NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
NOTE
1 – BASIS OF PRESENTATION
History
and Organization
US
Lighting Group, Inc. (the Company) was founded in 2013 in accordance with the laws of Wyoming and is located in Euclid, Ohio.
On July 13, 2016 (“Closing”), the Luxurious Travel Corp. acquired all of the issued and outstanding capital stock
of the Company and changed its name to US Lighting Group, Inc.
Overview
of Business
The
Company designs and manufactures commercial LED lighting. Intellitronix Corporation (“Intellitronix”), our wholly
owned subsidiary, is a manufacturer of automotive aftermarket and original equipment manufacturer (OEM) electronics.
COVID-19
Considerations
Through
the date these financial statements were issued, the COVID-19 pandemic did not have a net material impact on our operating results.
In the future, the pandemic may cause reduced demand for our products if, for example, the pandemic results in a recessionary
economic environment, which negatively effects the consumers who purchase our products.
Our
ability to operate without significant negative operational impact from the COVID-19 pandemic will in part depend on our ability
to protect our employees and our supply chain. The Company has endeavored to follow the recommended actions of government and
health authorities to protect our employees. Through the date that these financial statements were issued, we maintained the consistency
of our operations during the onset of the COVID-19 pandemic. However, the uncertainty resulting from the pandemic could result
in an unforeseen disruption to our workforce and supply chain (for example an inability of a key supplier or transportation supplier
to source and transport materials) that could negatively impact our operations.
Through
the date that these financial statements were issued, the COVID-19 pandemic has not negatively impacted the Company’s liquidity
position as of such date, and the Company continues to generate cash flows to meet its short-term liquidity needs, and it expects
to maintain access to the capital markets. The Company has not observed any material impairments of its assets or a significant
change in the fair value of its assets due to the COVID-19 pandemic.
Liquidity
The accompanying consolidated financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. During the year ended December 31, 2020, the Company realized a net
income of $485,000, and cash provided by operating activities was $531,000, compared to cash used in operating activities of
$315,000 in the prior year period. At December 31, 2020, current assets improved by $594,000, and current non-related party
liabilities decreased by $224,000, as compared to the prior year period. Based on current projections, we believe our available cash
on-hand, our current efforts to market and sell our products, and our ability to significantly reduce expenses, will provide
sufficient cash resources to satisfy our operational needs, for at least one year from the date these financial statements are
issued.
At
December 31, 2020, the Company had cash on hand in the amount of $108,000. Management estimates that the current funds on hand
will be sufficient to continue operations through March 31, 2021. No assurance can be given that any future financing will be
available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company can obtain additional
financing, it may contain undue restrictions on our operations in the case of debt financing, or cause substantial dilution for
our stockholders, in the case or equity financing.
In
conjunction with the Company’s capital raising efforts, management is working to improve its cash flows by increasing its
private label manufacturing opportunities for high volume and low overhead production orders, and managing its operating expenses
to support planned revenue growth. However, no assurance can be given that these efforts will be successful.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Consolidation
The
consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary Intellitronix Corp. Intercompany
transactions and balances have been eliminated in consolidation.
Loss
per Share Calculations
Basic
earnings per share are computed by dividing net income (loss) available to common shareholders by the weighted-average number
of common shares available. Diluted earnings per share is computed by dividing the net income applicable to common shareholders
by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding
if all dilutive potential common shares had been issued using the treasury stock method. Potential common shares are excluded
from the computation when their effect is antidilutive. The dilutive effect of potentially dilutive securities is reflected in
diluted net income per share if the exercise prices were lower than the average fair market value of common shares during the
reporting period.
Warrants
to acquire 20,000 shares of common stock have been excluded from the calculation of weighted average common shares outstanding
at December 31, 2020, as their effect would have been anti-dilutive. Warrants to acquire 5,814,000 shares of common stock, and
473,808 shares of common stock issuable under convertible note agreements, have been excluded from the calculation of weighted
average common shares outstanding at December 31, 2019, as their effect would have been anti-dilutive.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period.
Significant estimates are used in valuing our allowances for doubtful accounts, reserves for inventory obsolescence, valuing derivative
liabilities, valuing equity instruments issued for services, and valuation allowance for deferred tax assets, among others. Actual
results could differ from these estimates.
Segment
Reporting
The
Company operates in one segment for the manufacture and distribution of our products. In accordance with the “Segment Reporting”
Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President,
who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing
guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information
quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which
the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment
Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services;
and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information
required by “Segment Reporting” can be found in the accompanying consolidated financial statements.
Revenue
Recognition
The
Company recognizes revenue in accordance with Accounting Standard Update (“ASU”) No. 2014-09. This standard provides
authoritative guidance clarifying the principles for recognizing revenue and developing a common revenue standard for U.S. generally
accepted accounting principles. The core principle of the guidance is that an entity should recognize revenue to depict the transfer
of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in the exchange for those goods or services.
Under
this guidance, revenue is recognized when control of promised goods or services is transferred to the Company’s customers,
in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The
Company reviews its sales transactions to identify contractual rights, performance obligations, and transaction prices, including
the allocation of prices to separate performance obligations, if applicable. Revenue and costs of sales are recognized once products
are delivered to the customer’s control and performance obligations are satisfied.
In
the following table, revenue is disaggregated by major product line for the year ended 2020:
Sales
Channels
|
|
LED
digital
gauges and
automotive
electronics
and
accessories
|
|
|
LED
lighting
tubes and
bulbs
|
|
|
Total
|
|
Resellers/retail
|
|
$
|
-
|
|
|
$
|
43,000
|
|
|
$
|
43,000
|
|
Business
to business
|
|
|
2,338,000
|
|
|
|
|
|
|
|
2,338,000
|
|
Direct
to consumer
|
|
|
1,635,000
|
|
|
|
-
|
|
|
|
1,635,000
|
|
Total
|
|
$
|
3,973,000
|
|
|
$
|
43,000
|
|
|
$
|
4,016,000
|
|
In
the following table, revenue is disaggregated by major product line for the year ended 2019:
Sales
Channels
|
|
LED
digital gauges and automotive electronics and accessories
|
|
|
LED
lighting
tubes and
bulbs
|
|
|
Total
|
|
Resellers/retail
|
|
$
|
-
|
|
|
$
|
13,000
|
|
|
$
|
13,000
|
|
Business
to business
|
|
|
1,469,000
|
|
|
|
|
|
|
|
1,469,000
|
|
Direct
to consumer/online
|
|
|
1,165,000
|
|
|
|
-
|
|
|
|
1,165,000
|
|
Total
|
|
$
|
2,634,000
|
|
|
$
|
13,000
|
|
|
$
|
2,647,000
|
|
Products
sold by the Company are distinct individual products. The products are offered for sale as finished goods only, and there are
no performance obligations required post-shipment for customers to derive the expected value from them. A significant amount of
the Company’s sales are received through several eBay web-commerce websites, which requires customer payment at time of
order placement. Customer advanced payments were $29,000 and $15,000 at December 31, 2020 and 2019, respectively, and are recorded
as a liability on the consolidated balance sheets.
The
Company does offer a 30-day return policy from the date of shipment. The Company also provides a limited lifetime warranty on
its products. Due to a limited history of returns, the Company does not maintain a warranty reserve.
Cash
and Cash Equivalents
Cash
and cash equivalents include all highly liquid investments with remaining maturities of three months or less at the date of purchase.
Cash equivalents include funds held in PayPal accounts.
Accounts
Receivable
The
Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the
Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve
for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes
will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded
based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding.
The
allowance for doubtful accounts and returns is established through a provision reducing the carrying value of receivables. At
December 31, 2020, and December 31, 2019, the Company determined that no allowance for doubtful accounts was necessary.
Inventories
Inventories
are stated at the lower of cost or net realizable value. Cost is computed on a first-in, first-out basis. The Company’s
inventories consist almost entirely of finished goods as of December 31, 2020 and 2019.
The
Company provides inventory reserves based on excess and obsolete inventories determined primarily by future demand forecasts.
The write down amount is measured as the difference between the cost of the inventory and market based upon assumptions about
future demand and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition,
a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in
the restoration or increase in that newly established cost basis. At December 31, 2020 and December 31, 2019, the reserve for
excess and obsolete inventory was $0 and $12,000, respectively.
Property
and Equipment
Property
and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets. The Company has determined the estimated useful lives of its property and
equipment, as follows:
Building
|
|
40 years
|
Building improvements
|
|
7 years
|
Vehicles
|
|
5 years
|
Production equipment
|
|
5 years
|
Office equipment
|
|
3 years
|
Furniture and fixtures
|
|
7 years
|
Maintenance
and repairs are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of
are removed from the related accounts and the resulting gain or loss is reflected in the statements of operations.
Management
assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. If there is an indication of impairment, management prepares an estimate of future cash flows expected
to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the
asset, an impairment loss is recognized to write down the asset to its estimated fair value. The Company did not record an impairment
loss for the years ended December 31, 2020 and 2019.
Product
Development Costs
Product
development costs are expensed in the period incurred. The costs primarily consist of prototype and testing costs. Product development
costs were $236,000 and $230,000 for the year ended December 31, 2020 and 2019, respectively.
Shipping
and Handling Costs
The
Company’s shipping and handling costs relating to inbound freight are reported as cost of goods sold in the consolidated
Statements of Operations, while shipping and handling costs relating to outbound freight are reported as selling, general and
administrative expenses in the consolidated statements of operations. The Company classifies amounts billed to customers for shipping
fees as revenues.
Income
Taxes
Income
tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected
tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation
allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized. The Company has
recorded a valuation allowance against its deferred tax assets as of December 31, 2020 and 2019.
The
Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions.
The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that
it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50 percent likely of
being realized upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that
the Company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions
are recognized in the provision for income taxes.
Advertising
Costs
Advertising
costs are expensed as incurred and are included in selling, general and administrative expenses. Advertising costs were $24,000
and $29,000 for the year ended December 31, 2020 and 2019, respectively.
Concentration
Risks
The
Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits. During
the years ended December 31, 2020 and 2019, the Company had cash deposits that exceeded the federally insured limit of $250,000. The
Company believes that no significant concentration of credit risk exists with respect to these cash balances because of its assessment
of the creditworthiness and financial viability of the financial institution.
Sales.
During the year ended December 31, 2020, the Company’s two largest customers accounted for 15% and 14% of sales, respectively.
During the year ended December 31, 2019, the Company’s largest customer accounted for 15% of sales. No other customers exceeded
10% of sales in either period.
Accounts
receivable. As of December 31, 2020, the Company had accounts receivable from two customers which comprised 30%, and 26% of
its gross accounts receivable, respectively. As of December 31, 2019, the Company had accounts receivable from four customers
which comprised 25%, 22%, 14%, and 11% of its gross accounts receivable, respectively.
Purchases
from vendors. During the year ended December 31, 2020, the Company’s two largest material vendors accounted for approximately
18% and 14% of all purchases, respectively. The Company sourced 55% of its raw materials from its vendors in China. During the
year ended December 31, 2019, the Company’s largest materials vendor accounted for approximately 19% of all purchases. The
Company sourced 47% of its raw materials from its vendors in China. No other vendor exceeded 10% of all purchases in either periods.
Fair
Value Measurements
The
Company determines the fair value of its assets and liabilities based on the exchange price in U.S. dollars that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value
maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a fair value hierarchy with
three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:
|
●
|
Level
1 — Quoted prices in active markets for identical assets or liabilities.
|
|
●
|
Level
2 — Inputs, other than Level 1, that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities.
|
|
|
|
|
●
|
Level
3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities.
|
The
carrying amounts of financial instruments such as cash, accounts receivable, inventories, accounts payable and accrued liabilities,
accrued payroll liabilities, and advanced customer deposits, approximate the related fair values due to the short-term maturities
of these instruments. The carrying values of notes payable approximate their fair values due to the fact that the interest rates
on these obligations are based on prevailing market interest rates.
Recently
Issued Accounting Pronouncements
In
June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to
use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain
types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses.
ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe
the potential impact of the new guidance and related codification improvements will be material to its financial position, results
of operations and cash flows.
Other
recent accounting pronouncements issued by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on
the Company’s present or future financial statements.
NOTE
3 – PROPERTY AND EQUIPMENT
Property
and equipment consist of the following at December 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
Building and improvements
|
|
$
|
645,000
|
|
|
$
|
-
|
|
Land
|
|
|
96,000
|
|
|
|
-
|
|
Vehicles
|
|
|
411,000
|
|
|
|
345,000
|
|
Production equipment
|
|
|
630,000
|
|
|
|
224,000
|
|
Office equipment
|
|
|
35,000
|
|
|
|
28,000
|
|
Furniture and fixtures
|
|
|
48,000
|
|
|
|
25,000
|
|
|
|
|
1,865,000
|
|
|
|
622,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(446,000
|
)
|
|
|
(406,000
|
)
|
Property and equipment, net
|
|
$
|
1,419,000
|
|
|
$
|
216,000
|
|
On
April 24, 2020, the Company purchased land, building, and improvements for $741,000, and moved its operations to Euclid, Ohio,
in June 2020 (see Note 7). During the year ended December 31, 2020, the Company disposed of $57,000 of fully depreciated property
and equipment. Depreciation expense for the years ended December 31, 2020 and 2019 was $100,000 and $57,000, respectively.
NOTE
4 – ACCRUED PAYROLL TO OFFICER
Beginning
in January 2018, the Company’s President voluntarily elected to defer payment of his employment compensation. The balance
of the compensation owed to the Company’s President was $442,000 and $312,000 as of December 31, 2020 and 2019, respectively.
NOTE
5 – LINE OF CREDIT
On
April 28, 2020, the Company obtained a $50,000 unsecured line of credit from Keybank. The line of credit carries an interest rate
of 3.25% per annum. The balance outstanding on the line of credit was $49,000 at December 31, 2020.
NOTE
6 – LEASE PAYABLE
The
Company adopted ASU 2016-02, Leases, effective January 1, 2019. The standard requires a lessee to record a Right of Use (ROU)
asset and a corresponding lease liability at the inception of the lease, initially measured at the present value of the lease
payments. As a result, we recorded ROU assets aggregating $79,000 as of January 1, 2019. That amount consists of a lease on the
Company’s former Eastlake, Ohio office, and existing capitalized leases reclassified to ROU assets of $14,000.
ASU
2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is
allocated over the lease term, generally on a straight-line basis. During the year ended December 31, 2019, the Company reflected
amortization of ROU asset of $54,000 related to these leases, resulting in a net asset balance of $25,000 as of December 31, 2019.
During the year ended December 31, 2020, the leases terminated, and the Company reflected the remaining amortization of ROU asset
of $25,000, leaving no remaining balance at December 31, 2020.
On
January 1, 2019, liabilities recorded under finance leases and operating leases were $10,000 and $78,000, respectively. During
the year ended December 31, 2019, the Company made payments of $8,000 towards finance lease liability and $52,000 towards its
operating lease liability. As of December 31, 2019, liability under finance lease amounted to $2,000 and liability under operating
lease amounted to $27,000, which were reflected as current due, under finance leases and operating leases. During the year ended
December 31, 2020, the Company made its remaining payments of $2,000 towards its finance lease liability and $27,000 towards its
operating lease liability.
The
weighted average discount rate for the operating lease was 4.0% and 10.10% for the finance lease.
NOTE
7 – LOANS PAYABLE TO RELATED PARTIES
Loans
payable to related parties consists of the following at December 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
Loan
payable to officers/shareholders (a)
|
|
$
|
2,130,000
|
|
|
$
|
2,738,000
|
|
Loan
payable to related party (b)
|
|
|
125,000
|
|
|
|
125,000
|
|
Loan
payable to related party – past due (c)
|
|
|
34,000
|
|
|
|
32,000
|
|
Loan
payable to related party – (d)
|
|
|
330,000
|
|
|
|
-
|
|
Total
loans payable to related parties
|
|
|
2,619,000
|
|
|
|
2,895,000
|
|
Loans
payable to related parties, current portion
|
|
|
(2,619,000
|
)
|
|
|
(1,662,000
|
)
|
Loans
payable to related parties, net of current portion
|
|
$
|
-
|
|
|
$
|
1,233,000
|
|
a.
|
On
December 1, 2016, the Company acquired Intellitronix Corporation from the Company’s President and shareholder. The Company
agreed to pay $4,000,000 in exchange for all the shares of Intellitronix Corporation. The sixty-month loan matures in
December 2021, requires monthly payments of $74,000, carries an interest rate of 6.25%, and is secured by the assets of Intellitronix
Corporation. The loan balance on December 31, 2018, including accrued interest, was $3,095,000. During the year
ended December 31, 2019, the Company accrued interest of $172,000 and made principal loan payments of $529,000, leaving a
balance outstanding of $2,738,000 at December 31, 2019. During the year ended December 31, 2020, the Company accrued
interest of $131,000 and made principal loan payments of $739,000, leaving a balance outstanding of $2,130,000 at December
31, 2020.
|
b.
|
During
the year ended December 31, 2017, the Company’s President and shareholder, contributed $125,000 of working capital to
the Company. The contributed working capital balance were converted into a loan with no interest rate, and due on demand. The
loan balance was $125,000 on both December 31, 2020 and 2019.
|
|
|
c.
|
In
July 2016, the Company assumed an obligation of Solei Systems, Inc, an entity owned by the Company’s President and shareholder. The
Company agreed to enter into a note agreement with Huntington National Bank for $60,000. The loan has an interest rate
of 6.00% and requires a monthly payment of $1,000. The loan balance on December 31, 2018 was $37,000. During the
year ended December 31, 2019, the Company made loan payments of $5,000, leaving a balance outstanding of $32,000 at December
31, 2019. During the year ended December 31, 2020, the Company accrued interest of $2,000, leaving a balance outstanding
of $34,000 at December 31, 2020. At December 31, 2020, the loan was past due, and was paid in full in February 2021.
|
d.
|
On
April 24, 2020, the Company entered into a loan agreement (the “Loan Agreement”) with the Company’s President
and shareholder, Paul Spivak (the “Lender”), pursuant to which the Company borrowed $408,000 from the Lender.
The Loan has a term of twelve months and carries an interest rate of 6.00%. The Company used the net proceeds from the
Loan to acquire the facility described in Note 3. During the year ended December 31, 2020, the Company accrued interest
of $15,000, and made principal payments totaling $93,000, leaving a balance outstanding of $330,000 at December 31, 2020.
|
NOTE
8 – LOANS PAYABLE
Loan
payable consisted of the following as of December 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
SBA
PPP Loan (a)
|
|
$
|
-
|
|
|
$
|
-
|
|
PayPal
Working Capital Loan, net of discount (b)
|
|
|
38,000
|
|
|
|
152,000
|
|
PayPal
Working Capital Loan, net of discount (c)
|
|
|
14,000
|
|
|
|
59,000
|
|
Secured
promissory note (d)
|
|
|
86,000
|
|
|
|
-
|
|
Secured
promissory note (e)
|
|
|
265,000
|
|
|
|
-
|
|
Vehicle
loans (f)
|
|
|
131,000
|
|
|
|
85,000
|
|
Equipment
loan (g)
|
|
|
16,000
|
|
|
|
-
|
|
Equipment
loan (h)
|
|
|
17,000
|
|
|
|
-
|
|
Loan
discount
|
|
|
(8,000
|
)
|
|
|
(27,000
|
)
|
Total
loans payable
|
|
|
559,000
|
|
|
|
269,000
|
|
Loans
payable, current portion
|
|
|
(163,000
|
)
|
|
|
(203,000
|
)
|
Loans
payable, net of current portion
|
|
$
|
396,000
|
|
|
$
|
66,000
|
|
a.
|
On
April 10, 2020, the Company was granted a loan (the “PPP loan”) from Key Bank in the aggregate amount of $195,000
pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act. The PPP loan agreement is dated April
10, 2020, matures on April 10, 2022, bears interest at a rate of 1% per annum, is unsecured and guaranteed by the U.S. Small
Business Administration (SBA). Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used
for qualifying expenses. On December [ ], 2020, the SBA forgave the loan balance, and the Company recorded
the $195,000 as SBA PPP loan forgiveness included in other income and expenses in the consolidated statements of operations.
|
b.
|
On
August 12, 2019, the Company entered into a PayPal Working Capital loan. The principal amount of the loan was for $216,000.
The Company received net proceeds of $200,000, net of loan fees of $16,000. The loan has a 20-month term and requires monthly
payments equal to 20% of monthly PayPal sales proceeds, but no less than $11,000 every 90-day period. During the year ended
December 31, 2019, the Company made principal payments of $64,000, leaving a total of $152,000 owed at December 31, 2019. During
the year ended December 31, 2020, the Company made principal payments of $114,000, leaving a total of $38,000 owed at December
31, 2020.
|
c.
|
On
November 25, 2019, the Company entered into a PayPal Working Capital loan. The principal amount of the loan was for $66,000.
The Company received net proceeds of $50,000, net of loan fees of $16,000. The loan has a 20-month term and requires monthly
payments equal to 20% of monthly PayPal sales proceeds, but no less than $3,300 every 90-day period. During the year ended
December 31, 2019, the Company made principal payments of $7,000, leaving a total of $59,000 owed at December 31, 2019. During
the year ended December 31, 2020, the Company made principal payments of $45,000, leaving a total of $14,000 owed at December
31, 2020.
|
|
|
d.
|
On
March 12, 2020, the Company entered into a loan agreement with Celtic Bank in the principal amount of $150,000 with interest
at 32.09% per annum and due on September 12, 2021. The loan requires minimum monthly principal and interest payments of $11,000
and is secured by the Company’s assets and future sales and is personally guaranteed by the Company’s CEO. During
the year ended December 31, 2020, the Company made principal payments of $64,000, leaving a total of $86,000 owed at December
31, 2020.
|
|
|
e.
|
On
August 26, 2020, the Company entered into a loan agreement with Apex Commercial Capital Corp. in the principal amount of $266,000
with interest at 9.49% per annum and due on September 10, 2030. The loan requires one hundred nineteen (119) monthly payments
of $2,322, with a final balloon payment on the one hundred twentieth (120) month, or September 10, 2030, of $224,835. The
loan is guaranteed by the Company and the Company’s Chief Executive Officer and secured by the Company’s real
estate. During the year ended December 31, 2020, the Company made principal payments of $1,000, leaving a total of $265,000
owed at December 31, 2020.
|
f.
|
The
Company purchases vehicles for its Chief Executive Officer and for research and development activities. Generally, vehicles
are sold or traded in at the end of the vehicle loan period. The aggregate vehicle loan balance was $74,000 at
December 31, 2018. During the year ended December 31, 2019, the Company purchased an automobile for $30,000, with loan terms
of 72 months and an interest rate of 10.99% per annum, and made aggregate payments of $19,000, leaving an aggregate loan balance
on three vehicles of $85,000 at December 31, 2019. During the year ended December 31, 2020, the Company purchased two
vehicles for $50,000 and $69,000, respectively, and entered loans ranging from 60 to 144 months, with interest rates per annum
of 0% to 5.24%, and made total payments of $73,000, leaving an aggregate loan balance on three vehicles of $131,000 at December
31, 2020.
|
g.
|
On
August 3, 2020, the Company entered into a $18,000 term loan with Leaf Capital related to the purchase of production equipment. The
loan requires monthly payments over the term of 36 months, has an interest rate of 8.48% per annum, and is secured by the
production equipment. During the year ended December 31, 2020, the Company made principal payments of $2,000, leaving
a total of $16,000 owed at December 31, 2020.
|
|
|
h.
|
On
November 29, 2020, the Company entered into a $17,000 term loan with CIT Bank related to the purchase of software for its
production equipment. The loan requires monthly payments over the term of 36 months, has an interest rate of 13.18%
per annum, and is personally guaranteed by the Company’s CEO. The loan balance was $17,000 at December 31,
2020.
|
The
aggregate amount of the loan fees recorded in 2019, related to PayPal Working Capital Loans, was $32,000 and was recorded as a
valuation discount to be amortized over the life of the PayPal Working Capital Loans. During the year ended December 31, 2019,
amortization of valuation discount of $5,000 was recorded as an interest cost, leaving a $27,000 remaining unamortized balance
of the valuation discount at December 31, 2019. During the year ended December 31, 2020, amortization of valuation discount of
$19,000 was recorded as an interest cost, leaving a $8,000 remaining unamortized balance of the valuation discount at December
31, 2020.
NOTE
9 – CONVERTIBLE SECURED NOTES PAYABLE
The
Company issued convertible secured debentures (“Convertible Notes”) to accredited investors with interest at 10% per
annum, a term of eighteen months, and secured by all of the assets of the Company and its subsidiaries. The Convertible Notes
provide a conversion right, in which the principal amount of the Convertible Notes, together with any accrued but unpaid interest,
could be converted into the Company’s common stock at a conversion price at $0.25 per share. During the year ended December
31, 2019, the Company received proceeds of $113,000 on the issuance of Convertible Notes, leaving an aggregate balance owed of
$113,000 at December 31, 2019. During the year ended December 31, 2020, the Company received proceeds of $196,000 on the issuance
of Convertible Notes, accrued additional interest of $21,000, and converted $275,000 of principal and interest into shares of
the Company’s common stock, leaving a total of $55,000 owed at December 31, 2020. As of December 31, 2020, the Convertible
Notes were convertible into 220,000 shares of common stock.
NOTE
10 – SHAREHOLDERS’ EQUITY
Common
shares issued for cash
During
the years ended December 31, 2020 and 2019, the Company received proceeds of $683,000 and $622,000 on the sale of 4,275,665 and
2,487,998 shares of common stock, at an average price of $0.16 and $0.25 per share, respectively, as part of its Regulation D
offerings.
Common
shares issued for services
The
Company entered into various consulting agreements with third parties (“Consultants”) pursuant to which these Consultants
provided business development, sales promotion, introduction to new business opportunities, strategic analysis, and sales and
marketing activities. In addition, the Company issues its employees common shares to reward performance. During the year ended
December 31, 2020 and 2019, the Company issued 125,000 and 4,814,000 shares of common stock to these consultants and employees,
with a fair value of $31,000 and $1,204,000 at the date of grant, respectively, which was recognized as compensation cost and
included in selling, general and administrative expenses.
Common
shares issued to an officer
On
December 23, 2019, the Company issued Paul Spivak, the Company’s President and a shareholder, 27,091,000 shares of Company
common stock, with a fair value of $6,772,000, or $0.25 per shares, which was recognized as compensation cost.
Common
shares issued on conversion of convertible notes
During
the year ended December 31, 2020, the Company issued 1,222,544 shares of the Company common stock on the conversion of principal
and accrued interest of $275,000 on its convertible notes payable.
Summary
of Warrants
A
summary of warrants for the years ended December 31, 2020 and 2019, is as follows:
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
|
|
of
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
Balance
outstanding, December 31, 2018
|
|
|
15,301,354
|
|
|
|
0.50
|
|
Warrants
granted
|
|
|
150,000
|
|
|
|
0.50
|
|
Warrants
exercised
|
|
|
-
|
|
|
|
-
|
|
Warrants
expired or forfeited
|
|
|
(9,637,354
|
)
|
|
|
0.50
|
|
Balance
outstanding, December 31, 2019
|
|
|
5,814,000
|
|
|
|
0.50
|
|
Warrants
granted
|
|
|
20,000
|
|
|
|
0.25
|
|
Warrants
exercised
|
|
|
-
|
|
|
|
-
|
|
Warrants
expired or forfeited
|
|
|
(5,814,000
|
)
|
|
|
0.50
|
|
Balance
outstanding, December 31, 2020
|
|
|
20,000
|
|
|
$
|
0.25
|
|
Balance
exercisable, December 31, 2020
|
|
|
20,000
|
|
|
$
|
0.25
|
|
Information
relating to outstanding warrants at December 31, 2020, summarized by exercise price, is as follows:
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Exercise Price
Per Share
|
|
|
Shares
|
|
|
Life (Years)
|
|
|
Weighted Average
Exercise Price
|
|
|
Shares
|
|
|
Weighted Average
Exercise Price
|
|
$
|
0.25
|
|
|
|
20,000
|
|
|
|
0.69
|
|
|
$
|
0.25
|
|
|
|
20,000
|
|
|
$
|
0.25
|
|
In
conjunction with the sale of a portion of the common shares issued as part of its Regulation D offering discussed above, the Company
issued eighteen-month warrants to purchase shares of common stock at an exercise price of $0.50 and $0.25. During the year ended
December 31, 2020, the Company issued warrants to purchase 20,000 shares of common stock at an exercise price of $0.25. During
the year ended December 31, 2019, the Company issued warrants to purchase 150,000 shares of common stock at an exercise price
of $0.50.
The
weighted-average remaining contractual life of warrants outstanding and exercisable at December 31, 2020 was 0.69 years. The outstanding
and exercisable warrants at no intrinsic value at December 31, 2020.
NOTE
11 – INCOME TAXES
At
December 31, 2020, the Company had available Federal and state net operating loss carryforwards to reduce future taxable income.
The amounts available were approximately $5,800,000 for Federal and state purposes. The carryforwards expire in various amounts
through 2040. Given the Company’s history of net operating losses, management has determined that it is more likely than
not that the Company will not be able to realize the tax benefit of the carryforwards. Accordingly, the Company has not recognized
a deferred tax asset for this benefit. Section 382 generally limits the use of NOLs and credits following an ownership change,
which occurs when one or more 5 percent shareholders increase their ownership, in aggregate, by more than 50 percentage points
over the lowest percentage of stock owned by such shareholders at any time during the “testing period” (generally
three years).
Effective
January 1, 2007, the Company adopted FASB guidelines that address the determination of whether tax benefits claimed or expected
to be claimed on a tax return should be recorded in the financial statements. Under this guidance, we may recognize the 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 the
taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from
such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized
upon ultimate settlement. This guidance also provides guidance on de-recognition, classification, interest and penalties on income
taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as of December 31, 2020
and 2019, the Company did not have a liability for unrecognized tax benefits, and no adjustment was required at adoption.
The
Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31,
2020, and 2019, the Company has not accrued interest or penalties related to uncertain tax positions. Additionally, tax years
2017 through 2020 remain open to examination by the major taxing jurisdictions to which the Company is subject.
Upon
the attainment of taxable income by the Company, management will assess the likelihood of realizing the tax benefit associated
with the use of the carryforwards and will recognize the appropriate deferred tax asset at that time.
The
Company’s effective income tax rate differs from the amount computed by applying the federal statutory income tax rate to
loss before income taxes as follows:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Income
tax benefit at federal statutory rate
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
State
income tax benefit, net of federal benefit
|
|
|
(6.0
|
)%
|
|
|
(6.0
|
)%
|
Change
in valuation allowance
|
|
|
27.00
|
%
|
|
|
27.00
|
%
|
|
|
|
|
|
|
|
|
|
Income
taxes at effective tax rate
|
|
|
-
|
%
|
|
|
-
|
%
|
The
components of deferred taxes consist of the following at December 31, 2020 and 2019:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Net
operating loss carryforwards
|
|
$
|
1,430,000
|
|
|
$
|
1,922,000
|
|
Less:
Valuation allowance
|
|
|
(1,430,000
|
)
|
|
|
(1,922,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE
12 – LEGAL PROCEEDINGS
Intellitronix
Corporation is a defendant in a lawsuit filed by Michael A. Kunzman & Associates, Inc. for alleged nonpayment of manufacturer’s
representation commissions. The lawsuit was filed on August 24, 2020 and is currently pending in the Circuit Court for Oakland
County, Michigan. Intellitronix Corporation denies the allegations and intends to assert, upon leave of Court, a counterclaim
to recover its damages.
NOTE
13 – RELATED PARTY TRANSACTION
On
July 1, 2020, the Company entered a twenty-four (24) month commercial lease agreement with MigMarine Corporation for $5,000 per
month. MigMarine Corporation is owned by Paul Spivak, the Company’s President. The Company recorded lease income of $30,000
during the year ended December 31, 2020, and as of December 31, 2020, $30,000 is included in accounts receivable, related party
on the consolidated balance sheet.
NOTE
14 – SUBSEQUENT EVENTS
Subsequent
to December 31, 2020, the Company received proceeds of $146,000 on the sale of 975,000 shares of common stock, at an average price
of $0.15 per share, as part of its Regulation D offering.
Subsequent
to December 31, 2020, the Company created a new subsidiary on January 11, 2021 called Cortes Campers, LLC, domiciled in Wyoming.
Cortes was created to market tow behind travel trailers for the recreational vehicle market and has had no sales as of the date
of this report. Cortes is 99% owned by the Company and 1% owned by Paul Spivak, the Company’s CEO.