Note
1 Organization and Nature of Operations
SQL
Technologies Corp. (f/k/a Safety Quick Lighting & Fans Corp.), a Florida corporation (the “Company”), was originally
organized in May 2004 as a limited liability company under the name of Safety Quick Light, LLC. The Company was converted to corporation
on November 6, 2012. Effective August 12, 2016, the Company changed its name from “Safety Quick Lighting & Fans Corp.”
to “SQL Technologies Corp.” The Company holds a number of worldwide patents and has received a variety of final electrical
code approvals, including UL Listing and CSA approval (for the United States and Canadian Markets), the CE Marking (for the European
market) and, in December 2016, was approved by the National Fire Protection Association for inclusion in the NFPA 70: National
Electrical Code (NEC). The Company maintains offices in Georgia, Florida and in Foshan, Peoples Republic of China.
The
Company is engaged in the business of developing proprietary technology that enables a quick and safe installation of electrical
fixtures, such as ceiling fans and light fixtures, using a power plug installed in ceiling and wall electrical junction boxes.
The Company’s base technology consists of a weight bearing, fixable socket and a revolving plug for conducting electric
power and supporting an electrical appliance attached to a wall or ceiling. The socket is comprised of an electric power supply
that is connected to the electrical junction box. The plug, which is incorporated in an electrical appliance, attaches to the
socket via a male post and is capable of feeding electric power to the appliance. The plug includes a second structural element
allowing it to revolve and a releasable latching that provides a retention force between the socket and the plug to prevent unintentional
disengagement. The socket and plug can be detached by releasing the latch, thereby disengaging the electric power from the plug.
The socket is designed to replace the support bar incorporated in electric junction boxes, and the plug can be installed in light
fixtures, ceiling fans and wall sconce fixtures. The use of the Company’s technology enables the installation and replacement
of ceiling fans and lights and wall sconces in a fraction of the time of similar, conventional appliances.
The
Company’s base technology also houses modular circuit boards on which software can be added, enabling the incorporation
of smart home applications. The Company is currently conducting research and development on the addition of smart home applications
for future products using its base technology.
The
Company currently markets consumer friendly, energy saving “plugin” ceiling fans and light fixtures under the General
Electric Company (“GE” or “General Electric”) brand as well as “conventional” ceiling lights
and fans carrying the GE brand. The Company also owns 98.8% of SQL Lighting& Fans LLC (the “Subsidiary”). The
Subsidiary was formed in Florida on April 27, 2011, and is in the business of manufacturing the patented device that the Company
owns. The Subsidiary had no activity during the periods presented.
The
Company’s fiscal year end is December 31.
Note
2 Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally
accepted in the United States of America (U.S. GAAP) under the accrual basis of accounting.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
Such
estimates and assumptions impact both assets and liabilities, including but not limited to: net realizable value of accounts receivable
and inventory, estimated useful lives and potential impairment of property and equipment, the valuation of intangible assets,
estimate of fair value of share based payments and derivative liabilities, estimates of fair value of warrants issued and recorded
as debt discount, estimates of tax liabilities and estimates of the probability and potential magnitude of contingent liabilities.
Making
estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect
of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered
in formulating its estimate could change in the near term due to one or more future nonconforming events. Accordingly, actual
results could differ significantly from estimates.
Reclassifications
For
comparability, reclassifications of certain prior-year balances were made in order to confirm with current-year presentations.
Risks
and Uncertainties
The
Company’s operations are subject to risk and uncertainties including financial, operational, regulatory and other risks
including the potential risk of business failure.
The
Company has experienced, and in the future expects to continue to experience, variability in its sales and earnings. The factors
expected to contribute to this variability include, among others, (i) the uncertainty associated with the commercialization and
ultimate success of the product, (ii) competition inherent at large national retail chains where product is expected to be sold
(iii) general economic conditions and (iv) the related volatility of prices pertaining to the cost of sales.
Principles
of Consolidation
The
consolidated financial statements include the accounts of SQL Technologies Corp. (f/k/a Safety Quick Lighting and Fans Corp.)
and the Subsidiary, SQL Lighting & Fans LLC. All intercompany accounts and transactions have been eliminated in consolidation.
Non-controlling
Interest
In
May 2012, in connection with the sale of the Company’s membership units in the Subsidiary, the Company’s ownership
percentage in the Subsidiary decreased from 98.8% to 94.35%. The Company then reacquired these membership units in September 2013,
increasing the ownership percentage from 94.35% back to 98.8%. During the nine-month ended September 30, 2017 and the twelve-months
ended December 31, 2016, there was no activity in the Subsidiary.
Cash
and Cash Equivalents
Cash and cash equivalents are carried at cost
and represent cash on hand, demand deposits placed with banks or other financial institutions, and all highly liquid investments
with an original maturity of three months or less. The Company had $6,359,067 and $4,125,888 in cash equivalents as of September
30, 2017, and December 31, 2016, respectively. The Company has deposits in financial institutions which exceeds the amount insured
by the FDIC. The amount of uninsured deposits was $5,859,067 at September 30, 2017.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers
in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due
accounts.
The
Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries.
The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future bad debts,
as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible.
The
Company’s net balance of accounts receivable for the nine-months ended September 30, 2017 and December 31, 2016 were as
follows:
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September
30, 2017
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December
31, 2016
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(Unaudited)
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(Audited)
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Accounts
Receivable
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$
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1,079,686
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$
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796,824
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Allowance for Doubtful
Accounts
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(18,995)
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—
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Net Accounts Receivable
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$
|
1,060,691
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$
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796,824
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For
the nine-months ended September 30, 2017, the Company increased the Allowance for Doubtful Accounts to $18,995 reflecting amounts
deemed potentially uncollectable. For the nine-months ended September 30, 2017 the Company recorded $18,995 in bad debt expense.
The Company recorded no bad debt expense in 2016.
Inventory
Inventory
consists of finished goods purchased, which are valued at the lower of cost or market value, with cost being determined on the
first in, first out (FIFO) method. The Company periodically reviews historical sales activity to determine potentially obsolete
items and also evaluates the impact of any anticipated changes in future demand.
At September 30, 2017 and December 31, 2016,
the Company had $2,824,614 and $2,401,048 in inventory, respectively. The inventory at September 30, 2017 consisted of Finished
Goods of $2,315,433 and $509,181 in Component Parts. The December 31, 2016 inventory consisted entirely of Finshed Goods. The Company
will maintain an allowance based on specific inventory items that have shown no activity over a twenty-four-month period. The Company
tracks inventory as it is disposed, scrapped or sold at below cost to determine whether additional items on hand should be reduced
in value through an allowance method. As of September 30, 2017, and December 31, 2016, the Company has determined that no allowance
was required.
Valuation of Long-lived Assets and Identifiable Intangible Assets
The
Company reviews for impairment of long-lived assets and certain identifiable intangible assets whenever events or changes in circumstances
indicate that the carrying amount of any asset may not be recoverable. In the event of impairment, the asset is written down to
its fair market value. The Company determined no impairment adjustment was necessary for the periods presented.
Property
and Equipment
Property
and equipment is stated at cost, less accumulated depreciation, and is reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Depreciation
of property and equipment is provided utilizing the straight-line method over the estimated useful lives, ranging from 3 to 7
years of the respective assets. Expenditures for maintenance and repairs are charged to expense as incurred.
Upon
sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and
any gain or loss is reflected in the statements of operations.
Intangible
Asset Patent
The
Company developed a patent for an installation device used in light fixtures and ceiling fans. Costs incurred for submitting the
applications to the United States Patent and Trademark Office for these patents have been capitalized. Patent costs are being
amortized using the straight-line method over the related 15-year lives. The Company begins amortizing patent costs once a filing
receipt is received stating the patent serial number and filing date from the Patent Office.
The
Company incurs certain legal and related costs in connection with patent applications. The Company capitalizes such costs to be
amortized over the expected life of the patent to the extent that an economic benefit is anticipated from the resulting patent
or alternative future use is available to the Company. The Company also capitalizes legal costs incurred in the defense of the
Company’s patents when it is believed that the future economic benefit of the patent will be maintained or increased and
a successful defense is probable. Capitalized patent defense costs are amortized over the remaining expected life of the related
patent. The Company’s assessment of future economic benefit or a successful defense of its patents involves considerable
management judgment, and an unfavorable outcome of litigation could result in a material impairment charge up to the carrying
value of these assets.
GE
Trademark Licensing Agreement
The
Company entered into a Trademark License Agreement with General Electric on June 15, 2011 (the “License Agreement”)
allowing the Company to utilize the “GE trademark” on products which meet the stringent manufacturing and quality
requirements of General Electric (the “GE Trademark License”). As described further in Note 5 to these financial statements,
the Company and General Electric amended the License Agreement in August 2014. As a result of that amendment, the Company is required
to pay a minimum trademark licensing fee (the “Royalty Obligation”) to General Electric of $12,000,000. The repayment
schedule is based on a percent of sales, with any unpaid balance due in November 2018. Under SFAS 142 “Accounting for Certain
Intangible Assets” the Company has recorded the value of the Licensing Agreement and will amortize it over the life of the
License Agreement, which is 60 months.
Fair
Value of Financial Instruments
The
Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance
on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability,
as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that
market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes
a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation
techniques, are assigned a hierarchical level.
The
following are the hierarchical levels of inputs to measure fair value:
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Level 1 –
Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
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●
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Level 2 - Inputs
reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets
or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities;
or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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●
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Level 3 –
Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair
value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
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The
carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, other current assets,
accounts payable & accrued expenses, certain notes payable and notes payable – related party, approximate their fair
values because of the short maturity of these instruments.
The Company accounts for its derivative liabilities,
at fair value, on a recurring basis under Level 3. See Note 9.
Embedded
Conversion Features
The
Company evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to
determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative
at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment
under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration
of any beneficial conversion features.
Derivative
Financial Instruments
The
Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates
all of it financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain
features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the
derivative instrument is initially recorded at its fair value and is then revalued at each reporting date, with changes in the
fair value reported as charges or credits to income.
The Company changed
its method of valuation for fair market values of derivatives in 2017 to a lattice-binomial option-pricing model (“lattice-binomial
model”) from the Black-Scholes option-pricing model (“Black-Scholes model”) which was previously used under SFAS
123 and are reflected on our condensed consolidated statement of operations as other (income) expense at each reporting period.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity,
is reassessed at the end of each reporting period. However, such new and/or complex instruments may have immature or limited markets.
As a result, the pricing models used for valuation of derivatives often incorporate significant estimates and assumptions, which
may impact the level of precision in the financial statements. Furthermore, depending on the terms of a derivative or embedded
derivative, the valuation of derivatives may be removed from the financial statements upon conversion of the underlying instrument
into some other security. The change in valuation methodology had no material impact on the Company’s previous calculations.
Beneficial
Conversion Feature
For
conventional convertible debt where the rate of conversion is below market value, the Company records a “beneficial conversion
feature” (“BCF”) and related debt discount.
When
the Company records a BCF, the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective
debt instrument (offset to additional paid in capital) and amortized to interest expense over the life of the debt.
Debt
Issue Costs and Debt Discount
The
Company may record debt issue costs and/or debt discounts in connection with raising funds through the issuance of debt. These
costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense over the life
of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
Original
Issue Discount
For
certain convertible debt issued, the Company may provide the debt holder with an original issue discount. The original issue discount
would be recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the life of
the debt.
Extinguishments
of Liabilities
The
Company accounts for extinguishments of liabilities in accordance with ASC 860-10 (formerly SFAS 140) “Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities”. When the conditions are met for extinguishment accounting,
the liabilities are derecognized and the gain or loss on the sale is recognized.
Stock
Based Compensation – Employees
The
Company accounts for its stock based compensation in which the Company obtains employee services in share based payment transactions
under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting
Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which
goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value
of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
The
measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance
is complete or the date on which it is probable that performance will occur.
If
the Company is a newly formed corporation or shares of the Company are thinly traded, the use of share prices established in the
Company’s most recent private placement memorandum (based on sales to third parties), or weekly or monthly price observations
would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due
to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
The
fair value of share options and similar instruments is estimated on the date of grant using a Binomial option pricing valuation
model. The ranges of assumptions for inputs are as follows:
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Expected term of
share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification
the expected term of share options and similar instruments represents the period of time the options and similar instruments
are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s expected
exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data to estimate
holder’s expected exercise behavior. If the Company is a newly formed corporation or shares of the Company are thinly
traded the contractual term of the share options and similar instruments is used as the expected term of share options and
similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which
to estimate expected term.
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●
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Expected volatility
of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f) (2)(ii) a thinly
traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for
the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected,
the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company
uses the average historical volatility of the comparable companies over the expected contractual life of the share options
or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price
observations would generally be more appropriate than the use of daily price observations as the volatility calculation using
daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes
and lack of consistent trading in the market.
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●
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Expected annual
rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term
shall disclose the range of expected dividends used and the weighted average expected dividends. The expected dividend yield
is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within
the expected term of the share options and similar instruments.
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●
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Risk-free rate(s).
An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected
term of the share options and similar instruments.
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Generally,
all forms of share based payments, including stock option grants, warrants and restricted stock grants and stock appreciation
rights are measured at their fair value on the awards’ grant date, based on estimated number of awards that are ultimately
expected to vest.
The
expense resulting from share based payments is recorded in general and administrative expense in the statements of operations.
Stock
Based Compensation – Nonemployees
Equity
Issued to Parties Other Than Employees for Acquiring Goods or Services
The
Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance
of Subtopic 505-50 of the FASB Accounting Standards Codification (“Subtopic 505-50”).
Pursuant
to ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument
issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument
issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will
occur. If the Company is a newly formed corporation or shares of the Company are thinly traded the use of share prices established
in the Company’s most recent private placement memorandum, or weekly or monthly price observations would generally be more
appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between
the bid and asked quotes and lack of consistent trading in the market.
The
fair value of share options and similar instruments is estimated on the date of grant using a Binomial option pricing valuation
model. The ranges of assumptions for inputs are as follows:
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Expected term of
share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification
the expected term of share options and similar instruments represents the period of time the options and similar instruments
are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s expected
exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data to estimate
holder’s expected exercise behavior. If the Company is a newly formed corporation or shares of the Company are thinly
traded the contractual term of the share options and similar instruments is used as the expected term of share options and
similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which
to estimate expected term.
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●
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Expected volatility
of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f) (2)(ii) a thinly
traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for
the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected,
the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company
uses the average historical volatility of the comparable companies over the expected contractual life of the share options
or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price
observations would generally be more appropriate than the use of daily price observations as the volatility calculation using
daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes
and lack of consistent trading in the market.
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●
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Expected annual
rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term
shall disclose the range of expected dividends used and the weighted average expected dividends. The expected dividend yield
is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within
the expected term of the share options and similar instruments.
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●
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Risk-free rate(s).
An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected
term of the share options and similar instruments.
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Pursuant
to ASC paragraph 505-50-257, if fully vested, no forfeitable equity instruments are issued at the date the grantor and grantee
enter an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments),
then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement
date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement
is entered). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized
as contra equity under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances. Pursuant to
ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return
for fully vested, non-forfeitable equity instruments that are issued at the date the grantor and grantee enter an agreement for
goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such an
asset shall not be displayed as contra equity by the grantor of the equity instruments.
The
transferability (or lack thereof) of the equity instruments shall not affect the balance sheet display of the asset. This guidance
is limited to transactions in which equity instruments are transferred to other than employees in exchange for goods or services.
Section 505-50-30 provides guidance on the determination of the measurement date for transactions that are within the scope of
this Subtopic.
Pursuant
to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable
by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee
achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and
in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of
paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a share
option and similar instrument that the counterparty has the right to exercise expires unexercised.
Pursuant
to ASC paragraph 505-50-30-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable
equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received
(that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement
date and no entry should be recorded.
Revenue
Recognition
The
Company derives revenues from the sale of GE branded ceiling fans and lighting fixtures to large retailers through retail and
online sales.
Revenue
is recorded when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) asset is transferred
to the customer without further obligation, (3) the sales price to the customer is fixed or determinable, and (4) collectability
is reasonably assured.
Cost
of Sales
Cost
of sales represents costs directly related to the production and third-party manufacturing of the Company’s products.
Product
sold to large retail customers is typically shipped directly to the customer from the third-party manufacturer; costs associated
with shipping and handling is shown as a component of cost of sales.
Earnings
(Loss) Per Share
Basic
net earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common
stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) for the period
by the weighted average number of common stock, common stock equivalents and potentially dilutive securities outstanding during
each period.
The
Company uses the “treasury stock” method to determine whether there is a dilutive effect of outstanding convertible
debt, convertible preferred stock, and option and warrant contracts. For the nine-months ended September 30, 2017 and 2016, the
Company reflected net loss and a dilutive net loss, and the effect of considering any common stock equivalents would have been
antidilutive for the period. Therefore, separate computation of diluted earnings (loss) per share is not presented for the periods
presented.
The
Company has the following common stock equivalents at September 30, 2017 and December 31, 2016:
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September
30, 2017
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December
31, 2016
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(Unaudited)
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(Audited)
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Convertible
Debt (Exercise price $0.25/share)
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—
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800,000
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Stock Warrants (Exercise
price $0.001 - $3.00/share)
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11,948,984
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13,555,651
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Stock Options (Exercise
price $0.375 - $3.00/share)
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3,950,000
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1,350,000
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Total
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15,989,984
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15,705,651
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Related
Parties
The
Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure
of related party transactions.
Pursuant
to Section 850-10-20 the related parties include (a) Affiliates of the Company; (b) Entities for which investments in their
equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section
825–10–15, to be accounted for by the equity method by the investing entity; (c) Trusts for the benefit of employees,
such as pension and profit sharing trusts that are managed by or under the trusteeship of management; (d) Principal owners
of the Company; (e) Management of the Company; (f) Other parties with which the Company may deal if one party controls
or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties
might be prevented from fully pursuing its own separate interests; and (g) Other parties that can significantly influence
the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties
and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully
pursuing its own separate interests.
The
consolidated financial statements shall include disclosures of material related party transactions, other than compensation arrangements,
expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated
in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall
include: (a). the nature of the relationship(s) involved; (b). a description of the transactions, including transactions
to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such
other information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c).
the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change
in the method of establishing the terms from that used in the preceding period; and (d). amounts due from or to related parties
as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Contingencies
The
Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain
conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company,
but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings
that are pending against the Company or un-asserted claims that may result in such proceedings, the Company evaluates the perceived
merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected
to be sought therein.
If the assessment of a contingency indicates
that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a
potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material,
would be disclosed.
Loss contingencies considered remote are generally
not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. However, there is no assurance that
such matters will not materially and adversely affect the Company’s business, consolidated financial position, and consolidated
results of operations or consolidated cash flows.
Subsequent
Events
The
Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent
events. The Company will evaluate subsequent events through the date when the financial statements are issued.
Pursuant
to ASU 201009 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued
when they are widely distributed to users, such as through filing them on EDGAR.
Recently
Issued Accounting Pronouncements
In
March 2016, the FASB issued ASU 2016-09, Stock Compensation, which is intended to simplify the accounting for share based payment
award transactions. The new standard will modify several aspects of the accounting and reporting for employee share based payments
and related tax accounting impacts, including the presentation in the statements of operations and cash flows of certain tax benefits
or deficiencies and employee tax withholdings, as well as the accounting for award forfeitures over the vesting period. The guidance
is effective for fiscal years beginning after December 15, 2016, including interim periods within that year, and will be adopted
by the Company in the first quarter of fiscal 2017. The Company anticipates the new standard will result in an increase in the
number of shares used in the calculation of diluted earnings per share and will add volatility to the Company’s effective
tax rate and income tax expense. The magnitude of such impacts will depend in part on whether significant employee stock option
exercises occur.
In
April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest—Imputation of Interest (Topic 83530): Simplifying
the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to
a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by ASU 2015-03.
ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods
within those fiscal years. The Company has reclassified debt issuance costs from prepaid expenses and other current assets and
other assets as a reduction to debt in the condensed consolidated balance sheets.
In
May 2015, the FASB issued ASU 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities
That Calculate Net Asset Value per Share (or Its Equivalent)," which removes the requirement to categorize within the fair
value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Further,
the amendments remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair
value using the net asset value per share practical expedient. This ASU is effective for annual periods, including interim periods
within those annual periods, beginning after December 15, 2015, and early adoption is permitted. The new guidance should be applied
on a retrospective basis to all periods presented. We adopted this guidance on January 1, 2016. The adoption of this guidance
did not have a material impact on our financial position, results of operations or cash flows.
In
September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement –Period Adjustments.”
Changes to the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is
required to retrospectively adjust the balance sheet amounts of the acquired business recognized at the acquisition date with
a corresponding adjustment to goodwill as a result of changes made to the balance sheet amounts of the acquired business. The
measurement period is the period after the acquisition date during which the acquirer may adjust the balance sheet amounts recognized
for a business combination (generally up to one year from the date of acquisition). The changes eliminate the requirement to make
such retrospective adjustments, and, instead require the acquiring entity to record these adjustments in the reporting period
they are determined. The new standard is effective for both public and private companies for periods beginning after December 15,
2015. We adopted this guidance in the first quarter 2016. The adoption of this guidance did not have a material impact on our
financial position, results of operations or cash flows.
In
July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-11, Inventory
(Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”), which applies guidance on the subsequent measurement
of inventory. ASU 2015-11 states that an entity should measure inventory at the lower of cost and net realizable value. Net realizable
value is the estimated selling price in the ordinary course of business, less reasonable predictable costs of completion, disposal
and transportation. The guidance excludes inventory measured using last in, first out or the retail inventory method. ASU 2015-11
is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company
is not planning to early adopt ASU 2015-11 and is currently evaluating ASU 2015-11 to determine the potential impact to its condensed
consolidated financial statements and related disclosures.
In
February 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis," which
makes changes to both the variable interest model and voting interest model and eliminates the indefinite deferral of FASB Statement
No. 167, included in ASU 2010-10, for certain investment funds. All reporting entities that hold a variable interest in other
legal entities will need to re-evaluate their consolidation conclusions as well as disclosure requirements. This ASU is effective
for annual periods beginning after December 15, 2015, and early adoption is permitted, including any interim period. We adopted
this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position,
results of operations or cash flows.
In
January 2015, the FASB issued ASU 2015-01, "Income Statement – Extraordinary and Unusual Items (Subtopic 225-20),"
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. This update eliminates
from GAAP the concept of extraordinary items. We adopted this guidance on January 1, 2016. The adoption of this guidance
did not have a material impact on our financial position, results of operations or cash flows.
In
November 2014, the FASB issued ASU 2014-16, "Derivatives and Hedging (Topic 815)." Entities commonly raise capital by
issuing different classes of shares, including preferred stock, that entitle the holders to certain preferences and rights over
the other shareholders. The specific terms of those shares may include conversion rights, redemption rights, voting rights, and
liquidation and dividend payment preferences, among other features. One or more of those features may meet the definition of a
derivative under GAAP. Shares that include such embedded derivative features are referred to as hybrid financial instruments.
The objective of this update is to eliminate the use of different methods in practice and thereby reduce existing diversity under
GAAP in the accounting for hybrid financial instruments issued in the form of a share. The amendments are effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2015. We adopted this guidance on January 1,
2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.
In
August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements – Going Concern (Subtopic 205-40),
effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application
is permitted. This standard provides guidance about management’s responsibility to evaluate whether there is substantial
doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The guidance
is effective for annual reporting periods ending after December 15, 2016, and early adoption is permitted. We adopted this
guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results
of operations or cash flows.
In
March 2016, the FASB issued an accounting standards update which simplifies the accounting for share-based payment transactions,
inclusive of income tax accounting and disclosure considerations. This guidance is effective for fiscal and interim periods beginning
after December 15, 2016 and is required to be applied retrospectively to all impacted share-based payment arrangements. We adopted
this guidance on January 1, 2017. The adoption of this guidance did not have a material impact on our financial position,
results of operations or cash flows.
Recent
Accounting Pronouncements Issued but Not Adopted as of September 30, 2017
In May 2014, the FASB issued ASU 2014-09,
“Revenue from Contracts with Customers (Topic 606),” on revenue recognition. This guidance provides that an entity
should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires more detailed
disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash
flows arising from contracts with customers. The original effective date of this guidance was for interim and annual reporting
periods beginning after December 15, 2016, early adoption is not permitted, and the guidance must be applied retrospectively
or modified retrospectively. In July 2015, the FASB approved an optional one-year deferral of the effective date. As a result,
we expect to adopt this guidance on January 1, 2018. We have not yet determined our approach to adoption or the impact the
adoption of this guidance will have on our financial position, results of operations or cash flows, if any.
In
January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-01,
which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current
guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation
and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance
assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new
standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should
apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period
in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for
financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income.
We are currently evaluating the impact of adopting this guidance.
In
February 2016, the FASB issued an accounting standards update which modifies the accounting for leasing arrangements, particularly
those arrangements classified as operating leases. This update will require entities to recognize the assets and liabilities arising
from operating leases on the balance sheet. This guidance is effective for fiscal and interim periods beginning after December
15, 2018 and is required to be applied retrospectively to all leasing arrangements. We are currently assessing the effects this
guidance may have on our financial statements.
In
January 2017, the FASB issued Accounting Standards Update No. 2017-01, Clarifying the Definition of a Business ("ASU 2017-01").
The standard clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should
be accounted for as acquisitions of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15,
2017, and interim periods within those fiscal years. Under ASU 2017-01, to be considered a business, the assets in the transaction
need to include an input and a substantive process that together significantly contribute to the ability to create outputs. Prior
to the adoption of the new guidance, an acquisition or disposition would be considered a business if there were inputs, as well
as processes that when applied to those inputs had the ability to create outputs. Early adoption is permitted for certain transactions.
Adoption of ASU 2017-01 may have a material impact on our consolidated financial statements if we enter into future business combinations.
In
January 2017, the FASB issued Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment ("ASU
2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test,
which requires a hypothetical purchase price allocation. ASU 2017-04 is effective for annual or interim goodwill impairment tests
in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for
interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not anticipate the adoption
of ASU 2017-04 will have a material impact on our consolidated financial statements.
Other pronouncements issued by the FASB or
other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be
significant to the Company’s financial position, results of operations or cash flows.
Note
3 Furniture and Equipment
Property
and equipment consisted of the following at September 30, 2017 and December 31, 2016:
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
(Unaudited)
|
|
(Audited)
|
Machinery and Equipment
|
|
$
|
31,456
|
|
|
$
|
31,456
|
|
Computer Equipment
|
|
|
6,846
|
|
|
|
6,846
|
|
Furniture and Fixtures
|
|
|
36,059
|
|
|
|
36,059
|
|
Tooling and Production
|
|
|
193,756
|
|
|
|
105,379
|
|
Leasehold Improvements
|
|
|
54,951
|
|
|
|
—
|
|
Total
|
|
|
323,068
|
|
|
|
179,740
|
|
Less: Accumulated Depreciation
|
|
|
(101,079
|
)
|
|
|
(66,135
|
)
|
Property and Equipment net
|
|
$
|
221,989
|
|
|
$
|
113,605
|
|
Depreciation expense amounted to $19,539 and
$34,943 for the three and nine-months ended September 30, 2017, respectively; and $6,707 and $19,714 for the three-months
and nine-months ended September 30, 2016, respectively.
Note
4 Intangible Assets
Intangible
assets (patents) consisted of the following at September 30, 2017 and December 31, 2016:
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
(Unaudited)
|
|
(Audited)
|
Patents
|
|
$
|
183,684
|
|
|
$
|
134,919
|
|
Less: Impairment Charges
|
|
|
—
|
|
|
|
—
|
|
Less: Accumulated Amortization
|
|
|
(35,901
|
)
|
|
|
(28,577
|
)
|
Patents net
|
|
$
|
147,783
|
|
|
$
|
106,342
|
|
Amortization
expense associated with patents amounted to $2,221 and $7,326 for the three-months and nine-months ended September 30, 2017, respectively;
and $2,095 and $5,774 for the nine-months ended September 30, 2016, respectively.
At
September 30, 2017, future amortization of intangible assets for the years ending follows:
Year Ending December 31:
|
|
|
|
|
2017
|
|
|
$
|
3,058
|
|
2018
|
|
|
|
12,229
|
|
2019
|
|
|
|
12,229
|
|
2020
|
|
|
|
12,229
|
|
2021
|
|
|
|
12,229
|
|
2022 and Thereafter
|
|
|
|
95.809
|
|
|
|
|
$
|
147,783
|
|
Actual
amortization expense in future periods could differ from these estimates as a result of future acquisitions, divestitures, impairments
and other factors.
Note
5 GE Trademark License Agreement
The
Company entered into an amended License Agreement with General Electric regarding the GE Trademark License. The License Agreement
is amortized through its expiration in November 2018.
|
|
September 30, 2017 (Unaudited)
|
|
December 31, 2016
(Audited)
|
GE Trademark License
|
|
$
|
12,000,000
|
|
|
$
|
12,000,000
|
|
Less: Impairments
|
|
|
—
|
|
|
|
—
|
|
Less: Accumulated Amortization
|
|
|
(9,148,497
|
)
|
|
|
(7,324,415
|
)
|
GE Trademark License – net
|
|
$
|
2,851,503
|
|
|
$
|
4,675,585
|
|
Amortization
expense associated with the GE Trademark License amounted to $611,037 and $1,824,081 for the three-months and nine-months ended
September 30, 2017 and $615,385 and $1,832,777 for the three-months and nine-months ended 2016, respectively.
At September 30, 2017, future amortization of
intangible assets is as follows for the remaining:
Year
Ending December 31:
|
|
|
|
|
2017
|
|
|
$
|
611,037
|
|
2018
|
|
|
|
2,240,466
|
|
|
|
|
$
|
2,851,503
|
|
Note
6 Deferred Lease Credits
Cash
or rent abatements received upon entering into certain office leases are recognized on a straight-line basis as a reduction to
rent expense over the lease term. The unamortized portion is included in Deferred Lease Credits, which are included in other current
liabilities. As of September 30, 2017, and December 31, 2016 the deferred credits were $45,401 and $13,034 respectively. Deferred
Rent amortization was $(15,694) and $(30,324) for the three-months and nine-months ended September 30, 2017 and $2,292 and $6,875
for the three-months and nine-months ended 2016, respectively.
Note
7 Notes Payable
At September 30, 2017 and December
31, 2016, the Company had a note payable to a bank in the amount of $99,807 and $186,823, respectively. The note bears interest
at prime plus 1.5% (5.75
% as of September
30, 2017) and matures on August 28, 2018. The note is secured by the assets of the Company and personal guarantees by a shareholder
and an officer of the Company.
On
April 13, 2016, the Company entered in to an agreement with a third party for a $10,000,000 line of credit. The primary purpose
of this line of credit is to fund manufacturing and product related obligations. The amounts outstanding under the line of credit
promissory note carries interest of 8%, due monthly with principal and unpaid interest due December 31, 2017. The note is secured
by the assets of the Company. The outstanding balance on this note was $3,705,699 and $3,112,737 at September 30, 2017 and December
31, 2016, respectively.
The Company received a $500,000 loan from a
related party in January 2016. The note is on demand and carries interest of 12% and carried a balance of $200,000 at September
30, 2017 and December 31, 2016, respectively.
Principal
payments due under the terms of the notes described above are as follows:
Principal
Due in Next 12 Months
|
|
|
|
|
2017
|
|
|
$
|
3,962,829
|
|
2018
|
|
|
|
42,677
|
|
|
|
|
$
|
4,005,506
|
|
Interest
expense under the above agreements amounted to $74,294 and $204,939 for the three-months and nine-months ended September 30, 2017,
respectively and $65,982 and $107,816 for the three-months and nine-months ended September 30, 2016, respectively.
Note
8 Convertible Debt Net
The
Company has recorded derivative liabilities associated with convertible debt instruments, as more fully discussed at Note 9.
|
Third Party
|
|
Related Party
|
|
Totals
|
Balance December 31, 2015 (Audited)
|
$ 3,989,950
|
|
$ 50,000
|
|
$ 4,039,950
|
Add: Amortization of Debt Discount
|
474,283
|
|
0
|
|
474,283
|
Less Repayments/Conversions
|
(4,314,233)
|
|
-
|
|
-
|
Balance December 31, 2016 (Audited)
|
150,000
|
|
50,000
|
|
200,000
|
Add: Amortization of Debt Discount
|
-
|
|
-
|
|
-
|
Less Repayments/Conversions
|
(150,000)
|
|
(50,000)
|
|
(200,000)
|
Balance September 30, 2017 (Unaudited)
|
$ -
|
|
$ -
|
|
$ -
|
|
|
|
|
|
|
On
November 26, 2013, May 8, 2014 and September 25, 2014 the Company completed closings in connection with its offering (the “Notes
Offering”) of its 12% Secured Convertible Promissory Notes (the “12% Notes”) in the aggregate principal amount
of $4,240,100 and/or its 15% Secured Convertible Promissory Notes in the aggregate principal amount of $30,000 (the “15%
Notes”, and together with the 12% Notes, each a “Note” and collectively, the “Notes”), as applicable,
with certain “accredited investors” (the “Investors”), as defined under Regulation D, Rule 501 of the
Securities Act. Pursuant to the Notes Offering, the Company received $1,752,803, $1,400,000 and $800,500 in net proceeds on November
26, 2013, May 8, 2014 and September 25, 2014, respectively. The principal balance of each Note and all unpaid interest became
payable twenty-four (24) months after the date of issuance. The principal and outstanding interest under the Notes were convertible
into shares of the Company’s common stock at $0.25 per share and were secured by a first priority lien (subject only to
an existing note with Signature Bank of Georgia on the Company’s intellectual property and all substitutes, replacements
and proceeds of such intellectual property).
Pursuant
to the Notes Offering, each Investor also received five (5) year common stock warrants to purchase the Company’s common
stock at $0.375 per share (each a “Note Offering Warrant” and collectively, the “Note Offering Warrants”).
Investors of the 12% Notes received Note Offering Warrants with 25% coverage based on a predetermined valuation of the Company.
Investors of the 15% Notes received Note Offering Warrants with 15% coverage based on the predetermined valuation of the Company.
Investors with a principal investment amount equal to or greater than $250,000 received Note Offering Warrants with a bonus 40%
coverage (“Bonus Coverage”); however, if an Investor previously invested $250,000 or more in the Notes Offering,
such Investor received Bonus Coverage if such Investor subsequently invested $100,000 or more in the Notes Offering. In addition
to the terms customarily included in such instruments, the Note Offering Warrants may be exercised by the Investors by providing
to the Company a notice of exercise, payment and surrender of the Note Offering Warrant.
The
Notes and Note Offering Warrants were treated as derivative liabilities.
In
connection with the Notes Offering, the Company entered into Note Offering Registration Rights Agreements, each dated as of November
26, 2013, May 8, 2014 and September 25, 2014, and each by and between the Company and each of the Investors (collectively, the
“Note Offering Registration Rights Agreements”). Because the Company was unable to timely file a registration statement
pursuant to the terms of each Note Offering Registration Rights Agreements dated as of November 26, 2013 or May 8, 2014, the Company
was in default under such Note Offering Registration Rights Agreements (the “Filing Default Damages”), and because
the Company was unable to timely have a registration statement declared effective pursuant to the terms of the Note Offering Registration
Rights Agreements dated as of November 26, 2013, the Company was in default under such Note Offering Registration Rights Agreements
(the “Effectiveness Default Damages”). The Filing Default Damages stopped accruing on the date such registration statement
was filed, and the Effectiveness Default Damages stopped accruing on the date it was declared effective.
The
Company invited the Investors holding Notes dated November 26, 2013 to extend the first interest payment that was scheduled to
be paid pursuant to the Notes dated November 26, 2013 (the “Interest Due”) to February 24, 2015 and in exchange offered
to capitalize the Interest Due at a rate of 12% through payment (the “Additional Interest”), all of which was convertible
into the Company’s common stock at a price of $0.25 per share (the “Agreement and Waiver and Agreement to Convert”).
Through December 31, 2016, the Company has issued in total 2,343,191 shares of its common stock representing $585,798 in Additional
Interest, Interest Due, Filing Default Damages and Effectiveness Default Damages. As of December 31, 2016, all Additional Interest,
Interest Due, Filing Default Damages and Effectiveness Default Damages was repaid by the Company.
During
2015, five Investors requested that the Company withhold payments of interest due under their Notes at no cost to the Company,
to allow the Company to address working capital needs. Such interest due has been or will be paid to the five Investors in cash
or simple non-interest bearing promissory notes, and none of such amounts have been or will be paid in shares of the Company’s
capital stock.
In
November 2015, the Company invited the holders of Notes dated November 26, 2013, with respect to outstanding principal and interest
due under their respective Notes, to (i) receive payment in cash, (ii) convert their Notes into shares of the Company’s
common stock, or (iii) forbear an election for three (3) months, or until February 26, 2016, pursuant to a forbearance agreement,
during such time interest under their respective Notes would continue to accrue. In February 2016, the Company invited the same
holders to extend their forbearance period to make an election to convert or redeem their Notes for an additional three months,
or until May 26, 2016, under the same terms as the first forbearance agreements.
In
May 2016, the Company invited the holders of all Notes, where such holders had not already made an election to redeem or convert
their Notes, to forbear or extend their forbearance period to make an election to convert or redeem their Notes until July 31,
2016, which the Company thereafter extended to August 15, 2016 (the “August 2016 Election”). This also provided a
third option to all noteholders, whereby such holders could convert their respective Note(s) into shares of Series A Convertible
Preferred Stock (“Preferred Stock”). (See Note 8(B)).
Prior
to the August 2016 Election, several Investors had previously elected to receive payment in cash, or convert their Notes into
shares of the Company’s common stock, but most Notes remained outstanding.
For
the nine-months ended September 30, 2017, one Investor redeemed $50,000 in principal balance of one Note and one Investor was
issued 200,000 shares of Preferred Stock in connection with its August 2016 Election. Pursuant to the August 2016 Elections received
and effective as of August 15, 2016, through September 30, 2017 the Company redeemed or issued shares of the Company’s common
stock or Preferred Stock, as applicable, in exchange for the principal balance of the Notes, as follows: (i) the payment of, in
the aggregate, $50,000 in principal balance of one Note; (ii) the issuance of 240,000 shares of the Company’s common
stock, representing $60,000 in outstanding Note principal balance; and (iii) the issuance of 13,456,936 shares of Preferred
Stock, representing $3,364,234 in outstanding Note principal balance.
As of September 30, 2017, all Notes have either
been re-paid in cash, are represented by a separate debt obligation or have been converted, and all such Notes have been terminated.
All issuances of capital stock in the August 2016 Election were made only for principal balances due under the Notes, and all interest
was paid directly to the Investors.
The
debt carries interest between 12% and 15%, and was due in November 2015, May 2016 and September 2016, as extended to July 31,
2016 pursuant to certain forbearance agreements.
All
Notes and Note Offering Warrants issued in connection with the Notes Offering are convertible at $0.25 and $0.375 per share, respectively,
subject to the existence of a “ratchet feature”, which allows for a lower offering price if the Company offers shares
to the public at a lower price.
(B)
|
|
Offer
to Convert Debt to Preferred Shares
|
By
letter to each holder of the Notes, dated July 22, 2016, the Company requested that each holder indicate its election to (i) redeem
its Note, (ii) convert its Note into the Company’s common stock or (iii) elect to convert its Note into shares of Preferred
Stock (the “Preferred Option”), in each case by August 15, 2016.
For
those holders electing the Preferred Option, each holder has received shares of the Preferred Stock on a 1 to 1 ratio to the number
of shares of the Company’s common stock which are then convertible under such holder’s respective Note. With respect
to interest on junior securities, dividends, distributions or liquidation preference, shares of Preferred Stock will rank senior
to shares of the Company’s common stock or other junior securities. Along with other terms customary for a class of convertible
preferred stock, the Preferred Stock will be convertible into shares of the Company’s common stock at the same conversion
price as the Notes (i.e., USD $0.25 per share), and will pay interest quarterly at a rate of six percent (6%). The Preferred Stock
will be convertible upon the election of the holder thereof. Shares of the Preferred Stock may be repurchased by the Company upon
30 days’ prior written notice, in whole or in part, for USD $3.50 per share, provided that during such notice period the
holder will continue to have the option and right to convert its shares of Preferred Stock into shares of the Company’s
common stock. Holders will also have a put option, allowing them to sell their shares of Preferred Stock back to the Company at
USD $0.25 per share, the Note conversion price.
Each
holder electing the Preferred Option was required to enter into an amendment to its Note, providing that the Note will be convertible
into the Preferred Stock rather than the Company’s common stock, and to thereafter elect to convert their Note, as amended,
into Preferred Stock. In addition, each holder entered into a lockup agreement, whereby the holder agreed not to offer, sell,
contract to sell, pledge, give, donate, transfer or otherwise dispose of (i) the shares of the Company’s common stock it
then holds, (ii) the shares of Preferred Stock obtained upon conversion of its Note, and (iii) the shares of the Company’s
common stock underlying the Preferred Stock, for a period of twelve (12) months following the date of such agreement. The Note
amendments, conversion to Preferred Stock and lockup agreement have been entered into on August 15, 2016. The Note amendments
were approved by a majority of the holders of the then outstanding Notes. See above for more details related to the results of
that offering
Note
9 Derivative Liabilities
The
fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following
management assumptions as:
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
(Unaudited)
|
|
(Audited)
|
Balance Beginning of period
|
|
$
|
24,083,313
|
|
|
$
|
24,157,837
|
|
Fair value mark to market adjustment - stock options
|
|
|
2,012,078
|
|
|
|
(268,098
|
)
|
Fair value at the commitment date for options granted
|
|
|
1,441,935
|
|
|
|
4,625,002
|
|
Fair value mark to market adjustment - convertible debt
|
|
|
8,482,239
|
|
|
|
42,664,939
|
|
Fair value mark to market adjustment - warrants
|
|
|
2,340,171
|
|
|
|
(1,972,844
|
)
|
Fair value at commitment date for warrants issued
|
|
|
1,480,126
|
|
|
|
5,053,387
|
|
Debt settlement on the derivative liability associated with interest
|
|
|
—
|
|
|
|
3,204,363
|
|
Reclassification of derivative liability to Additional Paid-in-Capital due to share reservation
|
|
|
(7,061,433
|
)
|
|
|
(50,431,559
|
)
|
Gain on Settlement of Debt
|
|
|
—
|
|
|
|
(2,949,714
|
)
|
Balance at end of period
|
|
$
|
32,778,429
|
|
|
$
|
24,083,313
|
|
The
Company recorded a change in the value of embedded derivative liabilities income/(expense) of $180,682 and $(12,834,488) for the
three-months and nine-months ended September 30, 2017, respectively; and $(3,183,183) and $(38,644,799) for the three-months and
nine-months ended September 30, 2016, respectively.
|
|
Commitment
Date
|
|
|
Recommitment
Date
|
|
Expected
dividends
|
|
|
0%
|
|
|
|
0%
|
|
Expected volatility
|
|
|
150%
|
|
|
|
150%
|
|
Expected term
|
|
|
2-10 years
|
|
|
|
1.16 – 9.56
years
|
|
Risk Free Interest
Rate
|
|
|
0.29%-2.61%
|
|
|
|
1.47%-2.33%
|
|
The
Company recorded derivative expense of $(663,033) and $(2,922,061) for the three-months and nine-months ended September 30, 2017
and $(2,446,918) and $(7,410,369) for the three-months and nine-months ended September 30, 2016, respectively.
The Company recorded a change in the value
of embedded derivative liabilities income/(expense) of $180,682 and ($3,183,183) for the three months ended September 30, 2017
and 2016, respectively, and ($12,834,488) and ($38,644,799) for the nine months ended September 30, 2017 and 2016, respectively.
The
Company recorded loss on disposition of debt as a result of conversion to the Company’s common stock and Preferred Stock
of $(1,260,000) during the nine-months ended September 30, 2017. The loss was a result of the conversion value of the shares received
exceeded the face value of the note.
Note
10 Debt Discount
The
Company recorded the debt discount to the extent of the gross proceeds raised, and expensed immediately the remaining fair value
of the derivative liability, as it exceeded the gross proceeds of the note.
Accumulated
amortization of derivative discount amounted to $4,402,773 as of September 30, 2017 and December 31, 2016.
The
Company recorded $-0- and $474,283 amortization of debt discount expense for the three-months and nine-months ended September
30 2016, respectively. The Debt Discount was fully amortized as of September 30, 2017 and no expense was incurred for the periods
presented.
Note
11 Debt Issue Costs
|
|
|
|
|
|
|
September 30, 2017
(Unaudited)
|
|
December 31, 2016
(Audited)
|
Debt Issuance Costs
|
|
$
|
316,797
|
|
|
$
|
316,797
|
|
Total
|
|
|
316,797
|
|
|
|
316,797
|
|
Less: Accumulated Amortization
|
|
|
(316,797
|
)
|
|
|
(316,797
|
)
|
Debt Issuance Costs net
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company recorded amortization expense of $-0- for the three-months and nine-months ended September 30, 2017 and $-0-, and $14,605
for three-months and nine-months ended September 30, 2016, respectively.
Note
12 GE Royalty Obligation
In
2011, the Company executed a Trademark Licensing Agreement with General Electric, which allows the Company the right to market
certain ceiling light and fan fixtures displaying the GE brand. The License Agreement imposes certain manufacturing and quality
control conditions that the Company must maintain in order to continue to use the GE brand.
The
License Agreement is nontransferable and cannot be sublicensed. Various termination clauses are applicable; however, none
were applicable as of the periods presented.
In
August 2014, the Company entered into a second amendment to the License Agreement pertaining to its royalty obligations. Under
the terms of the amendment, the Company agreed to pay a total of $12,000,000 by November 2018 for the rights assigned in the original
contract. In case the Company does not pay GE a total of at least $12,000,000 in cumulative royalties over the term of the License
Agreement, the difference between $12,000,000 and the amount of royalties actually paid to GE is owed in December 2018. As of
September 30, 2017, and December 31, 2016 there were $10,850,995 and $11,302,423 outstanding under the License Agreement, respectively.
Payments
are due quarterly based upon the prior quarters’ sales. The Company made payments of $95,412 and $451,429 for the three-months
and nine-months ended September 30, 2017, respectively, and $98,686 and $319,170 for the three-months and nine-months ended September
30, 2016, respectively.
The
License Agreement obligation will be paid from sales of GE branded product subject to the following repayment schedule:
Net Sales in Contract Year
|
|
Percentage of Contract Year Net Sales owed to GE
|
$0 $50,000,000
|
|
|
7
|
%
|
$50,000,001 $100,000,000
|
|
|
6
|
%
|
$100,000,000+
|
|
|
5
|
%
|
The
Company has limited operating history and does not have the ability to estimate the sales of GE branded product, the liability
is classified as long-term. As sales are recognized, the Company will estimate the portion it expects to pay in the current year
and classify as current.
Note
13 Stockholders Deficit
For
the nine-months ended September 30, 2017 and twelve-months ended December 31, 2016, the Company issued the following common stock:
Transaction
Type
|
|
|
|
|
Quantity
(shares)
|
|
|
Valuation
($)
|
|
|
Range
of Value
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
Equity Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock issued Board of Directors Compensation
|
|
|
(1)
|
|
|
|
62,000
|
|
|
$
|
42,000
|
|
|
|
0.60-1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
per Agreement and Waiver and Agreement to Convert
|
|
|
(2)
|
|
|
|
1,790,092
|
|
|
|
822,524
|
|
|
|
0.25-.625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Offering
|
|
|
(3)
|
|
|
|
3,155,000
|
|
|
|
7,538,000
|
|
|
|
1.00-2.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Award
|
|
|
(4)
|
|
|
|
25,000
|
|
|
|
15,000
|
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Issued
for Services
|
|
|
(5)
|
|
|
|
300,000
|
|
|
|
136,250
|
|
|
|
0.25-1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Issued
for Conversion of Debt
|
|
|
(6)
|
|
|
|
443,156
|
|
|
|
110,789
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
2016 Equity Transactions
|
|
|
|
|
|
|
5,775,248
|
|
|
$
|
8,664,563
|
|
|
|
0.25-2.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
Equity Transactions (through September 30, 2017)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Offering
|
|
|
(7)
|
|
|
|
69,667
|
|
|
$
|
209,000
|
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Issued
per Exercise of Warrants
|
|
|
(8)
|
|
|
|
1,666,667
|
|
|
|
5,000,000
|
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Issued
per Exercise of Options
|
|
|
(9)
|
|
|
|
30,000
|
|
|
|
78,000
|
|
|
|
2.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
2017 Equity Transactions (through September 30, 2017)
|
|
|
|
|
|
|
1,766,334
|
|
|
$
|
5,287,000
|
|
|
$
|
2.60-3.00
|
|
The
following is a more detailed description of the Company’s stock issuance from the table above:
|
(1)
|
Shares Issued
to Board of Directors
|
The
Company appointed a new director in November 2015. Pursuant to the Company’s Director Compensation Policy (the “Director
Compensation Policy”), the Company issued the director 50,000 shares of the its common stock valued at $0.60 per share in
connection with the director’s appointment. The stock award was granted on November 15, 2015, but the shares were not issued
by the Company until February 2016. In January 2016, this director agreed to serve as the Company’s Audit Committee Chair,
and the Company issued the director 12,000 shares of the its common stock valued at $1.00 per share as compensation for the additional
responsibilities, pursuant to the Director Compensation Policy.
|
(2)
|
Shares Issued
in Connection with the Notes or Agreements to Convert
|
In
connection with the Agreement and Waiver and Agreement to Convert, as of the twelve-months ended December 31, 2016, the Company
issued an additional 2,343,191 shares of its common stock as payment for Additional Interest, Interest Due, Filing Default Damages
and Effectiveness Default Damages, representing payment to Investors of $1,210,798. Of this amount, $625,000 represents prior
year stock awards/grants that were not issued until 2016.
|
(3)
|
Shares Issued
in Connection with Offering
|
On
February 19, 2016, the Company completed a second closing of its offering of shares of its common stock, which first closed on
December 24, 2015, representing aggregate gross proceeds to the Company of $300,000, and thereafter issued 300,000 shares of its
common stock.
In
April 2016, the Company completed an offering of 2,000,000 shares of its common stock at an offering price of $2.50 per share,
and 1,666,667 in warrants having a conversion price of $3.00 per share.
In
May 2016, the Company completed an offering of 675,000 shares of its common stock at an offering price of $2.60 per share, and
1,350,000 of warrants having conversion price between $3.00 and $3.50 over the next three anniversary dates.
In
July 2016, the Company completed an offering of 30,000 shares of its common stock at an offering price of $2.60 per share, and
an additional 150,000 shares of its common stock at $2.70 per share in two separate offerings.
|
(4)
|
Shares Issued
Pursuant to Stock Awards.
|
In
September 2016, the Company issued 25,000 shares of its common stock in stock awards granted on November 15, 2015, at $0.60 per
share.
|
(5)
|
Shares Issued
for Services
|
In
September 2016, the Company issued 300,000 shares of its common stock representing $136,250 in services received in 2015. The
share conversions were in a range of valuations between $0.25 and $1.00 per share, based on the dates of the agreements and when
the services were rendered.
|
(6)
|
Shares Issued
in Conjunction with Retirement of Debt
|
In
accordance with the Notes, the Company issued 443,156 shares of its common stock for the retirement of debt during the year-ended
December 31, 2016.
|
(7)
|
Shares Issued
for Common Stock
|
During
the nine-months ended September 30, 2017, the Company received gross proceeds of $209,000 from the issuance of 69,667 shares of
its common stock to three individuals at $3.00 per share. In connection therewith, the Company issued five-year options to purchase
up to 315,000 shares of its common stock at an exercise price of $3.00 per share.
|
(8)
|
Shares Issued
Pursuant to Warrants Exercised
|
In
March 2017, the Company issued 1,666,667 shares of its common stock upon exercise in full of a warrant having an exercise price
of $3.00 per share, and the Company received gross proceeds of $5,000,000.
|
(9)
|
Shares Issued
Pursuant to Options Exercised
|
In
April 2017, the Company issued 30,000 shares of its common stock upon exercise in full of an option having an exercise price of
$2.60 per share, and the Company received gross proceeds of $78,000.
The
following is a summary of the Company’s Preferred Stock Activity:
Transaction
Type
|
|
Quantity
|
|
|
Valuation
|
|
|
Range
of
Value per
Share
|
|
|
|
|
|
|
|
|
|
|
|
2016
Preferred Stock Transactions
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock Issued per August 2016 Election
|
|
|
13,056,932
|
|
|
$
|
44,393,569
|
|
|
$
|
3.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
2016 Preferred Stock Transactions
|
|
|
13,056,932
|
|
|
$
|
44,393,569
|
|
|
$
|
3.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
Preferred Stock Transactions (through September 30, 2017)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock Issued per August 2016 Election
|
|
|
400,000
|
|
|
$
|
1,360,000
|
|
|
$
|
3.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
2017 Preferred Stock Transactions (through September 30, 2017)
|
|
|
400,000
|
|
|
$
|
1,360,000
|
|
|
|
3.40
|
|
In
accordance with the August 2016 Elections (see Note 8(B)), the Company has issued 13,456,932 shares of 6% Preferred Stock in exchange
for Notes having a principal balance of $3,364,234. The Preferred Stock will be convertible upon the election of the holder thereof.
Shares of the Preferred Stock may be repurchased by the Company upon 30 days’ prior written notice, in whole or in part,
for USD $3.50 per share, provided that during such notice period the holder will continue to have the option and right to convert
its shares of Preferred Stock into shares of the Company’s common stock. Holders also have a put option, allowing them to
sell their shares of Preferred Stock back to the Company at USD $0.25 per share, the Note conversion price, and therefore the
stock is classified as Mezzanine equity rather than permanent equity. The stock was valued based upon the value of shares of the
Company’s common stock publicly traded nearest the conversion date. During the nine-months ended September 30, 2017 the
Company paid dividends in the amount of $119,276 to the Preferred Stock shareholders.
The
following is a summary of the Company’s stock option activity:
|
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
Average
Remaining
Contractual Life
|
|
|
Aggregate
Intrinsic
|
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
(In Years)
|
|
|
Value
|
|
Balance, December 31, 2015 (Audited)
|
|
|
|
200,000
|
|
|
$
|
0.375
|
|
|
|
2.68
|
|
|
$
|
525,000
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Granted
|
|
|
|
1,150,000
|
|
|
|
0.835
|
|
|
|
8.88
|
|
|
|
2,490,000
|
|
Forfeited/Cancelled
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance, December 31, 2016 (Audited)
|
|
|
|
1,350,000
|
|
|
$
|
0.767
|
|
|
|
7.81
|
|
|
$
|
3,015,000
|
|
Exercised
|
|
|
|
(30,000)
|
|
|
|
2.60
|
|
|
|
—
|
|
|
|
(78,000)
|
|
Granted
|
|
|
|
3,555,000
|
|
|
|
1.307
|
|
|
|
7.47
|
|
|
|
6,230,250
|
|
Forfeited/Cancelled
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance, September 30, 2017 (Unaudited)
|
|
|
|
4,875,000
|
|
|
$
|
1.150
|
|
|
|
7.40
|
|
|
$
|
9,167,250
|
|
The
Company has issued options, some of which have vested, to purchase shares of common stock through our Incentive Plan. The Company
has issued options to purchase, in the aggregate, up to 4,875,000 shares of common stock options, in conjunction with our Incentive
Plan, agreements or otherwise. The Company has reserved 4,140,000 shares with the transfer agent for the future issuance for shares
associated with common stock options issued. As a result, 735,000 shares have not been reserved and are included in the calculation
of derivative liability (See Note 9).
During the nine months ended September
30, 2017, options to purchase up to 2,710,000 shares of our common stock were issued in lieu of services to non-employees, in connection
with our Incentive Plan. These options are for ten years, have an average vesting period between zero and three years, and have
strike prices ranging between $0.60 and $4.00. These options were issued in connection with grants that were made on November 15,
2015 and April 19, 2017.
The
following is a summary of the Company’s stock warrant activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Warrants
|
|
|
Weighted
Average Exercise
Price
|
|
|
Weighted Average Remaining Contractual Life (in Years)
|
|
Balance, December 31, 2015 (Audited)
|
|
|
|
9,728,984
|
|
|
$
|
0.289
|
|
|
|
1.5
|
|
Issued
|
|
|
|
3,826,667
|
|
|
|
3.28
|
|
|
|
1.6
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cancelled/Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance, December 31, 2016 (Audited)
|
|
|
|
13,555,651
|
|
|
$
|
0.72
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
60,000
|
|
|
|
3.00
|
|
|
|
2.7
|
|
Exercised
|
|
|
|
(1,666,667)
|
|
|
|
(3.00)
|
|
|
|
—
|
|
Cancelled/Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance, September 30, 2017 (Unaudited)
|
|
|
|
11,948,984
|
|
|
$
|
0.83
|
|
|
|
1
.7
|
|
During 2016, the Company issued warrants
to three (3) different groups totaling 3,826,667. These warrants had lives ranging from one to five years at strike prices between
$3.00 and $3.50 per share.
In
March 2017, 1,666,667 warrants were exercised at $3.00 per share.
In
May 2017, 60,000 warrants were issued at price between $3.00 and $3.50 per share contingent on the date of exercise.
|
(E)
|
2015 Stock Incentive
Plan
|
On
April 27, 2015, the Board approved the Company’s 2015 Stock Incentive Plan (the “Incentive Plan”). Under the
Incentive Plan, the Board has the sole authority to implement, interpret, and/or administer the Incentive Plan unless the Board
delegates all or any portion of its authority to implement, interpret, and/or administer the Incentive Plan to a committee of
the Board, or (ii) the authority to grant and administer awards under the Incentive Plan to an officer of the Company. The Incentive
Plan relates to the issuance of up to 5,000,000 shares of the Company’s common stock, subject to adjustment, and shall be
effective for ten (10) years, unless earlier terminated. Certain options to be granted to employees under the Incentive Plan are
intended to qualify as Incentive Stock Options (“ISOs”) pursuant to Section 422 of the Internal Revenue Code of 1986,
as amended, while other options granted under the Incentive Plan will be nonqualified options not intended to qualify as Incentive
Stock Options ISOs (“Nonqualified Options”), either or both as provided in the agreements evidencing the options described.
Note
14 Commitments
On September 20, 2017, the Company
entered into an operating lease for its Georgia location. The new lease commenced on July 1, 2017 and expires on September 30,
2020. We recognize rent expense under such arrangements on a straight-line basis.
On September 27, 2017 the Company entered into
a residential lease near the Florida office for one of its employees. The lease is for a term of 12 months and carries rent of
$2,000 per month. The rent payments are $2,000 per months and will reduce travel costs for the Company.
The minimum rent obligations are approximately
as follows:
|
|
|
Minimum
|
|
Year
|
|
|
Obligation
|
|
2017
|
|
|
$
|
30.764
|
|
2018
|
|
|
|
110,180
|
|
2019
|
|
|
|
78,467
|
|
2020
|
|
|
|
60,320
|
|
|
|
|
$
|
279,731
|
|
|
(B)
|
Chief Executive
Officer Agreement
|
In
November 2014, the Company entered into an employment agreement with John Campi, its Chief Executive Officer. In addition to salary,
the agreement provided for the issuance of 750,000 restricted shares of the Company’s common stock to him, which vested
and were issued as follows: 250,000 shares after the first 6 months of employment and 500,000 additional shares at December 31,
2015. Under terms of the agreement the executive would receive additional compensation in the form of stock options to purchase
shares of Company stock equal to 0.5% of quarterly net income. The strike price of the options will be established at the time
of the grant. The options will vest in twelve months and expire after sixty months. In addition to the stock options compensation,
the executive will receive cash compensation equal to 0.5% of annual sales up to $20 million and 0.25% for annual sales $20 million
and 3% of annual net income. The 750,000 shares were issued in 2016 and valued at $0.625 per share.
On
September 1, 2016, the Company entered into a new employment agreement with its Chief Executive Officer. The agreement provides
for a base salary of $150,000; 120,000 shares of The Company’s common stock in a “Sign on Bonus” which
will vest December 31, 2017; 0.25% of annual gross sales and 3% of annual adjusted gross income in cash compensation and
0.50% of quarterly net income in options, the strike price to be determined at the time of grant. Such options will expire 5 years
after issuance.
For
the three-months and nine-months ended September 30, 2017 Mr. Campi earned approximately $2,870 and $13,860, respectively, and
for the three-months and nine-months ended September 30, 2016, he earned $22 and $17,244, respectively, under this and the predecessor
agreement associated with performance pay as noted above.
|
(C)
|
Executive Chairman
Agreement
|
The
Company entered into a three-year consulting agreement with a director which was terminated effective September 1, 2016, and carries
an annual payment of $150,000 cash, stock or five-year options equal to 0.5% of the Company’s annual net sales. For the
three-months and nine-months ended September 30, 2017, Mr. Kohen earned approximately $5,739 and $27,720, respectively, and for
the three-months and nine-months ended September 30, 2016, he earned $22 and $17,244, respectively, under this and the predecessor
agreement associated with performance pay as noted above. No stock or options have been issued in association with this agreement.
On
September 1, 2016, the Company modified the above consulting agreement. The compensation was changed to $250,000 per annum, an
annual grant of 340,000 shares of the Company’s common stock, which vest in its entirety January 1, 2019, and stock options
equal to 0.50% of the Company’s gross revenue with five-year vesting. In addition, the Chairman was granted a “Sign
on Bonus” of 120,000 shares of the Company’s common stock which will vest January 1, 2020, and a supplemental bonus
of options which is tied to the performance of the Company’s common stock.
|
(D)
|
Employee Agreement
– President
|
On
August 17, 2016, the Company entered into an Employment Agreement with Mark Wells, its President. Mr. Wells receives a salary
of $250,000; 1,025,000 shares in the Company’s common stock which will vest in its entirety January 1, 2019; 0.25%
of the Company’s net revenue and a “Sign-on Bonus” of 120,000 shares of the Company’s common stock which
vests January 1, 2018. Mr. Wells earned $2,870 and $13,860 for the three-months and nine-months ended September 30, 2017, respectively,
under this employment agreement associated with performance pay as noted above.
|
(E)
|
Employee Agreement
– Chief Operating Officer
|
Effective
July 1, 2016, the Company entered into an Executive Employment Agreement with Patricia Barron, its Chief Operations Officer. Ms.
Barron receives a base salary of $120,000 per year and incentive compensation equal to 0.25% of the Company’s net revenue
paid in cash. Ms. Barron earned approximately $2,870 and $13,860 for the three-months and nine-months ended September 30, 2017,
respectively and for the three-months and nine-months ended September 30, 2016, she earned $8,799 and $8,799 respectively, associated
with performance pay as noted above.
Note
15 Subsequent Events
On October 2, 2017 the Company entered into
a residential lease near the Florida offices for Mr Wells, President for a period of 12 months. The rent payments are $2,000 per
month and will reduce travel costs for the executive.
On August 30, 2017, the Company invited
holders of Preferred Stock to (a) exercise their one or more Note Offering Warrants in full, on a cashless basis based on an
exercise price of $5.00 per share, and (b) receive new warrants to purchase a number of shares of Common Stock which is equal
to 10% of the number of shares of Preferred Stock held by such holder (or the number of shares of Common Stock that were
issuable upon conversion of the principal balance of a holder’s Note(s) prior to conversion), at an exercise price of
$3.30 per share (the “New Warrants”). In exchange, the Company asked the holders to (y) lock-up their shares of
Common Stock or derivatives thereof for one year and (z) waive their rights, if any, under the one or more Note Offering
Registration Rights Agreements. As of November 13, 2017, the Company has received notices to exercise Note Offering Warrants
from 23 Notes Offering Investors. Pursuant to such notices, the Note Offering Holders have elected to exercise their Note
Offering Warrants, which equal an aggregate of 4,467,100 shares of Common Stock, into 4,132,068 shares of Common Stock on a
cashless basis. The Company has issued, or is in the process of issuing, all 4,132,068 shares of Common Stock. In addition,
pursuant to the foregoing, the Company has issued, or is in the process of issuing, New Warrants exercisable into, in the
aggregate, up to 838,040 shares of Common Stock at an exercise price of $3.30 per share.