Notes
to Consolidated Financial Statements
Note
1 – Description of Business and Summary of Significant Accounting Policies
Formation
of the Company
ExeLED
Holdings, Inc. was incorporated in the State of Delaware on October 20, 1986 under the name “Verilink Corporation.”
We have also been known as Energie Holdings, Inc. and Alas Aviation Corp. On December 31, 2013, we entered into a Share Exchange
Agreement (the “Share Exchange Agreement”) with OELC, LLC, a Delaware limited liability company, and its wholly-owned
subsidiary, Energie LLC (hereinafter referred to as, “Energie”). The Share Exchange Agreement was not effective until
July 2, 2014 due to a variety of conditions subsequent that needed to be met, which are described below. Upon effectiveness, we
issued 33,000,000 “restricted” shares of our common stock, representing approximately 65% of our then issued and outstanding
voting securities, in exchange for all of the issued and outstanding member interests of Energie. The accounting is identical
to that resulting from a reverse acquisition, except that no goodwill or other intangible is recorded.
Thereafter,
on January 27, 2014, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with two of our then
wholly owned subsidiaries, Energie Holdings, Inc. and Alas Acquisition Company. The net effect of the Merger Agreement was to
effectuate a name change from Alas Aviation Corp., to Energie Holdings, Inc. in order to provide a better understanding to investors
of our entry into the LED lighting industry. Our management also changed.
All
references herein to “us,” “we,” “our,” “Holdings,” or the “Company”
refer to ExeLED Holdings, Inc. and its subsidiary, and their respective business following the consummation of the Merger and
Share Exchange Agreements, unless the context otherwise requires.
Description
of Business
We
are focused on acquiring and growing specialized LED lighting companies for the architecture and interior design markets for both
commercial and residential applications. The lighting products include both conventional fixtures and advanced solid-state technology
that can integrate with digital controls and day-lighting to create energy efficiencies and a better visual environment. Our objective
is to grow, innovate, and fully capture the rapidly growing lighting market opportunities associated with solid state lighting.
Energie
was founded in 2001 and is engaged in the import and sale of specialized interior lighting solutions to the architecture and interior
design markets in North America. Our headquarters is located in Arvada, Colorado, and we also maintain a production and assembly
facility in Zeeland, Michigan.
Basis
of Presentation
Our
financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).
The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. Although these estimates are based on our knowledge of current events and actions
we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Furthermore, when testing
assets for impairment in future periods, if management uses different assumptions or if different conditions occur, impairment
charges may result.
Going
Concern
As
shown in the accompanying financial statements, we had an equity deficit of $17,319,920 and a working capital deficit of $16,658,489
as of December 31, 2017, and have reported net losses of $4,018,993 and 3,455,227, respectively, for the years ended December
31, 2017 and 2016. These factors raise substantial doubt regarding our ability to continue as a going concern.
Our
ability to continue as a going concern is dependent on our ability to further implement our business plan, attract additional
capital and, ultimately, upon our ability to develop future profitable operations. We intend to fund our business development,
acquisition endeavors and operations through equity and debt financing arrangements. However, there can be no assurance that these
arrangements will be sufficient to fund our ongoing capital expenditures, working capital, and other cash requirements. The outcome
of these matters cannot be predicted at this time. These matters raise substantial doubt about our ability to continue as a going
concern. The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue
as a going concern. Additionally, current economic conditions in the United States and globally create significant challenges
attaining sufficient funding.
Some
of our debt agreements are due on demand. If demand for payment is made by one or multiple vendors, we would experience a liquidity
issue as we do not currently have the funds available to pay off these debts. While we have entered into extensions with several
of our lenders, there can be no assurances that any of the lenders will be cooperative or that if they are willing to provide
extensions or forbearances, that the terms under which they may be willing to provide them will be favorable to us.
Reclassifications
Certain
prior year amounts have been reclassified to conform with the current year presentation.
Summary
of Significant Accounting Policies
Cash
and cash equivalents
Cash
and cash equivalents include cash on hand, deposits with banks, and investments that are highly liquid and have maturities of
three months or less at the date of purchase.
Accounts
receivable
We
record accounts receivable at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts
to reflect any loss anticipated on the accounts receivable balances and is charged to Other income (expense) in the consolidated
statements of operations. We calculate this allowance based on our history of write-offs, the level of past-due accounts based
on the contractual terms of the receivables, and our relationships with, and the economic status of, our customers.
At
our discretion, we may sell our accounts receivable with recourse in order to accelerate the receipt of cash. Upon the sale of
selected accounts receivable, title transfers to the counterparty to the factoring agreement, we receive 85% of the face amount
sold, and we remove the account receivable from our balance. We pay a commission and, if the balance is not collected by the counterparty
within 30 days, a factoring fee. We are responsible for repaying the factoring counterparty for any amounts they are unable to
collect. The factoring counterparty retains a reserve in the event the amount they ultimately collect is less than the amount
paid to us. Depending on the volume of activity and uncollected accounts, therefore, we may have a receivable from or a liability
to the factoring counterparty.
Inventory
Inventory
is stated at the lower of cost or net realizable value, using the first-in, first-out method (“FIFO”) to
determine cost. We monitor inventory cost compared to selling price in order to determine if a lower of cost or net
realizable value mark-down is necessary. Inventory consists only of raw materials.
Intangible
assets
Our
intangible assets consist of the following:
UL
Listings
– Energie has over 20 United Laboratories
TM
(“UL”) files, which include UL Listings
for over 14,000 products for sale in the United States and Canada. UL is an independent safety testing laboratory. A UL Listing
means that UL has tested representative samples of the product and determined that it meets UL’s requirements. These requirements
are based primarily on UL’s published and nationally recognized standards for safety. UL’s testing certifies the design,
construction and assembly of the certified products. UL Listings do not expire as long as the product certified is not materially
changed. Ownership of a UL Listing may also be transferred between companies. Most customers in the lighting industry will only
buy UL listed products.
Trademarks
– Energie is a registered trademark.
Marketing
and design
– These consist of engineering and marketing materials covering the majority of our product offerings.
Intangible
assets are recorded at the cost to acquire the intangible, net of amortization over their estimated useful lives on a straight-line
basis. We determine the useful lives of our intangible assets after considering the specific facts and circumstances related to
each intangible asset. Factors we consider when determining useful lives include the contractual term of any agreement related
to the asset, the historical performance of the asset, our long-term strategy for using the asset, any laws or other local regulations
that could impact the useful life of the asset, and other economic factors, including competition and specific market conditions.
Property
and equipment
Property
and equipment are stated at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of our
assets, which are reviewed periodically.
Impairment
of long-lived assets
When
facts and circumstances indicate that the carrying value of long-lived assets may not be recoverable, management assesses the
recoverability of the carrying value by preparing estimates of revenues and the resulting gross profit and cash flows. These estimated
future cash flows are consistent with those we use in our internal planning. If the sum of the expected future cash flows (undiscounted
and without interest charges) is less than the carrying amount, we recognize an impairment loss. The impairment loss recognized,
if any, is the amount by which the carrying amount of the asset (or asset group) exceeds the fair value. We may use a variety
of methods to determine the fair value of these assets, including discounted cash flow models, which are consistent with the assumptions
we believe hypothetical marketplace participants would use.
We
have the option to perform a qualitative assessment of long-lived assets prior to completing the impairment test described above.
We must assess whether it is more likely than not that the fair value of the long-lived assets is less than their carrying amount.
If we conclude that this is the case, we must perform the test described above. Otherwise, we do not need to perform any further
assessment.
As
a result of applying the above procedures, we fully impaired all long-lived assets during the year ended December 31, 2014. Since
that time, we have not acquired any long-lived assets.
Warranty
reserve
We
provide limited product warranty for one year on our products and, accordingly, accrue an estimate of the related warranty expense
at the time of sale, included in Accrued liabilities on the consolidated balance sheets.
Convertible
debt
We
first evaluate our convertible debt to determine whether the conversion feature is an embedded derivative that requires bifurcation
and derivative treatment. Based on our analysis, we determined derivative treatment was not required. We then evaluate whether
the conversion feature is a beneficial conversion feature. Our convertible debt is treated as a liability and permits settlement
in cash. Accordingly, in order to determine the value of the conversion feature, we compared the estimated fair value of the convertible
debt to the fair value of debt that did not have the conversion feature. Based on this analysis, we concluded that the value of
the conversion feature was immaterial.
Revenue
recognition
We
recognize revenue when the four revenue recognition criteria are met, as follows:
|
·
|
Persuasive
evidence of an arrangement exists
– our customary practice is to obtain written
evidence, typically in the form of a sales contract or purchase order;
|
|
·
|
Delivery
– when custody is transferred to our customers either upon shipment to or receipt
at our customers’ locations, with no right of return or further obligations, such
as installation;
|
|
·
|
The
price is fixed or determinable
– prices are typically fixed at the time the
order is placed and no price protections or variables are offered; and
|
|
·
|
Collectability
is reasonably assured
– we typically work with businesses with which we have
a long standing relationship, as well as monitoring and evaluating customers’ ability
to pay.
|
Refunds
and returns, which are minimal, are recorded as a reduction of revenue. Payments received by customers prior to our satisfying
the above criteria are recorded as unearned income in the consolidated balance sheets.
Shipping
and handling
Payments
by customers to us for shipping and handling costs are included in revenue on the consolidated statements of operations, while
our expense is included in cost of revenues. Shipping and handling for inventory and materials purchased by us is included as
a component of inventory on the consolidated balance sheets, and in cost of revenues in the consolidated statements of operations
when the product is sold.
Research
and development costs
Internal
costs related to research and development efforts on existing or potential products are expensed as incurred. External costs incurred
for intangible assets, such as UL listing costs and attorney fees for patents, are capitalized.
Income
taxes
We
recognize deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between
the income tax and financial reporting carrying amount of our assets and liabilities. We monitor our deferred tax assets and evaluate
the need for a valuation allowance based on the estimate of the amount of such deferred tax assets that we believe do not meet
the more-likely-than-not recognition criteria. We also evaluate whether we have any uncertain tax positions and would record a
reserve if we believe it is more-likely-than-not our position would not prevail with the applicable tax authorities. Our assessment
of tax positions as of December 31, 2017 and 2016, determined that there were no material uncertain tax positions.
Concentration
of credit risk
Financial
instruments that potentially subject us to concentrations of credit risk consist of accounts receivable and the amount due, if
any, from our factoring counterparty. For the year ended December 31, 2017 three customers represented more than 52% of our total
revenues. As of December 31, 2017, our accounts receivable balance was not material to the overall consolidated financial statements.
Fair
value of financial instruments
Our
financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and long-term
debt. The carrying value of these financial instruments is considered to be representative of their fair value due to the short
maturity of these instruments. The carrying amount of our long-term debt approximates fair value, because the interest rates on
these instruments approximate the interest rate on debt with similar terms available to us.
Fair
value is defined as the exchange price 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 must maximize the use of observable inputs and minimize
the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered
observable and the last unobservable, as follows:
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 measurement of
the fair value of the assets or liabilities.
Recently
Issued Accounting Pronouncements
In
May 2017, the FASB issued ASU No. 2017-09
(ASU 2017-09), Scope of Modification Accounting (Topic 718)
. This guidance clarifies
the accounting for when the terms of a share-based award are modified. The ASU is effective for annual reporting periods beginning
after December 15, 2017, and for interim periods within those years, with early adoption permitted. We do not currently expect
this ASU to have a significant impact on our consolidated financial statements and related disclosures
In
May 2016, the FASB issued ASU No. 2016-12 (ASU 2016-12),
Revenue from Contracts with Customers (Topic 606).
The core
principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. ASU 2016-12 provides clarification on assessing collectability, presentation of sales taxes, noncash consideration,
and completed contracts and contract modifications.
In
May 2016, the FASB issued ASU No. 2016-11 (ASU 2016-11),
Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic
815).
This ASU clarifies guidance on assessing whether an entity is a principal or an agent in a revenue transaction.
This conclusion impacts whether an entity reports revenue on a gross or net basis.
In
April 2016, the FASB issued ASU No. 2016-10 (ASU 2016-10),
Revenue from Contracts with Customers (Topic 606).
This guidance
clarifies identifying performance obligations and the licensing implementation guidance, while retaining the related principles
for those areas.
We
have reviewed our contracts with customers, identified the rights of the parties, evaluated the payment terms, assessed the commercial
substance of the contracts, and estimated the probability of collectability. We have also considered the goods and services we
deliver compared to the contractual performance obligations. Our agreements predominantly have a fixed price for the goods or
services to be delivered, we do not provide financing, and we settle in cash. Each separate performance obligation within our
contracts with customers is priced individually, and we recognize revenue as each good or service is delivered, meaning when the
performance obligation is satisfied. Based on this assessment, adoption of the three ASUs immediately above will not have a significant
impact on our consolidated results of operations, cash flows or financial position.
Other
recent accounting pronouncements issued by the FASB and the SEC did not, or management believes will not, have a material impact
on our present or future consolidated financial statements.
Note
2 – Receivables
Receivables
consist of the following:
|
|
December 31,
|
|
|
2017
|
|
2016
|
Customer receivables
|
|
$
|
35,821
|
|
|
$
|
14,432
|
|
Less: Allowance for uncollectible accounts
|
|
|
(35,821
|
)
|
|
|
(14,401
|
)
|
|
|
|
—
|
|
|
$
|
31
|
|
Note
3 – Debt
Debt
consists of the following:
|
|
|
|
December 31,
|
Description
|
|
Note
|
|
2017
|
|
2016
|
Line of credit
|
|
|
A
|
|
|
$
|
31,588
|
|
|
$
|
47,000
|
|
Note payable to distribution partner
|
|
|
B
|
|
|
|
550,000
|
|
|
|
550,000
|
|
Investor debt
|
|
|
C
|
|
|
|
371,507
|
|
|
|
371,507
|
|
Related party debt
|
|
|
D
|
|
|
|
10,038,037
|
|
|
|
6,719,979
|
|
Other notes payable
|
|
|
E
|
|
|
|
1,021,937
|
|
|
|
981,137
|
|
Cash draw agreements
|
|
|
F
|
|
|
|
338,083
|
|
|
|
211,076
|
|
Convertible promissory notes
|
|
|
G
|
|
|
|
58,937
|
|
|
|
71,637
|
|
Total
|
|
|
|
|
|
|
12,410,089
|
|
|
|
8,952,336
|
|
Less: unamortized discount and debt issuance costs
|
|
|
|
|
|
|
(484,948
|
)
|
|
|
(280,555
|
)
|
Debt, net of unamortized discount and debt issuance costs
|
|
|
|
|
|
|
11,925,141
|
|
|
|
8,671,781
|
|
Less: current portion
|
|
|
|
|
|
|
(11,249,083
|
)
|
|
|
(8,451,781
|
)
|
Debt, long-term portion
|
|
|
|
|
|
$
|
676,058
|
|
|
$
|
220,000
|
|
A
– L
i
ne of Cr
e
d
i
t
– We utilized this entire bank line of credit for working capital purposes. The outstanding obligation is due on demand,
has a stated initial interest rate of 10.5% that is subject to adjustment, and is guaranteed by our majority shareholder/CEO.
Energie and our CEO (collectively, “the defendants”) were served with a summons and complaint, wherein the bank brought
an action to collect the amount due, including interest, costs and attorney’s fees. On April 4, 2016, the parties to this
action entered into a settlement agreement whereby the defendants agreed to pay to Vectra Bank the sum of $59,177 on or before
April 30, 2016. This payment was not made and the bank requested and received a judgment against both defendants jointly and severally
for $61,502 plus interest of 5.25% per annum plus 9.90% per annum on the default margin. On May 10, 2017, the bank agreed to stay
further execution on the judgment so long as the defendants pay the balance of the judgment in monthly payments of $5,000 per
month on the fifteenth of each month, commencing on May 15, 2017. Under this agreement, interest continues to accrue at the judgment
interest rate. The current principal balance is $31,588.
B
–
No
t
e
P
a
yab
l
e
t
o
D
i
s
t
r
i
bu
ti
on
Par
t
ner –
Note payable to a significant
European distribution partner, entered into in October 2014, bearing interest at 5% payable quarterly, with principal payable
monthly through September 2019.
C
–
Investor
Debt –
Notes payable
t
o
l
e
nde
r
s
ha
v
i
ng an ownership i
n
t
e
r
e
st
i
n
Holdings
at December 31, 2017 and 2016
. These loans are not collateralized. The following summarizes the terms and balances
of the investor debt:
December 31,
|
|
|
2017
|
|
2016
|
|
Interest Rate
|
$
|
87,787
|
|
|
$
|
87,787
|
|
|
|
24
|
%
|
|
50,000
|
|
|
|
50,000
|
|
|
|
24
|
%
|
|
50,000
|
|
|
|
50,000
|
|
|
|
24
|
%
|
|
25,000
|
|
|
|
25,000
|
|
|
|
8
|
%
|
|
25,000
|
|
|
|
25,000
|
|
|
|
8
|
%
|
|
20,000
|
|
|
|
20,000
|
|
|
|
2
|
%
|
|
113,720
|
|
|
|
113,720
|
|
|
|
various
|
|
$
|
371,507
|
|
|
$
|
371,507
|
|
|
|
|
|
D
– Related Party Debt
– The following summarizes notes payable to related parties.
|
|
December 31,
|
|
|
|
|
2017
|
|
2016
|
|
Interest Rate
|
|
D1
|
|
|
$
|
4,635,865
|
|
|
$
|
4,635,865
|
|
|
|
various
|
|
|
D2
|
|
|
|
34,888
|
|
|
|
34,888
|
|
|
|
12
|
%
|
|
D3
|
|
|
|
362,550
|
|
|
|
356,550
|
|
|
|
various
|
|
|
D4
|
|
|
|
1,205,234
|
|
|
|
668,176
|
|
|
|
18
|
%
|
|
D5
|
|
|
|
3,799,500
|
|
|
|
1,024,500
|
|
|
|
6
|
%
|
|
Total
|
|
|
$
|
10,038,037
|
|
|
$
|
6,719,979
|
|
|
|
|
|
D1
– Notes payable to Symbiote, Inc. (“Symbiote”), entered into from December 2014 to June 2016, with monthly
principal and interest payable through November 2017. Symbiote is an owner of the common stock of Holdings, is the lessor of our
manufacturing facility, and the provider of our payroll services. We also owe Symbiote $1,285,325 in accounts payable and accrued
interest.
D2
– Note payable to our chief executive officer (“CEO”), entered into in December 2014, with monthly principal
and interest payable through December 2016. We also owe Hal $879,404 in accrued compensation, accrued interest, and expenses incurred
on behalf of the Company.
D3
– Notes payable to the spouse of our CEO, entered into from September 2013 to March 2017, with principal and interest
payments due upon a specific event or upon demand. We also owe her $199,740 in accrued interest.
D4
–
Notes payable to the consulting firm that employs our Chief Financial Officer, entered into from June 2015 to December 2017. These
notes aggregated the previous accounts payable and accrued interest due to the consulting firm at the time the notes were made.
As of January 1, 2016, three of the notes are convertible into shares of our common stock at a conversion rate of 75% of the volume
weighted average market price of our stock over the 20 days preceding the notification of conversion. We determined that this
conversion feature does not meet the requirements to be treated as a derivative; however, we did determine it was a beneficial
conversion feature. Accordingly, we recorded a debt discount of $217,725, which was amortized through interest expense over the
life of the notes. We also owe this firm $294,412 in accrued interest.
D5
–
Notes payable to the principal shareholders of Symbiote, entered into from April to December 2017, with principal and interest
payments due upon a specific event or upon demand. We also owe them $106,154 in accrued interest.
E
–
O
t
h
er
No
t
es Pay
a
b
l
e
–
Represents the outstanding principal balance on six separate notes bearing interest at between 6% and 24%
annually. In the event we receive proceeds as the beneficiary of a life insurance policy covering our majority
shareholder/CEO, repayment of principal and interest is due on one of these notes prior to using the proceeds for any other
purpose. During November 2017, one of these noteholders requested a summary judgment for a note that is in default as
principal and interest payments were not made in accordance with the note. The note had consolidated past due rent
amounts and interest to one of our former landlords. In January 2018, a summary judgment in the amount of $475,832, which
represents the total principal and interest outstanding on the note as of October 31, 2017 was granted by the
court.
F
– Cash draw agreements
– Under these agreements, the lender advances us the principal balance and then automatically
withdraws a stated amount each business day. Accordingly, there is no stated interest rate. The total remaining daily payments
due under these arrangements was $437,529 as of December 31, 2017. The maturity dates of the agreements range from January to
April 2018.
G
–
Convertible
promissory notes –
Represents the outstanding principal balance related to a convertible promissory note entered
into during October 2014.
In May 2017, LG Capital Funding LLC (“LG”), filed a complaint against us in the
U.S. District Court for the Southern District of New York, Civil Action No. 17-cv-4006-(RJS), alleging that we owed LG the
principal balance of $75,000 plus interest, costs and attorneys’ fees, arising out of two convertible notes issued to
LG. LG amended its complaint in July 2017 and we filed our answer a week later denying any liability and
affirmatively stating that LG had been repaid many times over. LG then immediately filed a pre-discovery motion for summary
judgment. We submitted our opposition to the motion on September 25, 2017. LG filed reply papers in further support on
October 5, 2017. LG asserts that no factual issues exist and that summary judgment is therefore appropriate. Our opposition
asserts that summary judgment, as to both liability and damages, is woefully premature and unwarranted given the many factual
issues that exist regarding, among other things, LG’s failure to disclose material facts, potential short selling and
fraudulent concealment, usury, and fraud on the market. The motion remains pending before the Court.
Our defense in this matter is based in
part on a separate action filed by the Securities and Exchange Commission against unrelated defendants in the U.S. District Court
for the Southern District of Florida alleging that the defendant there, which follows the same business model as LG, has violated
federal securities laws by not registering as a dealer. We understand that LG also was not and is not registered as a dealer even
though it too should be given it too trades securities for its own account as part of its business. The SEC asserts that all gains
reaped by defendants in the attached complaint should be disgorged due to the ill-gotten gains received. LG has, admittedly, likewise
received substantial profits trading our stock for its own account.
As a result, we have filed an amended answer,
alleging that LG is entitled to no recovery, and that it should disgorge to us all gains unlawfully received from selling our shares
of common stock.
Debt
issuance costs of $484,948 are being amortized over the life of their respective notes.
The
future maturities of debt are as follows:
Year ending December 31,
|
|
|
|
2018
|
|
|
$
|
11,249,083
|
|
|
2019
|
|
|
|
670,058
|
|
|
2020
|
|
|
|
6,000
|
|
|
|
|
|
$
|
11,925,141
|
|
Note
4 – Equity
We
have authorized 5,000,000 shares of preferred stock at $0.0001 par value, with no shares issued and outstanding as of December
31, 2017. Upon issuing preferred stock, if any, the terms of each tranche of issuance may be determined by our board of directors,
including dividends and voting rights.
In
July 2014, we entered into an agreement with Dutchess Opportunity Fund, II, LP (“Dutchess”), under which Dutchess
has agreed to purchase from us 5,000,000 shares of our common stock, up to $5 million, during a 36 month period commencing on
the date a Registration Statement on Form S-1 was declared effective, October 29, 2014. We will sell these shares to Dutchess
at a price equal to 94% of the lowest daily volume weighted-average price of our common stock during the five consecutive trading
days beginning on the day we make notice to Dutchess and ending on and including the date that is four trading days after such
notice. We have the right to withdraw all or any portion of any put before the closing, subject to certain limitations. As part
of the agreement with Dutchess, we transferred 2,000,000 shares of our common stock for no proceeds. We will receive proceeds
when we make notice to Dutchess to sell these shares. The market price of the 2,000,000 shares was $40,000, based on the trading
price on the date of transfer. If we do not make notice to Dutchess, these shares will be returned to us at the end of the 36
month contractual period. As of December 31, 2017, we had not made notice to Dutchess to sell any of these shares. Accordingly,
the net impact to our stockholders’ equity is zero.
Note
5 – Commitments and Contingencies
Future
minimum rental payments required under all leases that have remaining non-cancelable lease terms in excess of one year as of December
31, 2017, are as follows:
Note
6 – Income Taxes
On December 22, 2017, the
Tax Reform Act was signed into law which significantly changed U.S. tax law by, among other things, lowering the corporate income
tax rate from 35% to 21% effective January 1, 2018, allowing for the acceleration of expensing for certain business assets, requiring
companies to pay a one-time transition tax on certain un-remitted earnings of foreign subsidiaries, and eliminating U.S. federal
income tax on dividends from foreign subsidiaries. We have no tax provision for any period presented due to history of operating
losses. As of December 31, 2017, we had deferred tax assets of $4,746,539, resulting from certain temporary differences and
net operating loss (“NOL”) carry-forwards, which are available to offset future taxable income, if any, through
2036. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as
management has determined that their realization is not likely to occur and accordingly, we have recorded a valuation allowance
for the deferred tax asset relating to these tax loss carry-forwards.
The components of the provision
for income taxes are as follows:
|
|
Year ended December 31,
|
|
|
2017
|
|
2016
|
Current tax provision
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,289,209
|
)
|
|
$
|
(1,100,820
|
)
|
State
|
|
|
(167,508
|
)
|
|
|
(143,630
|
)
|
|
|
|
(1,456,717
|
)
|
|
|
(1,244,450
|
)
|
Deferred tax provision
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,289,209
|
|
|
|
1,100,820
|
|
State
|
|
|
167,508
|
|
|
|
143,630
|
|
|
|
|
1,456,717
|
|
|
|
1,244,450
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The components of net deferred
tax assets and liabilities are as follows:
|
|
Year ended December 31,
|
|
|
2017
|
|
2016
|
Current deferred tax asset (liability):
|
|
|
|
|
|
|
|
|
Inventory reserve
|
|
$
|
97,554
|
|
|
$
|
67,430
|
|
Warranty reserve
|
|
|
7,148
|
|
|
|
7,148
|
|
Net operating loss carryforward
|
|
|
4,641,837
|
|
|
|
3,185,120
|
|
Valuation allowance
|
|
|
(4,746,539
|
)
|
|
|
(3,259,698
|
)
|
|
|
|
—
|
|
|
|
—
|
|
Long-term deferred tax asset (liability)
|
|
|
|
|
|
|
|
|
Long-lived assets
|
|
|
101,277
|
|
|
|
112,895
|
|
Valuation allowance
|
|
|
(101,277
|
)
|
|
|
(112,895
|
)
|
Net deferred tax asset (liability)
|
|
$
|
—
|
|
|
$
|
—
|
|
A reconciliation of our
income tax provision and the amounts computed by applying statutory rates to income before income taxes is as follows:
|
|
Year ended December 31,
|
|
|
2017
|
|
2016
|
Income tax benefit at statutory rate
|
|
$
|
(1,366,458
|
)
|
|
$
|
(1,169,297
|
)
|
State income tax, net of Federal benefit
|
|
|
(122,812
|
)
|
|
|
(105,092
|
)
|
Amortization of debt discount
|
|
|
—
|
|
|
|
27,793
|
|
Other
|
|
|
14,047
|
|
|
|
7,130
|
|
Valuation allowance
|
|
|
1,475,223
|
|
|
|
1,239,466
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Note
7 – Net Loss Per Share
Basic
net loss per share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting
period. Diluted net loss per share is computed similarly to basic net loss per share, except that it includes the potential dilution
that could occur if dilutive securities are exercised. In a net loss position, however, potential securities are excluded, because
they are considered anti-dilutive.
The
following table presents a reconciliation of the denominators used in the computation of net loss per share – basic and
diluted:
|
|
Year ended December 31,
|
|
|
2017
|
|
2016
|
Net loss available for stockholders
|
|
$
|
(4,018,993
|
)
|
|
$
|
(3,455,227
|
)
|
Weighted average outstanding shares of
common stock
|
|
|
249,447,443
|
|
|
|
176,839,038
|
|
Dilutive effect of securities
|
|
|
—
|
|
|
|
—
|
|
Common stock and equivalents
|
|
|
249,447,443
|
|
|
|
176,839,038
|
|
Net loss per share – Basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
There
are no dilutive instruments outstanding during the years ended December 31, 2017 and 2016.