NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2018 AND 2017
NOTE
1 – DESCRIPTION OF BUSINESS
Sports
Field Holdings, Inc. (“the Company”, “Sports Field Holdings”, “we”, “our”, or
“us”) is a Nevada corporation engaged in product development, engineering, manufacturing, and the construction, design
and building of athletic facilities, as well as supplying its own proprietary high end synthetic turf products to the sports industry.
The Company is headquartered at 1020 Cedar Ave, Suite 200, St. Charles, IL 60174.
NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements and related notes have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”).
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of Sports Field Holdings, Inc. and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ
from those estimates. The Company’s significant estimates and assumptions include the accounts receivable allowance for
doubtful accounts, warranty reserve, percentage of completion revenue recognition method, assumptions used in the fair value of
stock-based compensation, valuation of derivative liabilities and the valuation allowance relating to the Company’s deferred
tax assets.
Revenues
and Cost Recognition
Revenue
is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which
the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that
an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s)
with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate
the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies
a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect
the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception,
once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within
each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct.
The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation
when (or as) the performance obligation is satisfied. Sales, value add, and other taxes collected on behalf of third parties are
excluded from revenue.
The
Company generates revenue from fixed-price contracts, where revenue is recognized over time as work is completed because of the
continuous transfer of control to the customer (typically using an input measure such as costs incurred to date relative to total
estimated costs at completion to measure progress). Costs to obtain contracts are generally not significant and are expensed in
the period incurred. The Company has determined that these construction projects provide a distinct service and therefore qualify
as one performance obligation. Revenue from fixed-price contracts provide for a fixed amount of revenue for the entire project,
and any changes to the scope of the project is addressed in a change order, which is treated as a modification of the original
contract.
To
determine the proper revenue recognition method for contracts, the Company evaluates whether two or more contracts should be combined
and accounted for as one single performance obligation and whether a single contract should be accounted for as more than one
performance obligation. ASU 2014-09 defines a performance obligation as a contractual promise to transfer a distinct good or service
to a customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue
when, or as, the performance obligation is satisfied. The Company’s evaluation requires judgment and the decision to combine
a group of contracts or separate a contract into multiple performance obligations could change the amount of revenue and profit
recorded in a given period. To date, all of the Company’s contracts have a single performance obligation, as the promise
to transfer the individual goods or services is not separately identifiable from other promises in the contract and, therefore,
is not distinct. However, if in the future the Company has contracts with multiple performance obligations, then the Company will
allocate the contract’s transaction price to each performance obligation using the observable standalone selling price,
if available, or alternatively the Company’s best estimate of the standalone selling price of each distinct performance
obligation in the contract.
Accounting
for contracts involves the use of various techniques to estimate total transaction price and costs. For such contracts, transaction
price, estimated cost at completion and total costs incurred to date are used to calculate revenue earned. Unforeseen events and
circumstances can alter the estimate of the costs and potential profit associated with a particular contract. Total estimated
costs, and thus contract revenue and income, can be impacted by changes in productivity, scheduling, the unit cost of labor, subcontracts,
materials and equipment. Additionally, external factors such as weather, client needs, client delays in providing permits and
approvals, labor availability, governmental regulation and politics may affect the progress of a project’s completion and
thus the timing of revenue recognition. To the extent that original cost estimates are modified, estimated costs to complete increase,
delivery schedules are delayed, or progress under a contract is otherwise impeded, cash flow, revenue recognition and profitability
from a particular contract may be adversely affected.
The
nature of the Company’s contracts do not have variable consideration, such as liquidated damages, volume discounts, performance
bonuses, incentive fees, and other terms that can either increase or decrease the transaction price. In contrast, the contracts
are often modified to account for changes in contract specifications or requirements. Costs associated with contract modifications
are included in the estimated costs to complete the contracts and are treated as project costs when incurred. In most instances,
contract modifications are for goods or services that are not distinct, and, therefore, are accounted for as part of the existing
contract. The effect of a contract modification on the transaction price, and the measure of progress for the performance obligation
to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. In some cases, settlement of contract
modifications may not occur until after completion of work under the contract.
As
a significant change in one or more of these estimates could affect the profitability of its contracts, the Company reviews and
updates its contract-related estimates regularly. The Company recognizes adjustments in estimated profit on contracts under the
cumulative catch-up method. Under this method, the cumulative impact of the profit adjustment is recognized in the period the
adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate.
If at any time the estimate of contract profitability indicates an anticipated loss on a contract, the projected loss is recognized
in full in the period it is identified and recognized as an “Provision for Estimated Losses on Uncompleted Contracts”
which is included in “Contract liabilities” on the Condensed Consolidated Balance Sheets. For contract revenue recognized
over time, the Provision for Estimated Losses on Uncompleted Contracts is adjusted so that the gross profit for the contract remains
zero in future periods.
The
Company estimates the collectability of contract amounts at the same time that it estimates project costs. If the Company anticipates
that there may be issues associated with the collectability of the full amount calculated as the transaction price, the Company
may reduce the amount recognized as revenue to reflect the uncertainty associated with realization of the eventual cash collection.
The
timing of when the Company bills its customers is generally dependent upon agreed-upon contractual terms, milestone billings based
on the completion of certain phases of the work, or when services are provided. Sometimes, billing occurs subsequent to revenue
recognition, resulting in unbilled revenue, which is a contract asset. However, the Company sometimes receives advances or deposits
from its customers before revenue is recognized, resulting in deferred revenue, which is a contract liability.
For
the years ended December 31, 2018 and 2017, revenues from contracts with customers is summarized by product category were as follows:
|
|
|
December
31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Product
Category
|
|
|
|
|
|
|
|
|
|
Athletic
fields and tracks
|
|
$
|
5,016,929
|
|
|
$
|
4,889,657
|
|
|
Vertical
construction
|
|
|
1,582,534
|
|
|
|
2,156,235
|
|
|
Totals
|
|
$
|
6,599,463
|
|
|
$
|
7,045,892
|
|
“Athletic
fields and tracks” relates to the design, engineering and construction of outdoor playing fields, running tracks and related
works, stadiums, scoreboards, dug outs, base and drainage work, and similar projects, while “Vertical construction”
relates to the design, engineering and construction of an entire facility such as a dormitory, athletics facility, gymnasium,
or a similar general construction project.
Inventory
Inventory
is stated at the lower of cost (first-in, first out) or net realizable value and consists primarily of construction materials.
Property,
Plant and Equipment
Property,
plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated
using the straight-line method over the estimated useful lives of the assets, which generally range from 3 to 5 years. Leasehold
improvements are amortized over the remaining life of the lease. Gains and losses from the retirement or disposition of property
and equipment are included in operations in the period incurred. Maintenance and repairs are expensed as incurred.
Income
Taxes
Deferred
income tax assets and liabilities are determined based on the estimated future tax effects of net operating loss and credit carry-forwards
and temporary differences between the tax basis of assets and liabilities and their respective financial reporting amounts measured
at the current enacted tax rates. The differences relate primarily to net operating loss carryforward from date of acquisition
and to the use of the cash basis of accounting for income tax purposes. The Company records an estimated valuation allowance on
its deferred income tax assets if it is more likely than not that these deferred income tax assets will not be realized.
The
Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will
be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized
in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than
50% likelihood of being realized upon ultimate settlement. The Company has not recorded any unrecognized tax benefits.
Stock-Based
Compensation
The
Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award.
For employees, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is
generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. The fair value
amount is then recognized over the period during which services are required to be provided in exchange for the award, usually
the vesting period. Awards granted to directors are treated on the same basis as awards granted to employees.
Concentrations
of Credit Risk
Financial
instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash
and cash equivalents. The Company places its cash and temporary cash investments with credit quality institutions. At times, such
amounts may be in excess of the FDIC insurance limit.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require
collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the
outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if
receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management.
The maximum accounting loss from the credit risk associated with accounts receivable is the amount of the receivable recorded,
which is the face amount of the receivable, net of the allowance for doubtful accounts. As of December 31, 2018 and 2017, the
Company’s accounts receivable balance was $244,801 and $53,229, respectively, and the allowance for doubtful
accounts is $0 in each period.
Research
and Development
Research
and development expenses are charged to operations as incurred. For the years ended December 31, 2018 and 2017, the Company incurred
research and development expenses of $1,179 and $1,880, respectively.
Warranty
Costs
The
Company generally provides a warranty on the products installed for up to 8 years with certain limitations and exclusions based
upon the manufacturer’s product warranty. The Company’s subcontractors provide a one (1) year warranty to the Company
against defects in material or workmanship. The Company has accrued a warranty reserve of $50,000 and $50,000 as of December 31,
2018 and 2017, respectively which is included in accounts payable and accrued expenses on the consolidated balance sheets. See
Note 4 for warranty expenses incurred during the year ended December 31, 2018 and 2017.
Fair
Value of Financial Instruments
The
Company follows ASC 820-10 of the FASB Accounting Standards Codification to measure the fair value of its financial instruments
and disclosures about fair value of its financial instruments. ASC 820-10 establishes a framework for measuring fair value in
accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value
measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820-10 establishes
a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.
The three (3) levels of fair value hierarchy defined by ASC 820-10 are described below:
|
Level
1
|
|
Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
Level
2
|
|
Pricing
inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
|
|
|
|
|
|
Level
3
|
|
Pricing
inputs that are generally unobservable inputs and not corroborated by market data.
|
Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is unobservable.
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within
more than one level described above, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
The
carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, inventory, prepaid
expenses and other current assets, accounts payable and accrued expenses, and certain notes payable approximate their fair values
because of the short maturity of these instruments.
Transactions
involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of
competitive, free-market dealings may not exist.
The
Company’s Level 3 financial liabilities consist of the derivative conversion feature on a convertible note issued in 2016.
The Company valued the conversion features using a Black Scholes model. These models incorporate transaction details such as the
Company’s stock price, contractual terms, maturity, risk free rates, and volatility as of the date of issuance and each
balance sheet date.
The
Company utilized the following management assumptions in valuing the derivative conversion feature at December 31, 2018 and 2017:
|
|
|
2018
|
|
|
2017
|
|
|
Exercise
price
|
|
$
|
0.38
|
|
|
$
|
0.23
|
|
|
Expected
dividends
|
|
|
0%
|
|
|
|
0
%
|
|
|
Expected
volatility
|
|
|
43.06%
|
|
|
|
45.51%
|
|
|
Risk
fee interest rate
|
|
|
2.63%
|
|
|
|
1.31%
|
|
|
Term
|
|
|
1
year
|
|
|
|
1
year
|
|
Fair
Value of Financial Assets and Liabilities Measured on a Recurring Basis
The
Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative
liability at every reporting period and recognizes gains or losses in the statements of operations that are attributable to the
change in the fair value of the derivative liability.
Financial
assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the balance sheets as
follows:
|
|
|
Carrying
|
|
|
Fair
Value Measurement Using
|
|
|
As
of December 31, 2018
|
|
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Derivative
conversion feature on convertible note
|
|
$
|
131,100
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
131,100
|
|
|
$
|
131,100
|
|
|
|
|
Carrying
|
|
|
Fair
Value Measurement Using
|
|
|
As
of December 31, 2017
|
|
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Derivative
conversion feature on convertible note
|
|
$
|
84,200
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
84,200
|
|
|
$
|
84,200
|
|
The
unobservable level 3 inputs used by the Company was the expected volatility assumption used in the option pricing model. Expected
volatility is based on the historical stock price volatility of comparable companies common stock, as our stock does not have
sufficient historical trading activity.
The
table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and
liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period December
31, 2017 through December 31, 2018:
|
|
|
Fair
Value
Measurement Using
Level 3 Inputs
|
|
|
|
|
Derivative
conversion feature
on convertible note
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2016
|
|
|
204,300
|
|
|
|
204,300
|
|
|
Purchases,
issuances, reassessments and settlements
|
|
|
-
|
|
|
|
-
|
|
|
Change
in fair value
|
|
|
(120,100
|
)
|
|
|
(120,100
|
)
|
|
Balance,
December 31, 2017
|
|
$
|
84,200
|
|
|
$
|
84,200
|
|
|
Purchases,
issuances, reassessments and settlements
|
|
|
-
|
|
|
|
-
|
|
|
Change
in fair value
|
|
|
46,900
|
|
|
|
46,900
|
|
|
Balance,
December 31, 2018
|
|
$
|
131,100
|
|
|
$
|
131,100
|
|
Changes
in the unobservable input values could potentially cause material changes in the fair value of the Company’s Level 3 financial
instruments. The significant unobservable inputs used in the fair value measurements is the expected volatility assumption. A
significant increase (decrease) in the expected volatility assumption could potentially result in a higher (lower) fair value
measurement.
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 intrinsic value of the BCF would be recorded as a debt discount against the face amount of the respective
debt instrument. The debt discount attributable to the BCF is amortized over the period from issuance to the date that the debt
matures.
Derivative
Instruments
The
Company evaluates its convertible debt, warrants or other contracts to determine if those contracts or embedded components of
those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-15. The result of this accounting
treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability.
In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations
as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at
the conversion date and then that fair value is reclassified to equity.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject
to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date.
Net
Loss Per Common Share
The
Company computes basic net loss per share by dividing net loss per share available to common stockholders by the weighted average
number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings
per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive
securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. The
computation of basic and diluted loss per share excludes potentially dilutive securities because their inclusion would be anti-dilutive.
Anti-dilutive securities excluded from the computation of basic and diluted net loss per share for the years ended December 31,
2018 and 2017, respectively, are as follows:
|
|
|
December
31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Warrants
to purchase common stock
|
|
|
679,588
|
|
|
|
679,588
|
|
|
Options
to purchase common stock
|
|
|
1,697,500
|
|
|
|
1,297,500
|
|
|
Unvested
restricted common shares
|
|
|
-
|
|
|
|
-
|
|
|
Convertible
Notes
|
|
|
828,233
|
|
|
|
2,693,515
|
|
|
Totals
|
|
|
3,205,321
|
|
|
|
4,670,603
|
|
Significant
Customers
The
Company’s business focuses on securing a smaller number of high quality, highly profitable projects, which sometimes results
in having a concentration of sales and accounts receivable among a few customers. This concentration is customary among the design
and build industry for a company of our size. As we continue to grow and are awarded more projects, this concentration will continue
to decrease.
For
the year ended December 31, 2018, the Company had 3 customers that represented 33%, 31% and 25% of the total
revenue; and for the year ended December 31, 2017, the Company had two customers that represented 47 % and 44% of the total
revenue.
Recent
Accounting Pronouncements
In
May 2014, the FASB issued accounting standard update (“ASU”) No. 2014-09, “Revenue from Contracts
with Customers (Topic 606)” (“ASU 2014-09”). The standard’s core principle is that a company
will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need
to use more judgment and make more estimates than under previous guidance. This may include identifying performance obligations
in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction
price to each separate performance obligation. In July 2015, the FASB approved the proposal to defer the effective date of ASU
2014-09 standard by one year. Early adoption was permitted after December 15, 2016, and the standard became effective for public
entities for annual reporting periods beginning after December 15, 2017 and interim periods therein. In 2016, the FASB issued
final amendments to clarify the implementation guidance for principal versus agent considerations (ASU No. 2016-08), accounting
for licenses of intellectual property and identifying performance obligations (ASU No. 2016-10), narrow-scope improvements and
practical expedients (ASU No. 2016-12) and technical corrections and improvements to ASU 2014-09 (ASU No. 2016-20) in its
new revenue standard. The Company has performed a review of the requirements of the new revenue standard and is monitoring
the activity of the FASB and the transition resource group as it relates to specific interpretive guidance. The Company reviewed
customer contracts, applied the five-step model of the new standard to its contracts, and compared the results to
its current accounting practices. The Company has included disclosures required by the new standard and the adoption has
not had a material impact on the financial statements.
In
January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments — Overall: Recognition and Measurement
of Financial Assets and Financial Liabilities (“ASU 2016-01”). The standard addresses certain aspects of recognition,
measurement, presentation, and disclosure of financial instruments. This ASU is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2017. Early adoption is not permitted with the exception of certain provisions
related to the presentation of other comprehensive income. The adoption of ASU 2016-01 did not have a material impact on
the Company’s financial position, results of operations or cash flows.
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), (“ASU 2016-02”) and issued subsequent amendments
to the initial guidance. This ASU requires an entity to recognize a right-of-use asset (“ROU”) and lease
liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend
on classification as a finance or operating lease. Similar modifications have been made to lessor accounting in-line with revenue
recognition guidance. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements.
Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense
recognition in the income statement. The new standard is effective for the Company on January 1, 2019, with early adoption permitted.
Entities are required to adopt ASC 842 using a modified retrospective transition method. Full retrospective transition
is prohibited. The guidance permits an entity to apply the standard’s transition provisions at either the beginning of the
earliest comparative period presented in the financial statements or the beginning of the period of adoption (i.e., on the effective
date). We expect to adopt the new standard on its effective date. While the Company continues to assess all of the effects of
adoption, it currently believes the most significant effects relate to: the recognition of new ROU assets and lease liabilities
on its balance sheet for real estate and equipment operating leases; and providing significant new disclosures about its leasing
activities. The Company does not expect a significant change in its leasing activities between now and adoption. The new standard
provides a number of optional practical expedients in transition. The Company expects to elect the ‘package of practical
expedients’, which permits it to not reassess under the new standard its prior conclusions about lease identification, lease
classification and initial direct costs. The Company does not expect to elect the use-of hindsight or the practical expedient
pertaining to land easements; the latter not being applicable to it.
On
adoption, the Company currently expects to recognize additional operating lease liabilities with corresponding ROU assets of the
same amount based on the present value of the remaining minimum rental payments for existing operating leases on its consolidated
balance sheets. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company currently
expects to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify,
the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities
for existing short-term leases of those assets in transition. The Company also currently expects to elect the practical expedient
to not separate lease and non-lease components for all of its leases, which will mean all consideration that is fixed, or in-substance
fixed, relating to the non-lease components will be captured as part of its lease components for balance sheet purposes.
In
August 2016, FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” (“ASU
2016-15”). ASU 2016-15 clarifies the presentation and classification of certain cash receipts and cash payments
in the statement of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods within those
years beginning after December 15, 2017. The Company adopted ASU 2016-15 effective January 1, 2018 and it did
not have a material impact on its financial statements.
In
January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 as part of the goodwill
impairment test. The amount of the impairment charge to be recognized would now be the amount by which the
carrying value exceeds the reporting unit’s fair value. The loss to be recognized cannot exceed
the amount of goodwill allocated to that reporting unit. The amendments in ASU 2017-04 are effective for annual or interim
goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company has elected to early adopt ASU 2017-04
as of January 1, 2018. The Company has applied the guidance related to ASU 2017-04 during its annual impairment test in the fourth
quarter of 2018. An entity should apply the amendments in this update on a prospective basis. An entity is required to disclose
the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first
annual period and in the interim period within the entity initially adopts the amendments in this update. The Company has elected
to early adopt this standard in performing their 2018 impairment test.
In
May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting
(“ASU 2017-09”) to clarify when to account for a change to the terms or conditions of a share-based payment award
as a modification. Under this new guidance, modification accounting is required if the fair value, vesting conditions, or classification
of the award changes as a result of the change in terms or conditions. ASU 2017-09 is effective for annual reporting periods beginning
after December 15, 2017, including interim reporting periods within each annual reporting period. The Company adopted ASU 2017-09
effective January 1, 2018 and it did not have a material impact on its financial statements.
In
June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (ASC 718): Improvements to Nonemployee Share-Based Payment
Accounting (“ASU 2018-07”). ASU 2018-07 simplifies the accounting for nonemployee share-based payment transactions.
Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The new standard
will become effective for the Company
beginning
January 1, 2019, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated
financial statements and disclosures.
In
August 2018, the FASB issue ASU 2018-13, Fair Value Measurement (ASC 820): Disclosure Framework-Changes to the Disclosure Requirements
for Fair Value Measurement, which modifies the disclosure requirements for fair value measurements by removing, modifying, or
adding certain disclosures. The new standard will become effective for the Company January 1, 2020, with early adoption permitted.
The Company is currently evaluating the impact
of this standard
on its consolidated financial statements and disclosures.
Subsequent
Events
Management
has evaluated subsequent events or transactions occurring through the date on which the financial statements were issued.
NOTE
3 – GOING CONCERN
Our
historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern.
As reflected in the accompanying consolidated financial statements,
as of December 31, 2018 the Company had a working capital deficit of $(7,756,792). Furthermore, the Company incurred net
losses of approximately $3.74 million for the year ended December 31, 2018 and $1.87 million for the year ended
December 31, 2017, and had an accumulated deficit of $19.6 million at December 31, 2018. Substantially all of our
accumulated deficit has resulted from losses incurred on construction projects, costs incurred in connection with our research
and development and general and administrative costs associated with our operations. These factors raise substantial doubt about
the Company’s ability to continue as a going concern through April 15, 2020.
We
expect that for the next 12 months, our operating cash burn will be approximately $2.3 million, excluding repayments of existing
debts in the aggregate amount of $1.8 million. Our cash requirements relate primarily to working capital needed to operate and
grow our business, including funding operating expenses and continued development and expansion of our products/services. Our
ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including
the timing and size of awarded contracts; the timing and amount of our operating expenses; the timing and costs of working capital
needs; the timing and costs of expanding our sales team and business development opportunities; the timing and costs of developing
a marketing program; the timing and costs of warranty and other post-implementation services; the timing and costs of hiring and
training construction and administrative staff; the extent to which our brand and construction services gain market acceptance;
the extent of our ongoing and any new research and development programs; and changes in our strategy or our planned activities.
We
have experienced and continue to experience negative cash flows from operations and we expect to continue to incur net losses
in the foreseeable future.
The
Company will require additional funding to finance the growth of its current and expected future operations as well as to achieve
its strategic objectives. The Company believes its current available cash along with anticipated revenues may be insufficient
to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable
to the Company, if at all. If we are not able to obtain financing when needed, we may be unable to carry out our business plan.
As a result, we may have to significantly limit our operations and our business, financial condition and results of operations
would be materially harmed.
To
date, we have funded our operational short-fall primarily through private offerings of common stock, convertible notes and promissory
notes, our line of credit and factoring of receivables.
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any
adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should
the Company be unable to continue as a going concern.
NOTE
4 – COSTS AND ESTIMATED EARNINGS ON CONTRACTS IN PROCESS
Following
is a summary of costs, billings, and estimated earnings on contracts in process as of December 31, 2018 and December 31, 2017:
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Costs
incurred on contracts in progress
|
|
$
|
19,817,415
|
|
|
$
|
12,289,931
|
|
|
Estimated
earnings (losses)
|
|
|
(378,469
|
)
|
|
|
(771,512
|
)
|
|
|
|
|
19,438,946
|
|
|
|
13,061,443
|
|
|
Less
billings to date
|
|
|
(
21,287,808
|
)
|
|
|
(14,078,163
|
)
|
|
|
|
$
|
(1,848,862
|
)
|
|
$
|
(1,016,720
|
)
|
The
above accounts are shown in the accompanying consolidated balance sheet under these captions at December 31, 2018 and December
31, 2017:
Contract
assets consist of the following:
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
Costs
& Estimated Earnings in Excess of Billings
|
|
$
|
363,396
|
|
|
$
|
204,610
|
|
|
Inventory
|
|
|
-
|
|
|
|
256,884
|
|
|
Contract
Assets
|
|
$
|
363,396
|
|
|
$
|
461,494
|
|
Contract
assets decrease by $98,098 compared to December 31, 2017 due primarily to a decrease increase in project activity during year
ended December 31, 2018.
Contract
liabilities consist of the following:
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
|
|
Billings
in Excess of Costs & Estimated Earnings
|
|
$
|
1,961,580
|
|
|
$
|
1,186,562
|
|
|
Provision
for Estimated Losses on Uncompleted Contracts
|
|
|
250,678
|
|
|
|
34,768
|
|
|
Contract
Liabilities
|
|
$
|
2,212,258
|
|
|
$
|
1,221,330
|
|
Contract
liabilities increased $990,928 compared to December 31, 2017 primarily due to higher Billings in Excess of Costs & Estimated
Earnings and increased project activity.
Warranty
Costs
During
the years ended December 31, 2018 and 2017 the Company incurred costs of $37,935 and $0, respectively. A substantial amount
of the warranty costs incurred during the year ended December 31, 2018 related to subgrade installation provided by a new subcontractor
used on a 2018 project. Since then, this subcontractor has not been used again. The Company has implemented policies and procedures
to avoid these costs in the future, including but not limited to product improvements, change of suppliers, new field personnel,
improved subcontractor agreements and product warranties, improved project and supply chain management and quality control. The
Company generally provides a warranty on the products installed for up to 8 years with certain limitations and exclusions based
upon the manufacturer’s product warranty. The Company’s subcontractors provide an 8 - year warranty to the Company
against defects in material or workmanship. The Company has accrued a warranty reserve of $50,000 and $50,000 as of December 31,
2018 and 2017, respectively which is included in accounts payable and accrued expenses on the consolidated balance sheets.
NOTE
5 – PROPERTY AND EQUIPMENT
Property,
plant and equipment consists of the following:
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Furniture
and equipment
|
|
$
|
20,278
|
|
|
$
|
20,278
|
|
|
Leasehold
improvements
|
|
|
24,292
|
|
|
|
-
|
|
|
Total
|
|
|
44,570
|
|
|
|
20,278
|
|
|
Less:
accumulated depreciation
|
|
|
(25,003
|
)
|
|
|
(14,140
|
)
|
|
|
|
$
|
19,567
|
|
|
$
|
6,138
|
|
Depreciation
expense for the years ended December 31, 2018 and 2017 was $10,863 and $4,055, respectively.
NOTE
6 – DEPOSITS
Deposits
at December 31, 2018 and 2017 were comprised of a $2,090 security deposit on an Illinois office lease (See Note 11).
NOTE
7 – DEBT
Convertible
Notes
On
May 7, 2015, the Company issued unsecured convertible promissory notes (each a “Note” and collectively the “Notes”)
in an aggregate principal amount of $450,000 to three accredited investors (collectively the “Note Holders”) through
a private placement. The notes pay interest equal to 9% of the principal amount of the notes, payable in one lump sum, and mature
on February 1, 2016 unless the notes are converted into common stock if the Company undertakes a qualified offering of securities
of at least $2,000,000 (the “Qualified Offering”). The principal of the notes is convertible into shares of common
stock at a conversion price that is the lower of $1.00 per share or the price per share offered in a Qualified Offering. In order
to induce the investors to invest in the notes, one of the Company’s shareholders assigned an aggregate of 45,000 shares
of his common stock to such investors. The Company recorded a $45,000 debt discount relating to the 45,000 shares of common stock
issued with an offsetting entry to additional paid in capital. The debt discount was amortized to interest expense over the contractual
life of the notes. As part of the transaction, we incurred placement agent fees of $22,500 and legal fees of $22,500, which were
recorded as debt issue costs and were amortized over the contractual life of the notes. The outstanding principal balance on the
notes at December 31, 2018 and 2017 was $522,667 including interest and penalty as disclosed below.
The
notes matured on February 1, 2016. On March 31, 2016, the Note Holders entered into a letter agreement whereby, effective as of
February 1, 2016, they waived any and all defaults that may or may not have occurred prior to the date thereof (the “First
Waiver”). As consideration for the First Waiver, the Company issued the Note Holders an aggregate of 45,000 shares of the
Company’s common stock. The principal amount on the Notes increased from $450,000 to $490,500 as the initial interest amount,
$40,500 as of February 1, 2016, was added to the principal amount of the Notes. The maturity date of the Notes was extended to
July 1, 2016 and the Notes shall pay interest as of February 1, 2016 at a rate of 9% per annum, payable in one lump sum on the
maturity date. In addition, on any note conversion date from February 1, 2016 through July 1, 2016, the Notes are convertible
into shares of the Company’s common stock at a conversion price of $1.00 per share. On any Note conversion after July 1,
2016, the Notes are convertible into shares of the Company’s common stock at a conversion price that is the lower of (i)
$1.00 per share and (ii) the volume-weighted average price for the last five trading days preceding the conversion date. All remaining
terms of the Notes remained the same.
Subsequent
to the First Waiver, the Notes matured on July 1, 2016. On August 9, 2016, one Note Holder entered into a letter agreement whereby,
effective as of August 1, 2016, they waived any and all defaults that may or may not have occurred prior to the date thereof (the
“Second Waiver”). As consideration for the Second Waiver, the Company issued the Note Holder an aggregate of 40,000
shares of the Company’s common stock and added $15,000 to the principal amount of the note. The principal amount on the
Note increased from $218,000 to $242,810 as the accrued interest amount, $9,810 as of August 1, 2016 and the aforementioned $15,000
of consideration, was added to the principal amount of the Note. The maturity date of the Note was extended to January 1, 2017
and the Note shall pay interest as of August 1, 2016 at a rate of 15% per annum, payable in one lump sum on the maturity date.
In addition, on any note conversion date from August 9, 2016 through January 1, 2017, the Note is convertible into shares of the
Company’s common stock at a conversion price of $1.00 per share. On any Note conversion after January 1, 2017, the Note
is convertible into shares of the Company’s common stock at a conversion price that is the lower of (i) $1.00 per share
and (ii) the volume-weighted average price for the last five trading days preceding the conversion date. All remaining terms of
the Note remained the same. On October 18, 2017, a letter was sent to the board of directors and the CEO of the Company on behalf
of the Note Holder, demanding that the Company repay its outstanding debt in the principal aggregate amount of $200,000, plus
accrued interest, issued pursuant to the Note.
On
July 25, 2018, this Note Holder and another filed (“Note Holder Plaintiffs”) suit against the Company in the New York
State Supreme Court, County of New York. The suit alleges that, as of July 24, 2018, the Company owes the plaintiffs a total amount
of $466,177, which is inclusive of principal and interest. The plaintiffs filed a Motion for Summary Judgment in Lieu of Complaint
and asked that judgment be entered against the Company.
As
of November 8, 2018, the outstanding principal was $351,810 and accrued unpaid interest as $124,524, totaling $476,334.
On November 8, 2018, the Note Holder Plaintiffs and the Company executed a Settlement Agreement pursuant to which the Note Holder
Plaintiffs agreed to a full release and wavier of their claims, including but not limited to, dismissal with prejudice of the
suit in exchange for (a) an initial payment of $250,000, and (b) promissory notes in the total amount of $150,000, payable over
twenty-four (24) months, with interest at nine percent (9%) per annum. As security for the two promissory notes, the Company will
place 850,000 shares of common stock into an escrow account (“Escrow”). In the event the Company does not make timely
payments under the promissory notes, upon written notice and after expiration of a cure period, the escrow agent shall release
from Escrow shares of common stock with a value equal to the missed installment payment or payments plus accrued interest on that
payment or payments. The number of shares so issued shall be determined by dividing the amount of the past due installment payment
by the volume-weighted average price of the Company’s common stock for the last five trading days preceding the due date
of the installment payment. With respect to the common stock held in Escrow, Note Holder Plaintiffs do not have any shareholder
rights, including but not limited to voting, dividend or ownership rights. Upon full performance of the promissory notes, all
shares of common stock still remaining in Escrow shall revert back to the Company as treasury shares. Given that the Company
is experiencing financial difficulties and the Note Holder Plaintiffs granted a concession by accepting total payments of $400,000
for the remaining balance of the principal and interest due, the Company accounted for such transactions as a troubled debt restructuring
and recognized a total gain of $76,336 from the debt settlement. The gain on troubled debt restructuring was $0.00 per share.
Glenn
Tilley, a director of the Company, is the holder of $170,857 of principal as of December 31, 2018 of the aforementioned Note.
As of December 31, 2018, the Company was not compliant with the repayment terms of the Note but no defaults under the Note
have been called by the note holder. The Company is currently conducting good faith negotiations with the note holder
to further extend the maturity date, however, there can be no assurance that a further extension will be granted. The Company
is currently accruing interest on the Note at the default interest rate of 15% per annum. The Note is convertible into
shares of the Company’s common stock at a conversion price equal to the lower of i) $1.00 per share and ii) the volume-weighted
average price for the last five trading days preceding the conversion date.
On
February 22, 2016 (the “Effective Date”), the Company issued a convertible note in the principal aggregate amount
of $170,000 to a private investor (the “February 2016 Note”). As of December 31, 2018, the Company was not compliant
with the repayment terms of the Note but no defaults under the note have been called by the note holder. The Company is
currently conducting good faith negotiations with the Note Holder to further extend the maturity date, however, there can
be no assurance that a further extension will be granted. The Note is convertible into shares of the Company’s common stock
at a conversion price equal to the lower of i) $1.00 per share and ii) 65% of the volume-weighted average price for the
last twenty trading days preceding the conversion date. The Note holder converted a portion of the principal $1,500 and accrued
interest $1,748 to 16,901 shares of common stock during the second quarter ended June 30, 2017. The outstanding principal balance
on the February 2016 note at December 31, 2018 and 2017 was $168,500. Accrued interest on this note was $37,912 and $12,638
as of December 31, 2018 and 2017, respectively.
Promissory
Notes
On
July 14, 2016, the Company closed a Credit Agreement (the “Credit Agreement”) by and among the Company and First Form,
Inc. (the “Borrowers”) and Genlink Capital, LLC, as lender (“Genlink”). Pursuant to the Credit Agreement,
Genlink agreed to loan the Company up to a maximum of $1 million for general operating expenses. An initial amount of $670,000
was funded by Genlink at the closing of the Credit Agreement. Any increase in the amount extended to the Borrowers shall be at
the discretion of Genlink.
The
amounts borrowed pursuant to the Credit Agreement are evidenced by a Revolving Note (the “Revolving Note”) and the
repayment of the Revolving Note is secured by a first position security interest in substantially all of the Company’s assets
in favor of Genlink, as evidenced by a Security Agreement by and among the Borrowers and Genlink (the “Security Agreement”).
The Revolving Note is due and payable, along with interest thereon, on December 20, 2017, and bears interest at the rate of 15%
per annum, increasing to 19% upon the occurrence of an event of default. The Company incurred loan fees of $44,500 for entering
into the Credit Agreement. The loan fees shall be amortized to interest expense over the life of the notes. The Company must pay
a minimum of $75,000 in interest over the life of the loan. The principal balance on the note as of December 31, 2017 was $1,000,000.
In December 2017, in exchange for an extension fee of $10,000, this Loan Agreement was converted into a one-year term loan and
extend for one additional year, with monthly payments of $20,833 in principal plus interest at 15% and a balloon payment of $729,167
due at maturity on January 25, 2019.
In
November 2018, this Loan Agreement was amended in order to increase the principal amount to $1,125,000, and extended through
November 25, 2020 with interest at 15% requiring monthly payments of $26,650 in principal (starting in March 2019) plus
interest with a balloon payment of $592,000 due on the maturity date. As additional security for the term loan, the Company has
placed 970,000 shares of common stock into reserve.
As
of November 8, 2018, the outstanding principal was $351,810 and accrued unpaid interest as $124,524, totaling $476,334. On
November 8, 2018, the Note Holder Plaintiffs and the Company executed a Settlement Agreement pursuant to which the Note
Holder Plaintiffs agreed to a full release and wavier of their claims, including but not limited to, dismissal with prejudice
of the suit in exchange for (a) an initial payment of $250,000, and (b) promissory notes in the total amount of $150,000,
payable over twenty-four (24) months, with interest at nine percent (9%) per annum. As security for the two promissory notes,
the Company will place 850,000 shares of common stock into an escrow account (“Escrow”). In the event the Company
does not make timely payments under the promissory notes, upon written notice and after expiration of a cure period, the
escrow agent shall release from Escrow shares of common stock with a value equal to the missed installment payment or
payments plus accrued interest on that payment or payments. The number of shares so issued shall be determined by dividing
the amount of the past due installment payment by the volume-weighted average price of the Company’s common stock for
the last five trading days preceding the due date of the installment payment. With respect to the common stock held in
Escrow, Note Holder Plaintiffs do not have any shareholder rights, including but not limited to voting, dividend or ownership
rights. Upon full performance of the promissory notes, all shares of common stock still remaining in Escrow shall revert back
to the Company as treasury shares. Given that the Company is experiencing financial difficulties and the Note Holder
Plaintiffs granted a concession by accepting total payments of $400,000 for the remaining balance of the principal and
interest due, the Company accounted for such transactions as a troubled debt restructuring and recognized a total gain
of $76,336 from the debt settlement. The gain on troubled debt restructuring was $0.00 per share. At December 31, 2018,
the outstanding balance promissory notes was $140,490.
On
March 30, 2018, the Company entered into an eighteen-month loan agreement with an investor. Pursuant to the agreement, the investor
agreed to loan the Company $250,000 for general operating expenses. During the first six months, the Company will pay interest
only at 8% per annum. Thereafter, the Company shall pay principal and interest through maturity on December 31, 2019. At
December 31, 2018, the outstanding balance related to this finance agreement was $208,333.
On
April 9, 2018, the Company entered into an eighteen-month loan agreement with a director. Pursuant to the agreement, the
director agreed to loan the Company $50,000 for general operating expenses. During the first six months, the Company will
pay interest only at 8% per annum. Thereafter, the Company shall pay principal and interest through maturity on October 30, 2019.
At December 31, 2018, the outstanding balance was $45,833.
Future
maturities of debt are as follows:
For
the year ending December 31
|
2019
|
|
$
|
932,204
|
|
|
2020
|
|
|
930,592
|
|
|
Total
|
|
$
|
1,862,796
|
|
NOTE
8 – STOCKHOLDERS DEFICIT
Preferred
Stock
The
Company has authorized 20,000,000 shares of preferred stock, with a par value of $0.00001 per share. As of December 31, 2018 and
2017, the Company has no shares of preferred stock issued and outstanding.
Common
Stock
The
Company has authorized 250,000,000 shares of common stock, with a par value of $0.00001 per share. As of December 31, 2018 and
2017, the Company has 19,180,063 and 17,403,527 shares of common stock issued and outstanding, respectively.
Common
stock issued for services
During
each year ended December 31, 2018 and 2017, 40,000 shares of common stock were granted to a certain employee with
a fair value of $15,372 and $16,100, respectively.
During
each year ended December 31, 2018 and 2017, 6,000 shares of common stock were granted to a certain employee with
a fair value of $1,639 and $2,415, respectively.
During
the year ended December 31, 2018 and 2017, 137,204 shares and $119,853 shares, respectively, of common stock valued
at $33,548 and $51,292, respectively, were issued to consultant for professional services provided to the Company.
Sale
of common stock
During
the year ended December 31, 2018, the Company sold 1,593,332 shares of common stock to investors in exchange for $239,000 in gross
proceeds in connection with the private placement of the Company’s common stock.
Termination
of Registration Statement
On
September 19, 2017, pursuant to Rule 477 under the Securities Act of 1933, as amended (the “Securities Act”), we withdrew
our Registration Statement on Form S-1 (File No. 333-213385), together with all exhibits thereto, initially filed with the SEC
on August 30, 2016, as subsequently amended on November 4, 2016 (the “Registration Statement”). The Registration Statement
was not declared effective and no securities were issued or sold pursuant to the Registration Statement.
2016
Incentive Stock Option Plan
On
October 4, 2016, the Board approved the Sports Field 2016 Incentive Stock Option Plan (the “2016 Plan”). The Plan
provides for the issuance of up to 2,500,000 shares of common stock of the Company through the grant of non-qualified options
(the “Non-qualified Options”), incentive options (the “Incentive Options” and together with the Non-qualified
Options, the “Options”) and restricted stock (the “Restricted Stock”) and unrestricted stock (the “Unrestricted
Stock”) to directors, officers, consultants, attorneys, advisors and employees. The 2,500,000 shares available under the
2016 Plan represent approximately 15% of the Company’s issued and outstanding common stock as of October 4, 2016.
The
2016 Plan shall be administered by a committee consisting of two or more independent, non-employee and outside directors (the
“Committee”). In the absence of such a Committee, the Board shall administer the 2016 Plan. The 2016 Plan is currently
being administered by the Board.
Options
are subject to the following conditions:
(i)
The Committee determines the strike price of Incentive Options at the time the Incentive Options are granted. The assigned strike
price must be no less than 100% of the Fair Market Value (as defined in the Plan) of the Company’s Common Stock. In the
event that the recipient is a Ten Percent Owner (as defined in the Plan), the strike price must be no less than 110% of the Fair
Market Value of the Company.
(ii)
The strike price of each Non-qualified Option will be at least 100% of the Fair Market Value of such share of the Company’s
Common Stock on the date the Non-qualified Option is granted.
(iii)
The Committee fixes the term of Options, provided that Options may not be exercisable more than ten years from the date the Option
is granted, and provided further that Incentive Options granted to a Ten Percent Owner may not be exercisable more than five years
from the date the Incentive Option is granted.
(iv)
The Committee may designate the vesting period of Options. In the event that the Committee does not designate a vesting period
for Options, the Options will vest in equal amounts on each fiscal quarter of the Company through the five (5) year anniversary
of the date on which the Options were granted. The vesting period accelerates upon the consummation of a Sale Event (as defined
in the Plan).
(v)
Options are not transferable and Options are exercisable only by the Options’ recipient, except upon the recipient’s
death.
(vi)
Incentive Options may not be issued in an amount or manner where the amount of Incentive Options exercisable in one year entitles
the holder to Common Stock of the Company with an aggregate Fair Market value of greater than $100,000.
Awards
of Restricted Stock are subject to the following conditions:
(i)
The Committee grants Restricted Stock Options and determines the restrictions on each Restricted Stock Award (as defined in the
Plan). Upon the grant of a Restricted Stock Award and the payment of any applicable purchase price, grantee is considered the
record owner of the Restricted Stock and entitled to vote the Restricted Stock if such Restricted Stock is entitled to voting
rights.
(ii)
Restricted Stock may not be delivered to the grantee until the Restricted Stock has vested.
(iii)
Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of except as provided in
the Plan or in the Award Agreement (as defined in the Plan).
Stock
options issued for services
On
March 31, 2017, the Company issued our CEO 25,000 common stock options for services, having a total fair value of approximately
$7,500. These options expire on March 31, 2022.
On
May 17, 2017, the Company issued 200,000 common stock options to a board member for his services, having a total fair value of
approximately $4,015. The options vest ratably over a two-year period and have a $1 strike price.
On
July 11, 2017, the Company issued 100,000 common stock options to a consultant for investor relations services at a fair value
of $13,286. The options immediately vested and have a $0.35 strike price.
On
January 11, 2018, the Company issued 100,000 common stock options to a consultant for investor relations services at a fair value
of $3,796. The options immediately vested and have a $0.35 strike price.
On
May 8, 2018, the Company issued 200,000 common stock options to a board member for his services, having a total fair value of
approximately $10,169. The options vest ratably over a two-year period and have a $1 strike price.
On
July 1, 2018, the Company issued 100,000 common stock options to a consultant for investor relations services at a fair value
of $11,110. The options immediately vested and have a $0.35 strike price.
The
Company uses the Black-Scholes option pricing model to determine the fair value of the options granted. In applying the Black-Scholes
option pricing model to options granted, the Company used the following weighted average assumptions:
|
|
|
For
The Year Ended
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Risk
free interest rate
|
|
|
2.32-2.75%
|
|
|
|
1.43-1.50%
|
|
|
Dividend
yield
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
Expected
volatility
|
|
|
41
-44%
|
|
|
|
42-43%
|
|
|
Expected
life in years
|
|
|
3.5
-5.0
|
|
|
|
2.5-3.5
|
|
|
Forfeiture
Rate
|
|
|
0.00%
|
|
|
|
0.00%
|
|
Since
the Company has limited trading history, volatility was determined by averaging volatilities of comparable companies.
The
expected term of the option, taking into account both the contractual term of the option and the effects of employees’ expected
exercise and post-vesting employment termination behavior: The expected life of options and similar instruments represents the
period of time the option and/or warrant are expected to be outstanding. Pursuant to paragraph 718-10-S99-1, it may be appropriate
to use the
simplified method
,
i.e., expected term = ((vesting term + original contractual term) / 2)
, if (i) A
company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due
to the limited period of time its equity shares have been publicly traded; (ii) A company significantly changes the terms of its
share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer
provide a reasonable basis upon which to estimate expected term; or (iii) A company has or expects to have significant structural
changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate
expected term. The Company uses the simplified method to calculate expected term of share options and similar instruments as the
Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
The contractual term is used as the expected term for share options and similar instruments that do not qualify to use the simplified
method.
The
following is a summary of the Company’s stock option activity during the years ended December 31, 2018 and 2017:
|
|
|
Number
of Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Outstanding
- December 31, 2016
|
|
|
972,500
|
|
|
$
|
1.26
|
|
|
|
4.00
|
|
|
Exercisable
- December 31, 2016
|
|
|
847,500
|
|
|
$
|
1.23
|
|
|
|
4.02
|
|
|
Granted
|
|
|
325,000
|
|
|
$
|
0.86
|
|
|
|
5.00
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding
- December 31, 2017
|
|
|
1,297,500
|
|
|
$
|
1.14
|
|
|
|
3.34
|
|
|
Exercisable
- December 31, 2017
|
|
|
1,180,000
|
|
|
$
|
1.21
|
|
|
|
3.23
|
|
|
Granted
|
|
|
400
,000
|
|
|
$
|
0.86
|
|
|
|
5.00
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding
- December 31, 2018
|
|
|
1,697,500
|
|
|
$
|
1.05
|
|
|
|
3.14
|
|
|
Exercisable
- December 31, 2018
|
|
|
1,522,500
|
|
|
$
|
1.05
|
|
|
|
3.42
|
|
At
December 31, 2018 and 2017, the total intrinsic value of options outstanding was $75,000 and $0, respectively.
At
December 31, 2018 and 2017, the total intrinsic value of options exercisable was $75,000 and $0, respectively.
Stock-based
compensation for stock options has been recorded in the consolidated statements of operations and totaled $21,415 for the
year ended December 31, 2018 and $30,607 for the year ended December 31, 2017. As of December 31, 2018, the remaining balance
of unamortized expense is $4,597.
Stock
Warrants
The
following is a summary of the Company’s stock warrant activity during the years ended December 31, 2018 and 2017:
|
|
|
Number
of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining Contractual
Life
|
|
|
Outstanding
- December 31, 2016
|
|
|
679,588
|
|
|
$
|
1.03
|
|
|
|
2.66
|
|
|
Exercisable
- December 31, 2016
|
|
|
679,588
|
|
|
$
|
1.03
|
|
|
|
2.66
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding
- December 31, 2017
|
|
|
679,588
|
|
|
$
|
1.03
|
|
|
|
1.66
|
|
|
Exercisable
- December 31, 2017
|
|
|
679,588
|
|
|
$
|
1.03
|
|
|
|
1.66
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding
- December 31, 2018
|
|
|
679,588
|
|
|
$
|
1.03
|
|
|
|
1.66
|
|
|
Exercisable
- December 31, 2018
|
|
|
679,588
|
|
|
$
|
1.03
|
|
|
|
1.66
|
|
At
December 31, 2018 and 2017, the total intrinsic value of warrants outstanding and exercisable was $0 and $0, respectively.
NOTE
9 – RELATED PARTY TRANSACTIONS
Jeromy
Olson, the Chief Executive Officer of the Company, owns 50.0% of a sales management and consulting firm, NexPhase Global, LLC
(“NexPhase”) that provides sales services to the Company. These services include the retention of two full-time senior
sales representatives including the current National Sales Director of the Company. Consulting expenses pertaining to the firm’s
services were $270,000 for the year ended December 31, 2017. Included in consulting expense for the year
ended December 31, 2017 were 30,000 shares of common stock valued at $12,100, issued to NexPhase. The NexPhase consulting
agreement was terminated on October 1, 2017. For years ended December 31, 2018 and 2017, NexPhase earned sales commissions of
$0 and $74,517, respectively, and had accounts payable from the Company of $149,090 and $134,992, respectively.
Glenn
Tilley, a director of the Company, is the holder of $170,857 of principal as of December 31, 2018 of the aforementioned Note. As
of December 31, 2018, the Company was not compliant with the repayment terms of the Notes but no defaults under the note have
been called by the note holder. The Company is currently conducting good faith negotiations with the note holder to further extend
the maturity date, however, there can be no assurance that a further extension will be granted. The Company is currently accruing
interest on the Note at the default interest rate of 15% per annum. The Note is convertible into shares of the Company’s
common stock at a conversion price equal to the lower of i) $1.00 per share and ii) the volume-weighted average price for the
last five trading days preceding the conversion date.
On
March 30, 2018, the Company entered into an eighteen-month loan agreement with an investor. Pursuant to the agreement,
the investor agreed to loan the Company $250,000 for general operating expenses. During the first six months, the Company
will pay interest only at 8% per annum. Thereafter, the Company shall pay principal and interest through maturity on December
31, 2019. At December 31, 2018, the outstanding balance related to this finance agreement was $208,333.
On
April 9, 2018, the
Company entered into an eighteen-month loan agreement with a director. Pursuant to the agreement, the director agreed
to loan the Company $50,000 for general operating expenses. During the first six months, the Company will pay interest only at
8% per annum. Thereafter, the Company shall pay principal and interest through maturity on October 30, 2019. At December 31,
2018, the outstanding balance was $45,833.
NOTE
10 – EMPLOYEE SEPARATION
On
March 27, 2019 the Company entered into a mutual general release and settlement agreement (the “Settlement Agreement”)
with the former employee. Pursuant to the Settlement Agreement, the Company agreed to pay the former employee $69,000, payable
in three equal installments of $23,000 on March 31, June 28 and September 30, 2019 (the “Settlement Amount”). The
Settlement Agreement also contains a general release by the former employee of the Company relating to the Claim, such release
however is predicated on the Company making payments pursuant to the Settlement Agreement. As of the date of this filing, the
outstanding balance on this obligation was $46,000.
NOTE
11 – COMMITMENTS AND CONTINGENCIES
Services
Agreements
On
July 11, 2017 (the “Effective Date”), the Company entered into a Services Agreement with a consultant. The consultant
agreed to provide investor relations services to the Company for a period of 6 months. As compensation for the services, the Company
shall pay the consultant $7,500 per month and is obligated to issue options for 100,000 shares of the Company common stock upon
execution and, if renewed, at each renewal. The Company may terminate this agreement by providing at least 30 days advance written
notice prior to the next renewal date. The Company has recorded compensation expense relating to the equity portion of the agreement
of $14,905 during the year ended December 31, 2018.
Consulting
Agreements
In
March 2014, the Company reached an agreement with a consulting firm owned by the CEO of the Company, NexPhase, to provide non-exclusive
sales services. The consulting firm will receive between 3.5% and 5% commissions on sales referred to the Company. In addition,
the consulting firm will receive a monthly fee of $6,000, 50,000 shares of common stock upon execution of the agreement, and 10,000
shares of common stock at the beginning of each three month period for the term of the agreement and any renewal periods thereafter.
The agreement is for 18 months, and is renewable for successive 18 month terms. On December 10, 2014, the consulting agreement
was amended. The monthly fee was increased to $10,000 per month retroactive to September 1, 2014 and 50,000 additional shares
of common stock were issued. In addition, the consulting firm will be issued qualified stock options as follows:
|
|
●
|
100,000
stock options at an exercise price of $1.50 per share that vest on December 31, 2015
|
|
|
|
|
|
|
●
|
100,000
stock options at an exercise price of $1.75 per share that vest on December 31, 2016
|
|
|
|
|
|
|
●
|
100,000
stock options at an exercise price of $2.50 per share that vest on December 31, 2017
|
On
November 3, 2016, the Board, pursuant to the consulting agreement, approved the issuance of (i) qualified options to purchase
100,000 shares of the Company’s Common Stock at a price of $1.50 vesting immediately with a grant date of November 3, 2016
and (ii) qualified options to purchase 75,000 shares of the Company’s Common Stock at a price of $1.75 vesting on December
31, 2016. The consultant is due additional option grants pursuant to the consulting agreement, however, those grants were being
deferred to comply with the terms of the issuance of incentive options in the 2016 Plan.
On
March 14, 2016, the consulting agreement was further amended. The monthly fee was increased to $20,000 per month for a period
of twelve months. At the end of the twelve month period the monthly payment reverts back to $10,000.
The
NexPhase consulting agreement was terminated on October 1, 2017.
In
February 2015, the Company reached an agreement with a consulting firm to provide non-exclusive sales services with an effective
date of February 10, 2015 (the “Effective Date”). The agreement expired on December 31, 2017. As compensation for
the services, the consultant received (i) 5% commissions on sales of products or services other than turf referred to the Company;
(ii) commission based on square footage of turf sold to certain parties as outlined in the agreement; (iii) 100,000 shares of
the Company common stock (the “Payment Shares”) upon execution of the agreement, which were subject to certain Clawback
provisions. “Clawback” means (i) if this agreement was terminated by the Company prior to December 31, 2016, then
50,000 of the Payment Shares shall be forfeited, and cancelled by the Company; and (i) if this Agreement was terminated by the
Company prior to December 31, 2017, then 25,000 of the Payment Shares shall be forfeited, and cancelled by the Company. Unvested
shares are revalued at the end of each reporting period until they vest and are expensed on a straight-line basis over the term
of the agreement. The Company has recorded compensation expense relating to the equity portion of the agreement of $0 and
$23,095 during the years ended December 31, 2018 and 2018, respectively.
Employment
Agreements
In
September 2014, Jeromy Olson entered into a 40 month employment agreement to serve in the capacity of CEO, with subsequent one
year renewal periods (the “Olson Employment Agreement”). The CEO will receive a monthly salary of $10,000 that (1)
will increase to $13,000 upon the Company achieving gross revenues of at least $10,000,000, as amended, and an operating margin
of at least 15%, and (2) will increase to $16,000 per month upon the Company achieving gross revenues of at least $15,000,000
and an operating margin of at least 15%. The agreement provides for cash bonuses of 15% of the annual Adjusted EBITDA between
$1 and $1,000,000, 10% of the annual Adjusted EBITDA between $1,000,001 and $2,000,000 and 5% of the annual Adjusted EBITDA greater
than $2,000,000. For purposes of the agreement, Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and
amortization less share based payments, gains or losses on derivative instruments and other non-cash items approved by the Board
of Directors. The CEO was issued 250,000 shares of common stock on the date of the agreement and received 250,000 shares of common
stock on January 1, 2016. Lastly, the CEO will be issued qualified stock options as follows:
|
|
●
|
100,000
stock options at an exercise price of $1.50 per share that vest on December 31, 2015
|
|
|
|
|
|
|
●
|
100,000
stock options at an exercise price of $1.75 per share that vest on December 31, 2016
|
|
|
|
|
|
|
●
|
100,000
stock options at an exercise price of $2.50 per share that vest on December 31, 2017
|
On
November 3, 2016, the Board, pursuant to the Olson Employment Agreement (as defined above), approved the issuance of (i) qualified
options to purchase 100,000 shares of the Company’s Common Stock at a price of $1.50 vesting immediately with a grant date
of November 3, 2016, (ii) qualified options to purchase 75,000 shares of the Company’s Common Stock at a price of $1.75
vesting on December 31, 2016, and (iii) qualified options to purchase 25,000 shares of the Company’s Common Stock at a price
of $1.75 vesting on December 31, 2016, which options were issued in the first quarter of 2017. The CEO is due additional option
grants pursuant to the consulting agreement, however, those grants were deferred to comply with the terms of the issuance of incentive
options in the 2016 Plan. Pursuant to section 3 of the Olson Employment Agreement, Mr. Olson’s employment term was automatically
renewed and will expire on January 19, 2020.
Director
Agreements
On
August 27, 2015, the Company entered into a director agreement with Glenn Appel, concurrent with Mr. Appel’s appointment
to the Board of Directors of the Company effective August 27, 2015. The Director Agreement may, at the option of the Board, be
automatically renewed on such date that Mr. Appel is re-elected to the Board. Pursuant to the Director Agreement, Mr. Appel is
to be paid a stipend of One Thousand Dollars ($1,000) per meeting of the Board, which shall be contingent upon his attendance
at the meetings being in person, rather than via telephone or some other electronic medium. Additionally, Mr. Appel receive non-qualified
stock options to purchase Two Hundred Thousand (200,000) shares of the Company’s common stock. The exercise price of the
Options shall be One Dollar ($1.00) per share. The Options shall vest in equal amounts over a period of Two (2) years at the rate
of Twenty Five Thousand (25,000) shares per fiscal quarter on the last day of each such quarter, commencing in the third fiscal
quarter of 2015. The total grant date value of the options was $80,932 which shall be expensed over the vesting period.
On
January 4, 2016, the Company entered into a director agreement with Glenn Tilley, concurrent with Mr. Tilley’s appointment
to the Board of Directors of the Company (the “Board”) effective January 4, 2016. The director agreement may, at the
option of the Board, be automatically renewed on such date that Mr. Tilley is re-elected to the Board. Pursuant to the director
agreement, Mr. Tilley is to be paid a stipend of One Thousand Dollars ($1,000) per meeting of the Board, which shall be contingent
upon his attendance at the meetings being in person, rather than via telephone or some other electronic medium. Additionally,
Mr. Tilley shall receive non-qualified stock options (the “Options”) to purchase Two Hundred Thousand (200,000) shares
of the Company’s common stock. The exercise price of the Options shall be One Dollar ($1.00) per share. The Options shall
vest in equal amounts over a period of two (2) years at the rate of Twenty Five Thousand (25,000) shares per fiscal quarter on
the last day of each such quarter, commencing January 4, 2016. The total grant date value of the options was $97,535 which shall
be expensed over the vesting period.
On
May 15, 2017, the Company entered into a director agreement (“Minichiello Director Agreement”) with Tom Minichiello,
concurrent with Mr. Minichiello’s appointment to the Board of Directors of the Company (the “Board”) effective
May 15, 2017. The Minichiello Director Agreement may, at the option of the Board, be automatically renewed on such date that Mr.
Minichiello is re-elected to the Board. Pursuant to the Director Agreement, Mr. Minichiello is to be paid a stipend of One Thousand
Dollars ($1,000) per meeting of the Board, which shall be contingent upon his attendance at the meetings being in person, rather
than via telephone or some other electronic medium. Additionally, Mr. Minichiello shall receive non-qualified stock options (the
“Options”) to purchase up to Two Hundred Thousand (200,000) shares of the Company’s common stock. The exercise
price of the Options shall be One Dollar ($1.00) per share. The Options shall vest in equal amounts over a period of two (2) years
at the rate of Twenty Five Thousand (25,000) shares per fiscal quarter on the last day of each such quarter. The total grant date
value of the options was $4,017 which shall be expensed over the vesting period.
On
May 8, 2018, the Company entered into a director agreement (“Tuntland Director Agreement”) with John Tuntland, concurrent
with Mr. Tuntland’s appointment to the Board of Directors of the Company (the “Board”) effective May 8, 2018.
The Tuntland Director Agreement may, at the option of the Board, be automatically renewed on such date that Mr. Tuntland is re-elected
to the Board. Pursuant to the Director Agreement, Mr. Tuntland is to be paid a stipend of One Thousand Dollars ($1,000) per meeting
of the Board, which shall be contingent upon his attendance at the meetings being in person, rather than via telephone or some
other electronic medium. Additionally, Mr. Tuntland shall receive non-qualified stock options (the “Options”) to purchase
up to Two Hundred Thousand (200,000) shares of the Company’s common stock. The exercise price of the Options shall be One
Dollar ($1.00) per share. The Options shall vest in equal amounts over a period of two (2) years at the rate of Twenty Five Thousand
(25,000) shares beginning in the third quarter of 2018. The total grant date value of the options was $10,169 which shall
be expensed over the vesting period.
Advisory
Board Agreements
On
February 11, 2016, the Company entered into an advisory board agreement with John Brenkus, effective June 1, 2016 (the (“Effective
Date”). The term of the agreement is for a period of 24 months commencing on the Effective Date. Pursuant to the agreement,
Mr. Brenkus is to be issued 25,000 shares of the Company common stock at the beginning of each quarter starting on the Effective
Date through the term of the agreement. The Company has recorded compensation expense relating to the agreement of $7,500 and
$28,157 during the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017, this agreement has been terminated.
Supply
Agreement
On
December 2, 2015, IMG Academy LLC (“IMG”) and the Company entered into an Official Supplier Agreement (the “Agreement”).
The term of the Agreement is January 1, 2016 through December 31, 2019 (the “Term”). Under the Agreement, The Company
is to be the “Official Supplier” of IMG in connection with certain of the Company’s products and related services
during the Term. Additionally, the Agreement provides the Company with certain promotional opportunities and supplier benefits
including but not limited to (i) on-site signage and Company brand exposure (ii) the opportunity to install up to 4 test turf
plots (the “Test Plots”) in order for the Company to conduct research on its turf products and the ability to use
IMG athletes as participants in such testing (ii) opportunity to schedule site visits of test plots for potential Company customers
and (iv) access to IMG’s personnel to include Head Coaches, Athletic Director and Administrators, subject to clearances
and applicable rules of governing bodies such as NCAA. As consideration for its designation as IMG’s “Official Supplier”
the Company must pay IMG three installments of $208,000 during the Term as specified in the Agreement. For the years ended December
31, 2018 and 2017, the company has recorded $156,500 of expense related to the agreement.
Placement
Agent and Finders Agreements
The
Company entered into an exclusive Financial Advisory and Investment Banking Agreement with Spartan Capital Securities, LLC (“Spartan”)
effective November 20, 2013 (the “2013 Spartan Advisory Agreement”). The Company entered into a second exclusive Financial
Advisory and Investment Banking Agreement with Spartan Capital Securities, LLC (“Spartan”) effective October 1, 2015,
amended August 3, 2016 (the “2015 Spartan Advisory Agreement”), which replaced and superseded the 2013 Spartan Advisory
Agreement. Pursuant to the 2015 Spartan Advisory Agreement, Spartan will act as the Company’s exclusive financial advisor
and placement agent to assist the Company in connection with a best efforts private placement (the “2015 Financing”)
of up to $3.5 million or 3,181,819 shares (the “Shares”) of the common stock of the Company at $1.10 per Share. Spartan
shall have the right to place up to an additional $700,000 or 636,364 Shares in the 2015 Financing to cover over-allotments at
the same price and on the same terms as the other Shares sold in the 2015 Financing. The 2015 Spartan Advisory Agreement expires
on August 1, 2019.
The
Company, upon closing of the 2015 Financing, shall pay consideration to Spartan, in cash, a fee in an amount equal to 10% of the
aggregate gross proceeds raised in the 2015 Financing. The Company shall grant and deliver to Spartan at the closing of the 2015
Financing, for nominal consideration, five year warrants (the “Warrants”) to purchase a number of shares of the Company’s
Common Stock equal to 10% of the number of shares of Common Stock (and/or shares of Common Stock issuable upon exercise of securities
or upon conversion or exchange of convertible or exchangeable securities) sold at such closing. The Warrants shall be exercisable
at any time during the five year period commencing on the closing to which they relate at an exercise price equal to the purchase
price per share of Common Stock paid by investors in the 2015 Financing or, in the case of exercisable, convertible, or exchangeable
securities, the exercise, conversion or exchange price thereof. If the 2015 Financing is consummated by means of more than one
closing, Spartan shall be entitled to the fees provided herein with respect to each such closing. (See Note 8 sale of common stock).
Along
with the above fees, the Company shall pay (i) $15,000 engagement fees upon execution of the agreement, (ii) 3% of the gross proceeds
raised for expenses incurred by Spartan in connection with this Financing, together with cost of background checks on the officers
and directors of the Company, (iii) a monthly fee of $10,000 for 4 months for the period commencing October 1, 2015 through January
1, 2016; and contingent upon Spartan successfully raising $2.0 million under the 2015 Financing (iv) a monthly fee of $5,000 for
6 months for the period commencing September 1, 2016 through February 1, 2017; (v) a monthly fee of $7,500 for 6 months for the
period commencing March 1, 2017 through August 1, 2017; (vi) a monthly fee of $10,000 for 12 months for the period commencing
September 1, 2017 through August 1, 2018; (vii) a monthly fee of $13,700 for 12 months for the period commencing September 1,
2018 through August 1, 2019. The obligation to pay the monthly fee shall survive any termination of this agreement.
As
of December 31, 2018 and 2017, Spartan was owed fees of $292,250 and $153,750, respectively.
Litigation
On
January 26, 2018, the Company and one of its historical clients executed a Settlement Agreement, pursuant to which the Company
is obligated to remediate a track which was improperly installed by one of the Company’s subcontractors. No later the July
15, 2018, the Company is obligated to complete installment of a replacement track which is of the same or comparable specifications
as in the original contract. Upon completion of the installation, the client is obligated to release from escrow a retainage amount
of $110,000. During construction, the Company’s insurance company is obligated to release from escrow funds to cover the
expected construction costs of $370,000; the remediation will be entirely funded with insurance proceeds. This remediation work
has been completed.
On
July 25, 2018, two note holders filed suit against the Company in the New York State Supreme Court, County of New York. The suit
alleges that, as of July 24, 2018, the Company owes the plaintiffs a total amount of $466,177, which is inclusive of principal
and interest. The plaintiffs filed a Motion for Summary Judgment in Lieu of Complaint and asked that judgment be entered against
the Company.
As
of November 8, 2018, the outstanding principal was $351,810 and accrued unpaid interest as $124,524, totaling $476,334.
On November 8, 2018, the Note Holder Plaintiffs and the Company executed a Settlement Agreement pursuant to which the Note Holder
Plaintiffs agreed to a full release and wavier of their claims, including but not limited to, dismissal with prejudice of the
suit in exchange for (a) an initial payment of $250,000, and (b) promissory notes in the total amount of $150,000, payable over
twenty-four (24) months, with interest at nine percent (9%) per annum. With respect to this Settlement Agreement, the Company
recorded forgiveness of indebtedness income of $76,334. As security for the two promissory notes, the Company will place 850,000
shares of common stock into an escrow account (“Escrow”). In the event the Company does not make timely payments under
the promissory notes, upon written notice and after expiration of a cure period, the escrow agent shall release from Escrow shares
of common stock with a value equal to the missed installment payment or payments plus accrued interest on that payment or payments.
The number of shares so issued shall be determined by dividing the amount of the past due installment payment by the volume-weighted
average price of the Company’s common stock for the last five trading days preceding the due date of the installment payment.
With respect to the common stock held in Escrow, Note Holder Plaintiffs do not have any shareholder rights, including but not
limited to voting, dividend or ownership rights. Upon full performance of the promissory notes, all shares of common stock still
remaining in Escrow shall revert back to the Company as treasury shares. Given that the Company is experiencing financial difficulties
and the Note Holder Plaintiffs granted a concession by accepting total payments of $400,000 for the remaining balance of the principal
and interest due, the Company accounted for such transactions as a troubled debt restructuring and recognized a total gain of
$76,336 from the debt settlement. The gain on troubled debt restructuring was $0.00 per share.
On
March 27, 2019 the Company entered into a mutual general release and settlement agreement (the “Settlement Agreement”)
with the former employee. Pursuant to the Settlement Agreement, the Company agreed to pay the former employee $69,000, payable
in three equal installments of $23,000 on March 31, June 28 and September 30, 2019 (the “Settlement Amount”). The
Settlement Agreement also contains a general release by the former employee of the Company relating to the Claim, such release
however is predicated on the Company making payments pursuant to the Settlement Agreement. As of the date of this filing, the
outstanding balance on this obligation was $46,000.
On
April 5, 2019, Spartan Capital Securities, LLC, an investment banker (“Spartan Capital”), filed a Demand for
Arbitration with the American Arbitration Association
(New York, New York; case no. 01-19-0001-0700).
Spartan Capital alleges the Company owes various service fees and commissions, which the Company disputes both to legitimacy
and amount. This arbitration is subject to inherent uncertainties, and an adverse result may arise that could harm our business.
No assurance can be given that the Company will be able to resolve this matter or the timing of any such resolution.
Operating
Leases
On
January 1, 2018, the Company entered into a new lease agreement for its office space in Illinois. The lease commences on January
1, 2018 and expires on December 31, 2020. For 2018, the lease has minimum monthly payments of $1,367; thereafter, the minimum
monthly payment shall increase by the lesser of CPI or 5%.
Rent
expense was $15,936 and $20,295 for the years ended December 31, 2018 and 2017, respectively.
Future
lease payments for the years ended December 31 are as follows:
|
2019
|
|
$
|
17,224
|
|
|
2020
|
|
|
18,085
|
|
|
Total
|
|
$
|
35,310
|
|
The
table above assumes a 5% increase in minimum monthly payment each year.
NOTE
12 – INCOME TAXES
Per
FASB ASC 740-10, disclosure is not required of an uncertain tax position unless it is considered probable that a claim will be
asserted and there is a more-likely-than-not possibility that the outcome will be unfavorable. Using this guidance, as of December
31, 2017, the Company has no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.
The Company’s 2017, 2016, 2015 and 2014 Federal and State tax returns remain subject to examination by their respective
taxing authorities. Neither of the Company’s Federal or State tax returns are currently under examination.
On
December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” (TCJA) that significantly reformed
the Internal Revenue Code of 1986, as amended. The TCJA reduces the corporate tax rate to 21 percent beginning with years starting
January 1, 2018. Because a change in tax law is accounted for in the period of enactment, the deferred tax assets and liabilities
have been adjusted to the newly enacted U.S. corporate rate, and the related impact to the tax expense has been recognized in
the current year.
The reduction of the corporate tax rate did not result in a write-down
of the Company’s gross deferred tax assets.
Components
of deferred tax assets are as follows:
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Current deferred tax asset:
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
$
|
221,628
|
|
|
$
|
177,785
|
|
|
Accrual to cash method accounting items
|
|
|
274,180
|
|
|
|
214,745
|
|
|
Less valuation allowance
|
|
|
(495,808
|
)
|
|
|
(392,530
|
)
|
|
Net current deferred tax asset
|
|
|
-
|
|
|
|
-
|
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Expected income tax benefit from NOL carry-forwards
|
|
|
4,470,452
|
|
|
|
3,032,075
|
|
|
Less valuation allowance
|
|
|
(4,470,452
|
)
|
|
|
(3,032,075
|
)
|
|
Net non-current deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Income
Tax Provision in the Consolidated Statements of Operations
A
reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income
taxes is as follows:
|
|
|
For
the Year Ended
|
|
|
|
|
December
31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
U.S.
statutory federal tax rate
|
|
|
(
21.0
|
)%
|
|
|
(34.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
State
income taxes, net of federal tax benefit
|
|
|
(1.6
|
)%
|
|
|
(2.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for services
|
|
|
13.6
|
%
|
|
|
9.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in a separation agreement
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Tax
rate change
|
|
|
0.0
|
%
|
|
|
(0.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax true-up
|
|
|
(13.0
|
)%
|
|
|
(8.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Other
permanent differences
|
|
|
1.1
|
%
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Change
in valuation allowance
|
|
|
21.5
|
%
|
|
|
34.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Income
Tax Provision in the Consolidated Statements of Operations
A
reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income
taxes is as follows:
Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
reverse. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in the Consolidated Statement
of Operations in the period that includes the enactment date.
The
Company has available at December 31, 2018 unused federal and state net operating loss carry forwards totaling approximately $(20,837,409)
that may be applied against future taxable income that expire through 2030. Management believes it is more likely than not that
all of the deferred tax asset will not be realized. A valuation allowance has been provided for the entire deferred tax asset.
The valuation allowance increased approximately $1,438,377 and decreased approximately $540,295 for the years ended
December 31, 2018 and 2017, respectively.
NOTE
13 – SUBSEQUENT EVENTS
On
March 1, 2019, in exchange for retiring 400,000 in previously issued common stock options, the Company issued 550,000 common stock
options to a consultant for investor relations services. The options vest ratably in one-half year increments and have
a $0.10 strike price.
In
March and April
2019, the Company sold an aggregate of 4,100,000 shares of Company common stock for $410,000 in cash. These shares
were sold in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended,
as there was no general solicitation and the transactions did not involve a public offering.
On
March 27, 2019 the Company entered into a mutual general release and settlement agreement (the “Settlement Agreement”)
with the former employee. Pursuant to the Settlement Agreement, the Company agreed to pay the former employee $69,000, payable
in three equal installments of $23,000 on March 31, June 28 and September 30, 2019 (the “Settlement Amount”). The
Settlement Agreement also contains a general release by the former employee of the Company relating to the Claim, such release
however is predicated on the Company making payments pursuant to the Settlement Agreement. As of the date of this filing, the
outstanding balance on this obligation was $46,000.
On
April 5, 2019, Mr. John Rombold voluntarily resigned from the Company, to pursue other activities.
On
April 5, 2019, Spartan Capital Securities, LLC, an investment banker (“Spartan Capital”), filed a Demand for
Arbitration with the American Arbitration Association (New York, New York; case no. 01-19-0001-0700). Spartan Capital alleges
the Company owes various service fees and commissions, which the Company disputes both to legitimacy and amount. This arbitration
is subject to inherent uncertainties, and an adverse result may arise that could harm our business. No assurance can be given
that the Company will be able to resolve this matter or the timing of any such resolution.