The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION
Znergy, Inc., (formerly Mazzal Holding Corp., formerly Boston Investment and Development Corp.) is a Nevada corporation (the “Company”), incorporated on January 23, 2013. The original business plan of the Company was the construction and management of multi-family home developments and the subsequent sale thereof.
On October 26, 2015 the Company acquired Global ITS, Inc. and its wholly owned subsidiary, Znergy, Inc. in order to expand into the Energy Efficiency (EE) marketplace, focusing on commercial lighting and green project financing. On February 9, 2016, the Company agreed to sell to the Mazzal Trust the real property which the Trust had previously sold to the Company and the Trust returned to the Company 149,950,000 of the 150,000,000 shares of the Company’s common stock owned by the Trust. The Company is now focused solely on the EE marketplace with an emphasis on LED retrofitting and relamping.
Basis of Presentation
The accompanying interim condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and do not include all of the information and footnotes required by GAAP for complete financial statements.
Certain information and footnote disclosures normally included in the Company’s annual audited consolidated financial statements and accompanying notes have been condensed or omitted in these interim condensed consolidated financial statements. Accordingly, the unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2016, as filed with the Securities and Exchange Commission (“SEC”) on Form 10-K.
The results of operations presented in this quarterly report are not necessarily indicative of the results of operations that may be expected for any future periods. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments and accruals, consisting only of normal recurring adjustments that are necessary for a fair presentation of the results of all interim periods reported herein.
Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
Revenue Recognition
The Company accounts for revenue using the “completed contract method” in accordance with ASC 605-35. Under this method, contract costs are accumulated as deferred assets and billings and/or cash receipts are recorded to a deferred revenue liability account during the contract period but no revenues, costs or profits are recognized in operations until the completion of the contract. Costs include direct material, direct labor, subcontract labor and allocable indirect costs. All unallocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss when such loss is determined. A contract is considered complete when accepted by the customer. The Company quotes its customers the total costs of product installation and materials minus the expected rebates, if any, from a given utility. For projects larger than $10,000, rebates must be pre-approved by the utility.
Reclassification
Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations. Reclassifications have also been made to the Consolidated Condensed Statement of Cash Flows for the for the nine months ending September 30, 2016, for consistency with the current period presentation. This change in classification does not materially affect previously reported cash flows from operations, investing or financing activities in the Consolidated Condensed Statement of Cash Flows, and had no effect on the previously reported Consolidated Condensed Statement of Operations for any period.
NOTE 2 – GOING CONCERN
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. As of September 30, 2017, while the Company has a working capital surplus of $568,067, the accumulated losses from operations aggregated $11,064,096 and it continues to experience operating losses. The Company intends to fund operations through equity financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements through September 2018. As such, the company is attempting to secure purchase order and asset based financing to support the growth needs of the company.
The Company is dependent upon, among other things, obtaining additional financing to continue operations and to execute its business plan. No assurances can be made that management will be successful in pursuing any of these strategies.
These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 3 – FIXED ASSETS
On July 22, 2017, the Company entered into a purchase agreement for a property located at 808 A South Huntington Street, Syracuse, Indiana. The agreement stipulates a purchase price of $255,000 of which $30,000 was paid on July 22, 2017 with the balance of $225,000 due 180 days after closing. There is no interest payable on the balance due. The square footage of the building is approximately 2,348. The property also includes 27 storage units generating approximately $19,000 per year rental income. The Company closed on the property on September 1, 2017.
NOTE 4 – INTANGIBLE ASSETS
The Company was granted a federally registered trademark for “ZNERGY”. The cost of applying for and prosecuting this trademark was $1,845 which cost was accounted for as a non-amortizing intangible asset.
NOTE 5 – LOANS FROM RELATED PARTY
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Loans from related party
|
|
$
|
892
|
|
|
$
|
135,749
|
|
The loan at December 31, 2016 is from B2 Opportunity Fund, LLC, a major shareholder of the Company, and is unsecured, bears no interest and is repayable on demand. This loan was repaid by the issuance of 1,809,987 shares of common stock and 1,809,987 options to purchase common stock during June 2017 (see Note 6).
NOTE 6 – STOCKHOLDERS’ EQUITY
Common Stock
On January 25, 2017 the Company appointed Richard Mikles as Chairman of the board of directors and issued to Mr. Mikles 3,000,000 shares of its common stock, valued at its trading price and vested immediately, and 4,000,000 options to purchase shares of common stock of the Company at a price of $0.10 per share said options vesting equally over eight quarters and having an expiration of three years from the date of issue. Concomitantly, the Company entered into a consulting agreement with Mr. Mikles to provide marketing, strategic, and organizational services to the Company. Upon execution of this consulting agreement the Company issued 2,000,000 shares of common stock, valued at its trading price and vested immediately, and 5,000,000 options to purchase shares of common stock of the Company at a price of $0.10 per share said options to vest quarterly in the amount of one option for every two dollars of revenue recognized by the Company.
On January 27, 2017 the Company appointed Kevin Harrington to its Board of Directors and issued 2,000,000 shares of its common stock, valued at its trading price and vested immediately, and 4,000,000 options to purchase shares of common stock of the Company at a price of $0.10 per share said options vesting equally over eight quarters and having an expiration of three years from the date of issue.
On February 2, 2017 the Company entered into a consulting agreement with Venture Legal Services, PLLC, to provide legal and strategic advisory services for the Company. In conjunction with the execution of this agreement, the Company granted Venture options to purchase up to 2,000,000 shares of its common stock at a price of $0.10 per share. The options have an expiration of three years from the date of issue and vest quarterly one option for every two dollars of revenue recognized by the Company.
On May 15, 2017, the Company entered into an employment agreement with Mr. Baker, our CEO. Mr. Baker was granted 5,000,000 shares of common stock of the Company, valued at its trading price and vested immediately, and was granted 5,000,000 options to purchase common stock of the Company at $0.10 per share. These options have a three-year expiration and vest quarterly one option for every two dollars of revenue recognized by the Company.
On May 15, 2017, the Company entered into an employment agreement with Mr. Floyd, our CFO. Mr. Floyd was granted 10,000,000 options to purchase common stock of the Company at $0.10 per share. These options have a three-year expiration and vest quarterly one option for every two dollars of revenue recognized by the Company.
On June 1, 2017, the Company entered into a service agreement with a provider of investor relations services. Under the agreement, the Company issued 1,000,000 shares of common stock to the provider, valued at its trading price, vesting 500,000 on June 1, 2017, 250,000 shares on October 1, 2017 and 250,000 shares on January 1, 2018.
On June 13, 2017, the Company entered into a service agreement with a provider of bookkeeping, accounting, payroll and human resources services. Under the agreement, the Company issued 250,000 shares of common stock to the provider, valued at its trading price and vested immediately, and 1,000,000 options to purchase common stock of the Company at $0.10 per share. These options have a three-year expiration and vest evenly over two years.
On July 10, 2017 the Company entered into an employment agreement with Ryan Smith, 60, to serve as Senior Vice President of the Company. The agreement has a term of three years, and Mr. Smith’s employment with the Company is on an at-will basis. The agreement specifies an annual base salary of $100,000 and a performance based bonus within 45 days from the end of the Company’s fiscal year as determined by the Compensation Committee of the Board of Directors. In addition, Mr. Smith was granted 3,000,000 shares of common stock of the Company, vested immediately, and was granted 7,000,000 options to purchase common stock of the Company at $0.10 per share. The Options have a three-year expiration and vest quarterly one option for every two dollars of revenue recognized by the Company.
On July 13, 2017, the Company entered into a service agreement with a provider of tax services. Under the agreement, the Company issued 100,000 shares of common stock to the provider, valued at its trading price and vested immediately, and 400,000 options to purchase common stock of the Company at $0.10 per share. These options have a three-year expiration and vest evenly over two years.
On July 13, 2017, the Company amended and extended a consulting agreement, originally executed on January 23, 2017, with its Chairman, Rick Mikles. Under the amended and extended agreement, the Company issued 1,600,000 shares of common stock to Mr. Mikles, valued at its trading price and vested immediately.
On August 31, 2017, the Company entered into an advisory agreement with Donald Herrmann of Tampa, Florida. Under the agreement, the Company issued 100,000 shares of common stock to Mr. Herrmann, valued at its trading price and vested immediately, and 900,000 options to purchase common stock of the Company at $0.10 per share. These options have a three-year expiration and vest evenly over two years.
On September 19, 2017 the Company appointed Jennifer Peek to its Board of Directors and as its Audit Committee Chair and issued 1,500,000 shares of its common stock, valued at its trading price and vested immediately, and 1,500,000 options to purchase shares of common stock of the Company at a price of $0.10 per share. The options vest equally over eight quarters and having an expiration of three years from the date of issue.
Private Offerings of Common Stock and Warrants
During the period ended June 30, 2017 the Company completed a private offering of common stock and warrants to accredited and unaccredited investors for gross proceeds of $1,119,372 which securities were offered under Regulation D, Rule 506(b) of the Securities and Exchange Act of 1933. The Company accepted subscriptions, in the aggregate, for 14,924,960 shares of common stock and one-year warrants to purchase 14,924,960 shares of common stock of which 10,600,000 shares of its common stock and 10,600,000 warrants were issued for $795,000 in cash and 4,324,960 shares of its common stock and 4,324,960 warrants were issued for $324,372 in the conversion of debt. Investors received one-year fully vested warrant to purchase up to 100% of the number of shares purchased in the offering. The warrants have an exercise price of $0.15 per share. The purchase price for each share of common stock together with the warrants was $0.075. For the debt converted, the difference between the amount of debt converted and the fair value of the common stock and warrants issued of $519,085 has been charged to interest expense.
Options
The Company has issued and outstanding two types of options, time vesting and performance vesting.
Options – Time Vesting
There were 2,400,000 options issued and outstanding as of December 31, 2016 that vest equally over time. The following table shows the stock option activity for time vesting options during the period ended September 30, 2017:
|
|
Number of
Options
|
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
Options outstanding at beginning of year
|
|
|
2,400,000
|
|
|
$
|
0.10
|
|
Changes during the period:
|
|
|
|
|
|
|
|
|
Granted - at market price
|
|
|
11,800,000
|
|
|
$
|
0.10
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
Options outstanding at end of period
|
|
|
14,200,000
|
|
|
$
|
0.10
|
|
Options exercisable at end of period
|
|
|
5,204,168
|
|
|
$
|
0.10
|
|
Options issued were valued using the Black-Scholes model assuming zero dividends, a $0.10 strike price, 3-year expiration, 1.51% average risk-free rate and 255% average volatility. Costs incurred in respect of stock based compensation related to time-vested options for employees, advisors and consultants for the three and nine-month periods ended September 30, 2017 were approximately $122,000 and $295,000, respectively. Costs incurred in respect of stock based compensation related to time-vested options for employees, advisors and consultants for the three and nine-month periods ended September 30, 2016 were $-0- and $-0-, respectively.
Unrecognized compensation costs related to time-vested options was approximately $800,000 which is expected to be recognized ratably over approximately 22 months.
Options – Performance Vesting
There were 5,000,000 options issued and outstanding as of December 31, 2016 that vest based on Company performance with one option vesting for every two dollars of revenue, vesting quarterly. The following table shows the stock option activity for performance vesting options during the period ended September 30, 2017:
|
|
Number of
Options
|
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
Options outstanding at beginning of year
|
|
|
5,000,000
|
|
|
$
|
0.10
|
|
Changes during the period:
|
|
|
|
|
|
|
|
|
Granted - at market price
|
|
|
30,800,000
|
|
|
$
|
0.10
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
Options outstanding at end of period
|
|
|
35,800,000
|
|
|
$
|
0.10
|
|
Options exercisable at end of period
|
|
|
3,641,815
|
|
|
$
|
0.10
|
|
Options issued were valued using the Black-Scholes model assuming zero dividends, a $0.10 strike price, 3-year expiration, 1.62% average risk-free rate and 259% average volatility. Costs incurred in respect of stock based compensation related to performance vested options for employees, advisors and consultants for the three and nine-month periods ended September 30, 2017 were approximately $282,000 and $381,000, respectively. Costs incurred in respect of stock based compensation related to performance-vested options for employees, advisors and consultants for the three and nine-month periods ended September 30, 2016 were $-0- and $-0-, respectively.
Unrecognized compensation costs related to options was approximately $3,441,000 which is expected to be recognized over approximately 12 months.
Warrants
There were no warrants issued and outstanding as of December 31, 2016. The following table shows the warrant activity during the period ended September 30, 2017:
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
|
|
Of
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
Warrants outstanding at beginning of year
|
|
|
-
|
|
|
|
|
Changes during the period:
|
|
|
|
|
|
|
|
Granted
|
|
|
14,924,960
|
|
|
$
|
0.15
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
Warrants outstanding at end of period
|
|
|
14,924,960
|
|
|
$
|
0.15
|
|
Warrants exercisable at end of period
|
|
|
14,924,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued were valued using the Black-Scholes model assuming zero dividends, a $0.15 strike price, 1-year expiration, 1.49% risk-free rate and volatility of 238%. Costs incurred for warrants issued to related parties for the conversion of debt were recorded as interest expenses and were $0 and $367,662 for the three and nine months ending September 30, 2017, respectively.
NOTE 7 – LITIGATION
16(b) Litigation
On September 26, 2016, Registrant filed in the United States District Court for the Middle District of Florida a Complaint against defendants The Mazzal Trust, Nissim S. Trabelsi and Shawn Telsi (collectively the “Defendants”), seeking the disgorgement of profits obtained by Defendants and certain of their shareholder affiliates defined under Rule 16a-1(a)(1) under the Exchange Act defined below (collectively, the “Group”) through “short swing profits” in violation of Section 16(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Specifically, Registrant alleged that the Group acted under the guidance and control of the Defendants, whose individual defendants had filed forms 3 and 4 with the Securities and Exchange Commission (the “SEC”), declaring themselves to be “insiders” for the purpose of Section 16(b). The Group owned 100% of the shares of Registrant at the time that members of the group were engaged in the sale and purchase of such shares. The sales and purchases referenced all occurred within six months of other sales and purchases, subjecting Defendants to disgorge to Registrant all profits made by the Group in such sales and purchases. As detailed in paragraphs 16-22 of the Complaint, the total profits received by the Group is $1,695,689. Accordingly, Registrant has demanded the return of all such profits to Registrant plus the statutory payment of attorneys’ fees. On August 24, 2017, the court granted the Company a default judgment against Defendants. The Company intends to vigorously pursue satisfaction of this judgment although there can be no assurance of the recovery of any funds from Defendants.
VStock Transfer Communications
On January 26, 2017, the Company received an email from its transfer agent, VStock Transfer, LLC, (“VStock”) informing the Company that it had been served with a Summons and Complaint (B2 Opportunity Fund (“B2”) v. Trabelsi et al. - Index No.:17-CV-10043, the “Claim”) and further stating that the Company was obligated to indemnify VStock for fees and expenses incurred in defending the Claim. The Company responded on February 24, 2017 stating that (1) we reviewed the Transfer Agent and Registrar Agreement between Mazzal and VStock dated May 20, 2014 and that in Article VI(c) of that agreement it states that indemnification will not be offered if the acts of VStock constitute bad faith or gross negligence, (2) we reviewed the lawsuit filed by B2 against VStock and others and find that VStock’s actions constitute gross negligence and perhaps bad faith, and we therefore deny indemnification of VStock relating to the Claim, and (3) should VStock take any action to seek indemnification by Znergy in any manner, Znergy will either join B2 in its lawsuit or will file an action on its own. The Company terminated its agreement with VStock. Management cannot at this time estimate what, if any, financial impact this matter will have on the Company.
NOTE 8 – CUSTOMER CONCENTRATION
During the three months ended September 30, 2017 we had one customer whose purchases accounted for 79% of sales. During the three months ended September 30, 2017 we had one utility whose rebates accounted for 20% of sales.
At September 30, 2017, there was one customer and one utility who each had an accounts receivable balance greater than 10% of our total outstanding receivable balance.
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have based these forward-looking statements on our current expectations and projections about future events, and they are applicable on as of the dates of such statement. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “forecast,” “expect,” “plan,” anticipate,” believe,” estimate,” continue,” or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those listed under the heading “Risk Factors” and those listed in our other SEC filings. You should not put undue reliance on any forward-looking statements. These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available on our website or otherwise, and we undertake no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q. The following discussion should be read in conjunction with our Financial Statements and related Notes thereto included elsewhere in this report. Throughout this Quarterly Report on Form 10-Q we will refer to Znergy, Inc., together with its subsidiaries, as the “Company,” “we,” “us,” and “our.”