 17%, 11% and 15%, respectively, of the total revenues.
Reclassifications
Certain
items in the prior year financial statements have been reclassified to conform to the current year presentation.
Recent
Accounting Pronouncements Adopted
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The updated guidance changes
how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes,
forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.
In
July 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-11, “Simplifying the Measurement
of Inventory,” (“ASU 2015-11”). ASU 2015-11 simplifies the subsequent measurement of inventory by using only
the lower of cost or net realizable value. The ASU defines net realizable value as estimated selling prices in the ordinary course
of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for reporting
periods beginning after December 15, 2016, for emerging growth companies, and interim periods within those fiscal years with early
adoption permitted. ASU 2015-11 should be applied prospectively. The adoption of this guidance did not have a significant impact
on the operating results for the three months or nine months ended September 30, 2017.
Recent
Accounting Guidance Not Yet Adopted
During
May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which
requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new
guidance also requires 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. In July 2015, the FASB voted to delay the effective date of ASU 2014-09 by one year to the first
quarter of 2018 to provide companies sufficient time to implement the standards. Early Adoption will be permitted, but not before
the first quarter of 2017. Adoption can occur using one of two prescribed transition methods. The Company has completed its initial
assessment of the new standard and is in the process of assessing its contracts with customers. The Company will continue to assess
the impact through its implementation process. The adoption of ASU 2014-09 is not expected to have a material impact on our consolidated
financial position, results of operations or cash flows.
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-02, “Leases” (topic 842). The FASB issued this update to increase transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those
fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard on
our consolidated financial statements.
In
April 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing” (topic 606).
In March 2016, the Financial Accounting Standards Board (‘FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross verses
Net)” (topic 606). These amendments provide additional clarification and implementation guidance on the previously issued
ASU 2014-09, “Revenue from Contracts with Customers”. The amendments in ASU 2016-10 provide clarifying guidance on
materiality of performance obligations; evaluating distinct performance obligations; treatment of shipping and handling costs;
and determining whether an entity’s promise to grant a license provides a customer with either a right to use an entity’s
intellectual property or a right to access an entity’s intellectual property. The amendments in ASU 2016-08 clarify how
an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the
control principle to certain types of arrangements. The adoption of ASU 2016-10, ASU 2016-08 and ASU 2014-09 is not expected to
have a material impact on our consolidated financial position, results of operations or cash flows.
In
August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments.” ASU No.
2016-15 addresses specific cash flow classification issues where there is currently diversity in practice including debt prepayment
and proceeds from the settlement of insurance claims. ASU 2016-15 is effective for annual periods beginning after December 15,
2017, with early adoption permitted. The Company is currently evaluating the impact of the new standard on our consolidated financial
statements.
In
November 2016, the FASB issued ASU No. 2016-18 “Statement of Cash Flows (Topic 230), Restricted Cash” which provides
guidance on the presentation of restricted cash and restricted cash equivalents in the statements of cash flows. The new guidance
requires restricted cash and restricted cash equivalents to be included within the cash and cash equivalents balances when reconciling
the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The ASU is effective for reporting periods
beginning after December 15, 2017 with early adoption permitted. The Company is currently evaluating the impact of the new standard
on our consolidated financial statements.
In
May 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-09, “Compensation - Stock Compensation
(Topic 718) - Scope of Modification Accounting.” ASU No. 2017-09 provides clarity and reduces complexity when applying the
guidance in Topic 718 for changes in terms or conditions of share-based payment awards. It is effective for annual reporting periods
beginning after December 15, 2017. The Company is currently evaluating the impact the adoption of this new standard will have
on its financial statements.
In
July 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-11, “Earnings Per Share (Topic
260), Part I. Accounting for Certain Financial Instruments with Down Round Features.” Part I of this Update addresses the
complexity of accounting for certain financial instruments with down round features. Down round features are features of certain
equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of
future equity offerings. Part I of this ASU 2017-11 change the classification analysis of certain equity-linked financial instruments
(or embedded features) with down round features, and clarifies existing disclosure requirements for equity-classified instruments.
The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.
Early adoption is permitted. The Company is currently evaluating the impact the adoption of this new standard will have on its
financial statements.
There
were no other new accounting pronouncements that were issued or became effective that management believes are expected to have,
a material impact on our consolidated financial position, results of operations or cash flows.
NOTE
3 – GOING CONCERN
As reflected in the accompanying
condensed consolidated financial statements, as of September 30, 2017, the Company had a working capital deficit of
$4,830,382. Furthermore, the Company had a net loss of $1,388,103 for the nine months ended September 30, 2017 and an
accumulated deficit totaling ($15,345,683). Management has concluded that, due to these conditions, there is substantial
doubt about the Company’s ability to continue as a going concern through November 14, 2018. We have evaluated the
significance of these conditions in relation to our ability to meet our obligations.
The
ability of the Company to continue its operations as a going concern is dependent on Management’s plans, which include the
raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including
but not limited to term notes, until such time that funds provided by operations are sufficient to fund working capital requirements.
The
Company will require additional funding to finance the growth of its current and expected future operations as well as to achieve
its strategic objectives. The Company believes its current available cash along with anticipated revenues may be insufficient
to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable
to the Company, if at all.
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any
adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should
the Company be unable to continue as a going concern.
NOTE
4 – COSTS AND ESTIMATED EARNINGS ON CONTRACTS IN PROCESS
Following
is a summary of costs, billings, and estimated earnings on contracts in process as of September 30, 2017 and December 31, 2016:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Costs incurred on contracts in progress
|
|
$
|
10,236,845
|
|
|
$
|
6,299,675
|
|
Estimated earnings (losses)
|
|
|
534,091
|
|
|
|
(320,450
|
)
|
|
|
|
10,770,939
|
|
|
|
5,979,225
|
|
Less billings to date
|
|
|
(11,392,276
|
)
|
|
|
(6,344,596
|
)
|
|
|
$
|
(621,336
|
)
|
|
$
|
(365,371
|
)
|
The
above accounts are shown in the accompanying condensed consolidated balance sheet under these captions at September 30, 2017 and
December 31, 2016:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Costs and estimated earnings in excess of billings
|
|
$
|
558,983
|
|
|
$
|
75,624
|
|
Billings in excess of costs and estimated earnings
|
|
|
(1,145,115
|
)
|
|
|
(374,916
|
)
|
Provision for estimated losses on uncompleted contracts
|
|
|
(35,204
|
)
|
|
|
(66,079
|
)
|
|
|
$
|
(621,336
|
)
|
|
$
|
(365,371
|
)
|
Warranty
Costs
During the nine months ended September 30,
2017 and September 30, 2016, the Company incurred costs of approximately $16,020 and $121,000, respectively. The Company has implemented
policies and procedures to avoid or reduce these costs in the future. The Company generally provides a warranty on the products
installed for up to 8 years with certain limitations and exclusions based upon the manufacturer’s product warranty. However,
based upon historical warranty issues, the Company has established a warranty reserve, which is $50,000 as of September 30, 2017
and $50,000 as of December 31, 2016.
NOTE
5 – DEBT
Convertible
Notes
On
May 7, 2015, the Company issued unsecured convertible promissory notes (each a “Note” and collectively the “Notes”)
in an aggregate principal amount of $450,000 to three accredited investors (collectively the “Note Holders”) through
a private placement. The notes pay interest equal to 9% of the principal amount of the notes, payable in one lump sum, and mature
on February 1, 2016 unless the notes are converted into common stock if the Company undertakes a qualified offering of securities
of at least $2,000,000 (the “Qualified Offering”). The principal of the notes is convertible into shares of common
stock at a conversion price that is the lower of $1.00 per share or the price per share offered in a Qualified Offering. In order
to induce the investors to invest in the notes, one of the Company’s shareholders assigned an aggregate of 45,000 shares
of his common stock to such investors. The Company recorded a $45,000 debt discount relating to the 45,000 shares of common stock
issued with an offsetting entry to additional paid in capital. The debt discount was amortized to interest expense over the contractual
life of the notes. As part of the transaction, we incurred placement agent fees of $22,500 and legal fees of $22,500, which were
recorded as debt issue costs and were amortized over the contractual life of the notes. The outstanding principal balance on the
notes at September 30, 2017 and December 31, 2016 was $522,668 including interest and penalty as disclosed below.
The
notes matured on February 1, 2016. On March 31, 2016, the Note Holders entered into a letter agreement whereby, effective as of
February 1, 2016, they waived any and all defaults that may or may not have occurred prior to the date thereof (the “First
Waiver”). As consideration for the First Waiver, the Company issued the Note Holders an aggregate of 45,000 shares of the
Company’s common stock. The principal amount on the Notes increased from $450,000 to $490,500 as the initial interest amount,
$40,500 as of February 1, 2016, was added to the principal amount of the Notes. The maturity date of the Notes was extended to
July 1, 2016 and the Notes shall pay interest as of February 1, 2016 at a rate of 9% per annum, payable in one lump sum on the
maturity date. In addition, on any note conversion date from February 1, 2016 through July 1, 2016, the Notes are convertible
into shares of the Company’s common stock at a conversion price of $1.00 per share. On any Note conversion after July 1,
2016, the Notes are convertible into shares of the Company’s common stock at a conversion price that is the lower of (i)
$1.00 per share and (ii) the volume-weighted average price for the last five trading days preceding the conversion date. All remaining
terms of the Notes remained the same.
Subsequent
to the First Waiver, the Notes matured on July 1, 2016. On August 9, 2016, one Note Holder entered into a letter agreement whereby,
effective as of August 1, 2016, they waived any and all defaults that may or may not have occurred prior to the date thereof (the
“Second Waiver”). As consideration for the Second Waiver, the Company issued the Note Holder an aggregate of 40,000
shares of the Company’s common stock and added $15,000 to the principal amount of the note. The principal amount on the
Note increased from $218,000 to $242,810 as the accrued interest amount, $9,810 as of August 1, 2016 and the aforementioned $15,000
of consideration, was added to the principal amount of the Note. The maturity date of the Note was extended to January 1, 2017
and the Note shall pay interest as of August 1, 2016 at a rate of 15% per annum, payable in one lump sum on the maturity date.
In addition, on any note conversion date from August 9, 2016 through January 1, 2017, the Note is convertible into shares of the
Company’s common stock at a conversion price of $1.00 per share. On any Note conversion after January 1, 2017, the Note
is convertible into shares of the Company’s common stock at a conversion price that is the lower of (i) $1.00 per share
and (ii) the volume-weighted average price for the last five trading days preceding the conversion date. All remaining terms of
the Note remained the same. On October 18, 2017, a letter was sent to the board of directors and the CEO of the Company on behalf
of the Note Holder, demanding that the Company repay its outstanding debt in the principal aggregate amount of $200,000, plus
accrued interest, issued pursuant to the Note. The Company has not been named in any legal proceeding relating to this matter
and is in discussions with the Note Holder to resolve this matter. However, no assurance can be given that the Company will be
able to resolve this matter or the timing of any such resolution.
On
October 21, 2016, a second Note Holder entered into a letter agreement whereby, effective as of August 1, 2016, they waived any
and all defaults that may or may not have occurred prior to the date thereof (the “Second Waiver”). As consideration
for the Second Waiver, the Company issued the Note Holder an aggregate of 30,000 shares of the Company’s common stock. The
principal amount on the Note increased from $163,500 to $170,858 as the accrued interest amount, $7,358 as of August 1, 2016,
was added to the principal amount of the Note. The maturity date of the Note was extended to January 1, 2017 and the Note shall
pay interest as of August 1, 2016 at a rate of 15% per annum, payable in one lump sum on the maturity date. In addition, on any
note conversion date from August 9, 2016 through January 1, 2017, the Note is convertible into shares of the Company’s common
stock at a conversion price of $1.00 per share. On any Note conversion after January 1, 2017, the Note is convertible into shares
of the Company’s common stock at a conversion price that is the lower of (i) $1.00 per share and (ii) the volume-weighted
average price for the last five trading days preceding the conversion date. All remaining terms of the Note remained the same.
Glenn
Tilley, a director of the Company, is the holder of $170,858 of principal of the aforementioned Notes.
As
of January 1, 2017, the Company was not compliant with the repayment terms of all of the Notes. As of September 30, 2017, and
December 31, 2016, the outstanding principal balance on the Notes was $522,668. The Company is currently conducting good faith
negotiations with the Note Holders to further extend the maturity date, however, there can be no assurance that a further extension
will be granted. The Company is currently accruing interest on the Notes at the default interest rate of 15% per annum.
First
Waiver
In
accordance with ASC 470, since the present value of the cash flows under the new debt instrument was not at least ten percent
different from the present value of the remaining cash flows under the terms of the original debt instrument, the Company accounted
for the First Waiver as a debt modification. Accordingly, the Company recorded a debt discount of $49,500 in the consolidated
balance sheet. The debt discount was amortized to interest expense over the life of the note.
The
Company assessed the conversion feature of the Note in default at the end of the reporting period and concluded that the conversion
feature of the Note did not qualify as a derivative because the settlement terms indicate that the Note is indexed to the entity’s
underlying stock. The Company will reassess the conversion feature of the Note for derivative treatment at the end of each subsequent
reporting period.
On
February 22, 2016 (the “Effective Date”), the Company issued a convertible note in the principal aggregate amount
of $170,000 to a private investor (the “February 2016 Note”). The note pays interest at a rate of 12% per annum and
matures on August 19, 2016 (the “Maturity Date”). The Note is convertible into shares of the Company’s common
stock at a conversion price equal to: (i) from the Effective Date through the Maturity Date at $1.00 per share; and (ii) beginning
one day after the Maturity Date, or notwithstanding the foregoing, at any time after the Company has registered shares of its
common stock underlying the Note in a registration statement on Form S-1 or any other form applicable thereto, the lower of i)
$1.00 per share and ii) 65% of the volume-weighted average price for the last twenty trading days preceding the conversion date.
The
Company used the proceeds of the February 2016 Note to pay off a debenture issued in favor of a private investor on August 19,
2015. The debenture was in the principal amount of $150,000 and as of the date of this filing the investor has been paid all principal
and interest due in full satisfaction thereof.
As
additional consideration for issuing the February 2016 Note, on the Effective Date the Company issued to the investor 35,000 shares
of the Company’s restricted common stock. The Company recorded a $30,637 debt discount relating to the 35,000 shares of
common stock issued. The debt discount was amortized to interest expense over the life of the convertible note.
The
intrinsic value of the February 2016 Note, when issued, gave rise to a beneficial conversion feature which was recorded as a discount
to the note of $67,637 and was amortized over the period from issuance to the date that the debt matured.
The
Company assessed the conversion feature of the February 2016 Note on the date of issuance, on the date of default and at the end
of each subsequent reporting period through September 30, 2016 and concluded the conversion feature of the note did not qualify
as a derivative because there was no market mechanism for net settlement and it was not readily convertible to cash.
The
Company reassessed the conversion feature of the note for derivative treatment on December 31, 2016. Due to the fact that this
convertible note has an option to convert at a variable amount, they are subject to derivative liability treatment. The Company
has applied ASC No. 815, due to the potential for settlement in a variable quantity of shares. The conversion feature has been
measured at fair value using a Black Scholes model at period end. The conversion feature, when reassessed, gave rise to a derivative
liability of $204,300. In accordance with ASC 815 the $204,300 was charged to paid in-capital due to the fact a beneficial conversion
feature was recorded on the original issue date. Gains and losses in future reporting periods from the change in fair value of
the derivative liability will be recognized on the statements of operations. For the three and nine months ended September 30,
2017 the company recorded a gain or loss on the change in fair value of ($49,300) and $7,295, respectively. As of September 30,
2017, the derivative liability was $197,000.
The
Note holder converted a portion of the principal $1,500 and accrued interest $1,748 to 16,901 shares of common stock during the
second quarter ended June 30, 2017.
The
outstanding principal balance on the February 2016 Note at September 30, 2017 and December 31, 2016 was $168,500 and $170,000,
respectively.
As of August 19, 2016, the Company was not
compliant with the repayment terms of this note but no defaults under the note have been called by the note holder. The Company
is currently conducting good faith negotiations with the note holder to further extend the maturity date, however, there can be
no assurance that a further extension will be granted. Accrued interest on this note including default rate interest at 18% is
$40,995 and $23,667 as of September 30, 2017 and December 31, 2016, respectively.
Promissory
Notes
On
September 15, 2015, the Company entered into a short-term loan agreement with an investor. The principal amount of the loan was
$200,000. The first $100,000 of the loan was payable upon the Company raising $500,000 in a qualified offering (as defined therein).
The remaining balance was payable upon the Company raising $1,000,000 in a qualified offering. The loan bears interest at a rate
of 8%. On May 10, 2017, the Company paid all principal and interest due under the short-term loan in satisfaction thereof.
On
July 14, 2016, the Company closed a Credit Agreement (the “Credit Agreement”) by and among the Company, First Form,
Inc. (the “Borrowers”) and Genlink Capital, LLC, as lender (“Genlink”). Pursuant to the Credit Agreement,
Genlink agreed to loan the Company up to a maximum of $1 million for general operating expenses. An initial amount of $670,000
was funded by Genlink at the closing of the Credit Agreement. Any increase in the amount extended to the Borrowers shall be at
the discretion of Genlink.
The
amounts borrowed pursuant to the Credit Agreement are evidenced by a Revolving Note (the “Revolving Note”) and the
repayment of the Revolving Note is secured by a first position security interest in substantially all of the Company’s assets
in favor of Genlink, as evidenced by a Security Agreement by and among the Borrowers and Genlink (the “Security Agreement”).
The Revolving Note is due and payable, along with interest thereon, on December 20, 2017, and bears interest at the rate of 15%
per annum, increasing to 19% upon the occurrence of an event of default. The Company incurred loan fees of $44,500 for entering
into the Credit Agreement. The loan fees shall be amortized to interest expense over the life of the notes. The Company must pay
a minimum of $75,000 in interest over the life of the loan. As of September 30, 2017, the outstanding balance related to this
finance agreement was $1,000,000.
On
January 26, 2017, the Company entered into a finance agreement with IPFS Corporation (“IPFS”). Pursuant to the terms
of the agreement, IPFS loaned the Company the principal amount of $54,139, which would accrue interest at 3.95% per annum, to
partially fund the payment of the premium of the Company’s general liability insurance. The agreement requires the Company
to make nine monthly payments of $6,115, including interest starting on February 27, 2017. As of September 30, 2017, the outstanding
balance related to this finance agreement was $13,127.
On
December 28, 2016, the Company entered into finance agreement with First Insurance Funding (“FIF”). Pursuant to the
terms of the agreement, FIF loaned the Company the principal amount of $31,492, which would accrue interest at 4.05% per annum,
to partially fund the payment of the premium of the Company’s directors and officers insurance. The agreement requires the
Company to make ten monthly payments of $3,208, including interest starting on January 3, 2017. As of September 30, 2017, the
outstanding balance related to this finance agreement was $13,127.
Debt
under promissory notes is as follows:
|
|
September 30,
2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Promissory notes payable
|
|
$
|
1,
023,471
|
|
|
$
|
1,082,500
|
|
|
|
|
|
|
|
|
|
|
Less: Current maturities
|
|
|
(
1,013,127
|
)
|
|
|
(1,052,410
|
)
|
|
|
|
|
|
|
|
|
|
Less: Debt issuance costs
|
|
|
(10,344
|
)
|
|
|
(30,090
|
)
|
|
|
|
|
|
|
|
|
|
Promissory notes payable, net of Current maturities and debt issuance costs
|
|
$
|
-
|
|
|
$
|
-
|
|
Future
minimum principal payments under promissory notes are as follows:
Year ending December 31:
|
|
|
|
|
|
|
|
2017
|
|
$
|
1,013,127
|
|
|
|
|
|
|
2018 and thereafter
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
1,013,127
|
|
NOTE
6 – STOCKHOLDERS EQUITY (DEFICIT)
Preferred
Stock
The
Company has authorized 20,000,000 shares of preferred stock, with a par value of $0.00001 per share. As of September 30, 2017,
and December 31, 2016, the Company has no shares of preferred stock issued and outstanding.
Common
Stock
The
Company has authorized 250,000,000 shares of common stock, with a par value of $0.00001 per share. As of September 30, 2017, and
December 31, 2016, the Company has 17,325,089 and 17,074,470 shares of common stock issued and outstanding, respectively.
Common
stock issued for services
During
the three and nine months ended September 30, 2017, 1,500 and 4,500 shares of common stock were granted to a certain employee
with a fair value of $735 and $1,835, respectively
During the three and nine months ended September
30, 2017, 109,579 and 180,028 shares of common stock valued at $48,537 and $73,722, respectively, were issued to various consultants
for professional services provided to the Company.
Sale
of common stock
During
the nine months ended September 30, 2017, the Company did not sell any shares of common stock to investors.
Termination
of Registration Statement
On
September 19, 2017, pursuant to Rule 477 under the Securities Act of 1933, as amended (the “Securities Act”), we withdrew
our Registration Statement on Form S-1 (File No. 333-213385), together with all exhibits thereto, initially filed with the SEC
on August 30, 2016, as subsequently amended on November 4, 2016 (the “Registration Statement”). The Registration Statement
was not declared effective and no securities were issued or sold pursuant to the Registration Statement.
2016
Incentive Stock Option Plan
On
October 4, 2016, the Board approved the Sports Field 2016 Incentive Stock Option Plan (the “2016 Plan”). The Plan
provides for the issuance of up to 2,500,000 shares of common stock of the Company through the grant of non-qualified options
(the “Non-qualified Options”), incentive options (the “Incentive Options” and together with the Non-qualified
Options, the “Options”) and restricted stock (the “Restricted Stock”) and unrestricted stock (the “Unrestricted
Stock”) to directors, officers, consultants, attorneys, advisors and employees. The 2,500,000 shares available under the
2016 Plan represent approximately 15% of the Company’s issued and outstanding common stock as of October 4, 2016. The Board
believes the 2,500,000 shares that may be awarded under the 2016 Plan should be sufficient to cover grants through at least the
end of the fiscal year 2018.
Stock
options issued for services
On
January 4, 2016, the Company issued a board member 200,000 common stock options for services. These options expire on January
4, 2021.
On
November 3, 2016, the Company issued our CEO 175,000 common stock options for services. These options expire on November 3, 2021.
On
November 3, 2016, the Company issued Nexphase Global 175,000 common stock options for services. These options expire on November
3, 2021.
On
March 31, 2017, the Company issued our CEO 25,000 common stock options for services. These options expire on March 31, 2022.
On
May 15, 2017, the Company issued a board member 200,000 common stock options for services. These options expire on May 15, 2022.
On
July 11, 2017, the Company issued a consulting firm 100,000 common stock options for services. These options expire in July 11,
2022.
The
Company uses the Black-Scholes option pricing model to determine the fair value of the options granted. In applying the Black-Scholes
option pricing model to options granted, the Company used the following weighted average assumptions:
|
|
For the Nine
Months Ended
September 30,
2017
|
|
|
For the Year Ended December 31,
2016
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
1.43 -
1.93
|
%
|
|
|
1.26
- 1.73
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
41
|
%
|
|
|
40
- 45
|
%
|
Expected life in years
|
|
|
2.5 - 3.5
|
|
|
|
2.5
- 5
|
|
Forfeiture Rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Since
the Company has limited trading history, volatility was determined by averaging volatilities of comparable companies.
The
expected term of the option, taking into account both the contractual term of the option and the effects of employees’ expected
exercise and post-vesting employment termination behavior: The expected life of options and similar instruments represents the
period of time the option and/or warrant are expected to be outstanding. Pursuant to paragraph 718-10-S99-1, it may be appropriate
to use the
simplified method
,
i.e., expected term = ((vesting term + original contractual term) / 2)
, if (i) A
company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due
to the limited period of time its equity shares have been publicly traded; (ii) A company significantly changes the terms of its
share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer
provide a reasonable basis upon which to estimate expected term; or (iii) A company has or expects to have significant structural
changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate
expected term. The Company uses the simplified method to calculate 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. The
contractual term is used as the expected term for share options and similar instruments that do not qualify to use the simplified
method.
The
following is a summary of the Company’s stock option activity during the nine months ended September 30, 2017:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
Outstanding – December 31, 2016
|
|
|
972,500
|
|
|
|
1.23
|
|
|
|
4.00
|
|
Granted
|
|
|
325,000
|
|
|
|
0.86
|
|
|
|
5.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding - September 30, 2017
|
|
|
1,297,500
|
|
|
|
1.14
|
|
|
|
3.59
|
|
Exercisable - September 30, 2017
|
|
|
1,155,000
|
|
|
|
1.21
|
|
|
|
3.45
|
|
At September 30, 2017 and 2016, the total
intrinsic value of options outstanding was $14,000 and $0, respectively.
At September 30, 2017 and 2016,
the total intrinsic value of options exercisable was $14,000 and $0, respectively.
Stock-based compensation for stock
options has been recorded in the condensed consolidated statements of operations and totaled $2,795 and $33,202 for the three and
nine months ended September 30, 2017, respectively, and $35,427 and $105,143 for the three and nine months ended September 30,
2016, respectively. There is approximately $1,970 amortization of stock option compensation left to be recognized over the next
2 years.
Stock
Warrants
The
following is a summary of the Company’s stock warrant activity during the three months ended September 30, 2017:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
Outstanding -
December
31, 2016
|
|
|
679,588
|
|
|
|
1.03
|
|
|
|
2.66
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding - September 30, 2017
|
|
|
679,588
|
|
|
|
1.03
|
|
|
|
2.66
|
|
Exercisable - September 30, 2017
|
|
|
679,588
|
|
|
|
1.03
|
|
|
|
2.66
|
|
At
September 30, 2017 and 2016, the total intrinsic value of warrants outstanding and exercisable was $0 and $0, respectively.
NOTE
7 – RELATED PARTY TRANSACTIONS
Jeromy
Olson, the Chief Executive Officer of the Company, owns 50.0% of a sales management and consulting firm, NexPhase Global, LLC
(“NexPhase”) that provides sales services to the Company. These services include the retention of two full-time senior
sales representatives including the current National Sales Director of the Company. Consulting expenses pertaining to the firm’s
services were $90,000 and $270,000 for the three and nine months ended September 30, 2017, respectively. Consulting expenses pertaining
to the firm’s services were $78,300 and $200,300 for the three and nine months ended September 30, 2016, respectively. Included
in consulting expense for the three and nine months ended September 30, 2017 were 10,000 and 30,000 shares of common stock valued
at $4,900 and $12,100, respectively, issued to NexPhase. Included in consulting expense for the three and nine months ended September
30, 2016 were 10,000 and 30,000 shares of common stock valued at $3,300 and $25,000, respectively, issued to NexPhase. The NexPhase
consulting agreement was terminated on October 1, 2017.
Glenn
Tilley, a director of the Company, was issued 15,000 shares of our common stock as part of a Waiver entered into with Mr. Tilley
on March 31, 2016. (See Note 5 - Convertible Notes - May 7, 2015 Notes).
NOTE
8 – EMPLOYEE SEPARATION
On
December 30, 2016, the Company entered into a mutual general release and settlement agreement (the “Settlement Agreement”)
with a former employee. As of September 30, 2017 the liability has been fully paid, and as of December 31, 2016 the Company had
accrued a liability of $45,000 related to the Settlement Agreement, which was included in accounts payable and accrued expenses
in the accompanying condensed consolidated Balance Sheet.
NOTE
9 – COMMITMENTS AND CONTINGENCIES
Sports
Field Contractors LLC, a subsidiary of the Company, is a guarantor under a commercial security agreement issued in favor of Illini
Bank, as lender, by The AllSynthetic Group, Inc., as borrower, on November 26, 2012, in connection with a loan made
by Illini Bank to The AllSynthetic Group, Inc. in the amount of $249,314 (the “Illini Loan”). Jeremy Strawn,
a former officer of the Company, executed the Illini Loan on behalf of The AllSynthetic Group, Inc. in his capacity as such company’s
President/CEO. The Illini Loan appears to have matured on November 26, 2013 and appears to currently be in default.
The Illini Loan is collateralized by all of the assets of Sports Field Contractors LLC; however, because Sports Field Contractors
LLC is an inactive subsidiary of the Company and had no assets, the Company believes that it does not have any financial exposure
in connection with the Illini Loan.
Services
Agreements
On February 19, 2016 (the “Effective
Date”), the Company entered into a Services Agreement with a consultant. The consultant agreed to provide investor relations
services to the Company for a period of 12 months. As compensation for the services, the Company shall pay the consultant $12,000
per month and is obligated to issue 62,500 shares of the Company common stock upon the 90-day anniversary of the Effective Date
and on the 180-day, 270-day and 360-day anniversary of the Effective Date, if the agreement is renewed as outline in the terms
of the service. The Company may terminate this agreement by providing 5 days advance written notice in the first 60 days of entering
into this agreement and with 30 days advance written notice thereafter for the duration of the agreement. The contract was terminated
during the fourth quarter of 2016. Unvested shares are revalued at the end of each reporting period until they vest and are expensed
on a straight-line basis over the term of the agreement. The Company has recorded compensation expense relating to the equity
portion of the agreement of $13,646 and $85,534 during the three and nine months ended September 30, 2016, respectively.
Effective November 1, 2016 (the
“Effective Date”), the Company entered into a Services Agreement with a consultant. The consultant agreed to provide
financial and operational services to the Company. The agreement terminates on July 31, 2018. As compensation for the services,
the Company shall pay the consultant $3,000 per month and is obligated to issue $3,000 in shares of the Company common stock to
be issued monthly in arrears based on a share price equal to the 5-day moving average share price. As additional compensation,
the Company is obligated to issue a total of 55,087 shares of the Company common stock over the remainder of 2017. The Company
may terminate this agreement by providing 21 days advance written notice for the duration of the agreement.
On
December 20, 2016, the Company entered into a Services Agreement with a consulting firm. This agreement was renewed on July 11,
2017. Under the renewed agreement, the consulting firm agreed to provide investor relations services to the Company for a period
of 6 months, which 6-month period auto-renews unless one party provides at least 30-days written notice of non-renewal. As compensation
for the services, the Company shall pay the consultant $7,500 per month (increased 5% each year) and, upon execution and each
renewal thereafter, is obligated to issue 100,000 fully vested option at an exercise price of $ 0.35 per share of the Company
common stock.
Consulting
Agreements
In
March 2014, the Company reached an agreement with NexPhase Global, LLC (“NexPhase”), a consulting firmed owned by
the CEO of the Company and 50% by the Company’s head of sales, to provide non-exclusive sales services. The consulting firm
will receive between 3.5% and 5% commissions on sales referred to the Company. In addition, NexPhase will receive a monthly fee
of $6,000, 50,000 shares of common stock upon execution of the agreement, and 10,000 shares of common stock at the beginning of
each three month period for the term of the agreement and any renewal periods thereafter. The agreement is for 18 months, and
is renewable for successive 18 month terms. On December 10, 2014, the consulting agreement was amended. The monthly fee was increased
to $10,000 per month retroactive to September 1, 2014 and 50,000 additional shares of common stock were issued. In addition, NexPhase
is to be issued qualified stock options in accordance with the following:
|
●
|
100,000
stock options at an exercise price of $1.50 per share that vest on December 31, 2015
|
|
●
|
100,000
stock options at an exercise price of $1.75 per share that vest on December 31, 2016
|
|
●
|
100,000
stock options at an exercise price of $2.50 per share that vest on December 31, 2017
|
On
November 3, 2016, the Board, pursuant to the consulting agreement, approved the issuance of (i) qualified options to purchase
100,000 shares of the Company’s Common Stock at a price of $1.50 vesting immediately with a grant date of November 3, 2016,
(ii) qualified options to purchase 75,000 shares of the Company’s Common Stock at a price of $1.75 vesting on December 31,
2016, and (iii) qualified options to purchase 25,000 shares of the Company’s Common Stock at a price of $1.75 vesting on
December 31, 2016, which options were to be have and have been issued in the first quarter of 2017.
On
March 14, 2016, the consulting agreement was further amended. The monthly fee was increased to $20,000 per month for a period
of twelve months. At the end of the twelve month period the monthly payment reverts back to $10,000.
The
NexPhase consulting agreement was terminated on October 1, 2017.
In
February 2015, the Company reached an agreement with a consulting firm to provide non-exclusive sales services with an effective
date of February 10, 2015 (the “Effective Date”). The agreement expires on December 31, 2017 and automatically renews
for successive one year terms unless either party notifies the other, in writing, of its intention not to renew at least 15 days
before the end of the initial term of this agreement or any renewal term. As compensation for the services, the consultant will
receive (i) 5% commissions on sales of products or services other than turf referred to the Company; (ii) commission based on
square footage of turf sold to certain parties as outlined in the agreement; (iii) 100,000 shares of the Company common stock
(the “Payment Shares”) upon execution of the agreement, which shall be subject to certain Clawback provisions. “Clawback”
means (i) if this agreement is terminated by the Company prior to December 31, 2016, then 50,000 of the Payment Shares shall be
forfeited, and cancelled by the Company; and (i) if this Agreement is terminated by the Company prior to December 31, 2017, then
25,000 of the Payment Shares shall be forfeited, and cancelled by the Company. No equity compensation will be owed in connection
with any renewal term. Unvested shares are revalued at the end of each reporting period until they vest and are expensed on a
straight-line basis over the term of the agreement.
In
November 2015, the Company reached an agreement with an individual to provide non-exclusive sales services with an effective date
of January 1, 2015 (the “Effective Date”). The term of the agreement is for 3 years from the date of execution, and
automatically renews for successive one year terms unless either party notifies the other, in writing, of its intention not to
renew at least 90 days before the end of the initial term of this agreement or any renewal term. As compensation for the services,
the Company is obligated to issue 75,000 shares of the Company common stock (the “Payment Shares”) within 30 days
of execution of the agreement, which shall be subject to certain Clawback provisions. “Clawback” means (i) if this
agreement is terminated by the Company prior to September 30, 2016, then 50,000 of the Payment Shares shall be forfeited, and
cancelled by the Company; and (i) if this Agreement is terminated by the Company prior to June 30, 2017, then 25,000 of the Payment
Shares shall be forfeited, and cancelled by the Company. No equity compensation will be owed in connection with any renewal term.
Unvested shares are revalued at the end of each reporting period until they vest and are expensed on a straight-line basis over
the term of the agreement.
In
December 2015, the Company reached an agreement with an individual to provide non-exclusive sales services. The individual will
receive up to 5% commissions on sales referred to the Company. The term of the agreement is for 18 months from the date of execution,
and automatically renews for successive one year terms unless either party notifies the other, in writing, of its intention not
to renew at least 90 days before the end of the initial term of this agreement or any renewal term. As compensation for the services,
the Company is obligated to issue 25,000 shares of the Company common stock within 30 days of execution of the agreement, 125,000
shares of the Company common stock which shall vest at the rate of 25,000 shares per quarter, effective beginning as of the quarter
ending March 31, 2016 and 20,000 shares of the Company common stock upon reaching certain sales milestones. No equity compensation
will be owed in connection with any renewal term. Unvested shares are revalued at the end of each reporting period until they
vest and are expensed on a straight-line basis over the term of the agreement.
In
March 2016, the Company reached an agreement with an individual to provide non-exclusive sales services with an effective date
of March 15, 2016 (the “Effective Date”). The individual will receive up to 1% commissions on sales referred to the
Company. The term of the agreement is for one year, and automatically renews for successive one year terms unless either party
notifies the other, in writing, of its intention not to renew at least 60 days before the end of the initial term of this agreement
or any renewal term. As compensation for the services, the Company is obligated to issue 4,000 shares of the Company common stock
on the 15th day of each month for the first 4 months of this agreement; and (ii) 10,000 shares of the Company common stock for
every $1 million in gross revenue earned by the Company attributable to projects sold by the individual. Unvested shares are revalued
at the end of each reporting period until they vest and are expensed on a straight-line basis over the term of the agreement.
In
April 2016, the Company reached an agreement with an individual to provide non-exclusive sales services; this agreement was revised
and replaced with new agreement with an effective date of April 1, 2017 (the “Effective Date”). The individual will
receive a monthly fee of $ 4,000 and up to 3% commissions on sales referred to the Company. The term of the agreement is for one
year, and automatically renews for successive one year terms. The Company may terminate this agreement by providing 60 days advance
written notice for the duration of the agreement. As additional compensation for the services, the Company is obligated pay a
bonus commission of 10% of the commission already paid for every $1.5 million in gross revenue earned by the Company attributable
to projects sold by the individual, which bonus commission is payable in cash/stock/option upon the mutual agreement. Unvested
shares are revalued at the end of each reporting period until they vest and are expensed on a straight-line basis over the term
of the agreement.
In July 2017, the Company reached an
agreement with a service company to provide non-exclusive market awareness campaign and IR services. As compensation for the services,
the service company will receive 40,000 shares of Company common stock. The term of the agreement is for three months.
In July 2017, the Company renewed an agreement with a service
company to provide non-exclusive IR services. As compensation, the service company will receive (a) $7,500 per month and (b) 100,000
options to purchase shares of Company common stock with an exercise price of $0.35. The term of the agreement is for six
months, which term automatically renews unless either party gives at least 30-days prior written notice of non-renewal. At each
renewal date, the service provider company will be entitled to another 100,000 options to purchase shares of Company common stock
with an exercise price of $0.35. Additionally, on an annual basis, the monthly service fee will increase by 5%.
Employment
Agreements
In
September 2014, Jeromy Olson entered into a 40-month employment agreement to serve in the capacity of CEO, with subsequent one
year renewal periods (the “Olson Employment Agreement”). The CEO will receive a monthly salary of $10,000 that (1)
will increase to $13,000 upon the Company achieving gross revenues of at least $10,000,000, as amended, and an operating margin
of at least 15%, and (2) will increase to $16,000 per month upon the Company achieving gross revenues of at least $15,000,000
and an operating margin of at least 15%. The agreement provides for cash bonuses of 15% of the annual Adjusted EBITDA between
$1 and $1,000,000, 10% of the annual Adjusted EBITDA between $1,000,001 and $2,000,000 and 5% of the annual Adjusted EBITDA greater
than $2,000,000. For purposes of the agreement, Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and
amortization less share based payments, gains or losses on derivative instruments and other non-cash items approved by the Board
of Directors. The CEO was issued 250,000 shares of common stock on the date of the agreement and received 250,000 shares of common
stock on January 1, 2016. Lastly, the CEO will be issued qualified stock options as follows:
|
●
|
100,000
stock options at an exercise price of $1.50 per share that vest on December 31, 2015
|
|
●
|
100,000
stock options at an exercise price of $1.75 per share that vest on December 31, 2016
|
|
●
|
100,000
stock options at an exercise price of $2.50 per share that vest on December 31, 2017
|
On
November 3, 2016, the Board, pursuant to the Olson Employment Agreement (as defined above), approved the issuance of (i) qualified
options to purchase 100,000 shares of the Company’s Common Stock at a price of $1.50 vesting immediately with a grant date
of November 3, 2016 and (ii) qualified options to purchase 75,000 shares of the Company’s Common Stock at a price of $1.75
vesting on December 31, 2016, and (iii) qualified options to purchase 25,000 shares of the Company’s Common Stock at a price
of $1.75 vesting on December 31, 2016, which options were to have been issued in the first quarter of 2017.
Advisory
Board Agreements
On
February 11, 2016, the Company entered into an advisory board agreement with John Brenkus, effective June 1, 2016 (“Effective
Date”). The term of the agreement is for a period of 24 months commencing on the Effective Date. Pursuant to the agreement,
during the first twelve months, Mr. Brenkus is to be issued 25,000 shares of the Company common stock at the beginning of each
quarter starting on the Effective Date through the term of the agreement.
Supply
Agreement
On
December 2, 2015, IMG Academy LLC (“IMG”) and the Company entered into an Official Supplier Agreement (the “Agreement”).
The term of the Agreement is January 1, 2016 through December 31, 2019 (the “Term”). Under the Agreement, the Company
is to be the “Official Supplier” of IMG in connection with certain of the Company’s products and related services
during the Term. Additionally, the Agreement provides the Company with certain promotional opportunities and supplier benefits
including but not limited to (i) on-site signage and Company brand exposure (ii) the opportunity to install up to 4 test turf
plots (the “Test Plots”) in order for the Company to conduct research on its turf products and the ability to use
IMG athletes as participants in such testing (ii) opportunity to schedule site visits of test plots for potential Company customers
and (iv) access to IMG’s personnel to include Head Coaches, Athletic Director and Administrators, subject to clearances
and applicable rules of governing bodies such as NCAA. As consideration for its designation as IMG’s “Official Supplier”
the Company must pay IMG three installments of $208,000 during the Term as specified in the Agreement. As of the three and nine
month periods ended September 30, 2017, the Company has recorded $39,126 and $117,378 of expense related to the agreement, respectively.
Placement
Agent and Finders Agreements
The
Company entered into a second exclusive Financial Advisory and Investment Banking Agreement with Spartan Capital Securities, LLC
(“Spartan”) effective October 1, 2015 (the “2015 Spartan Advisory Agreement”). Pursuant to the 2015 Spartan
Advisory Agreement, among other things Spartan will act as the Company’s exclusive financial advisor and provide investment
banking services. Spartan is to be paid (i) a monthly fee of $10,000 for 4 months for the period commencing October 1, 2015 through
January 1, 2016; and contingent upon Spartan successfully raising $2.0 million under the 2015 Spartan Advisory Agreement (ii)
a monthly fee of $5,000 for 6 months for the period commencing February 1, 2016 through July 1, 2016; (iii) a monthly fee of $7,500
for 6 months for the period commencing August 1, 2016 through January 1, 2017; (vi) a monthly fee of $10,000 for 12 months for
the period commencing February 1, 2017 through January 1, 2018; and (vi) a monthly fee of $13,700 for 12 months for the period
commencing February 1, 2018 through January 1, 2019. The obligation to pay the monthly fee shall survive any termination of this
agreement. The 2015 Spartan Advisory Agreement expires on January 1, 2019.
As
of September 30, 2017, and December 31, 2016, Spartan was owed fees of $123,750 and $17,500, respectively.
Litigation
On
October 18, 2017, a letter was sent to the board of directors and the CEO of the Company on behalf of one of the Company’s
note holders, demanding that the Company repay its outstanding debt in the principal aggregate amount of $200,000, plus accrued
interest, issued pursuant to a convertible note dated May 7, 2015. The Company has not been named in any legal proceeding relating
to this matter and is in discussions with the note holder to resolve this matter. However, no assurance can be given that the
Company will be able to resolve this matter or the timing of any such resolution.
Operating
Leases
On
October 2, 2016, the Company entered into a new lease agreement for its office space in Illinois. The lease commences on January
1, 2017 and expires on December 31, 2017. The lease has minimum monthly payments of $1,045. The lease automatically renews for
periods of 12 months unless three months’ notice is provided by either the Company or the landlord. The Company was required
to pay a security deposit to the lessor totaling $2,090.
Rent expense was $3,135
and $9,405 for the three and nine months ended September 30, 2017, respectively.