NOTES TO
CONDENSED FINANCIAL STATEMENTS
NOTE
1 ORGANIZATION AND NATURE OF OPERATIONS
SQL Technologies
Corp. (f/k/a Safety Quick Lighting & Fans Corp.), a Florida corporation (the “Company”), was originally organized
in May 2004 as a limited liability company under the name of Safety Quick Light, LLC. The Company was converted to corporation
on November 6, 2012. Effective August 12, 2016, the Company changed its name from “Safety Quick Lighting & Fans Corp.”
to “SQL Technologies Corp.” The Company holds a number of worldwide patents and has received a variety of final electrical
code approvals, including UL Listing and CSA approval (for the United States and Canadian Markets), the CE Marking (for the European
market) and, in December 2016, was approved by the National Fire Protection Association for inclusion in the NFPA 70: National
Electrical Code (NEC). The Company maintains offices in Georgia, Florida and in Foshan, Peoples Republic of China.
The Company
is engaged in the business of developing proprietary technology that enables a quick and safe installation of electrical fixtures,
such as ceiling fans and light fixtures, using a power plug installed in ceiling and wall electrical junction boxes. The Company’s
base technology consists of a weight bearing, fixable socket and a revolving plug for conducting electric power and supporting
an electrical appliance attached to a wall or ceiling. The socket is comprised of an electric power supply that is connected to
the electrical junction box. The plug, which is incorporated in an electrical appliance, attaches to the socket via a male post
and is capable of feeding electric power to the appliance. The plug includes a second structural element allowing it to revolve
and a releasable latching that provides a retention force between the socket and the plug to prevent unintentional disengagement.
The socket and plug can be detached by releasing the latch, thereby disengaging the electric power from the plug. The socket is
designed to replace the support bar incorporated in electric junction boxes, and the plug can be installed in light fixtures,
ceiling fans and wall sconce fixtures. The use of the Company’s technology enables the installation and replacement of ceiling
fans and lights and wall sconces in a fraction of the time of similar, conventional appliances.
The Company
currently markets consumer friendly, energy saving “plugin” ceiling fans and light fixtures under the General Electric
Company (“GE” or “General Electric”) brand as well as “conventional” ceiling lights and fans
carrying the GE brand. The Company also owns 98.8% of SQL Lighting& Fans LLC (the “Subsidiary”). The Subsidiary
was formed in Florida on April 27, 2011 and is in the business of manufacturing the patented device that the Company owns. The
Subsidiary had no activity during the periods presented.
The Company’s fiscal year
end is December 31.
NOTE
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following
is a summary of the Company’s significant accounting policies:
Basis of
Presentation
The accompanying
consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted
in the United States of America (U.S. GAAP) under the accrual basis of accounting.
Principles
of Consolidation
The consolidated
financial statements include the accounts of SQL Technologies Corp. (f/k/a Safety Quick Lighting and Fans Corp.) and the Subsidiary,
SQL Lighting & Fans LLC. All intercompany accounts and transactions have been eliminated in consolidation.
Non-controlling
Interest
In May 2012,
in connection with the sale of the Company’s membership units in the Subsidiary, the Company’s ownership percentage
in the Subsidiary decreased from 98.8% to 94.35%. The Company then reacquired these membership units in September 2013, increasing
the ownership percentage from 94.35% back to 98.8%. During year ended 2017 and 2016, there was no activity in the Subsidiary.
Use of
Estimates
The preparation
of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and accompanying notes.
Such estimates
and assumptions impact both assets and liabilities, including but not limited to: net realizable value of accounts receivable
and inventory, estimated useful lives and potential impairment of property and equipment, the valuation of intangible assets,
estimate of fair value of share based payments and derivative liabilities, estimates of fair value of warrants issued and recorded
as debt discount, estimates of tax liabilities and estimates of the probability and potential magnitude of contingent liabilities.
Making estimates
requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a
condition, situation or set of circumstances that existed at the date of the financial statements, which management considered
in formulating its estimate could change in the near term due to one or more future nonconforming events. Accordingly, actual
results could differ significantly from estimates.
Reclassifications
For comparability, reclassifications
of certain prior-year balances were made in order to confirm with current-year presentations.
Risks and Uncertainties
The Company’s
operations are subject to risk and uncertainties including financial, operational, regulatory and other risks including the potential
risk of business failure.
The Company
has experienced, and in the future, expects to continue to experience, variability in its sales and earnings. The factors expected
to contribute to this variability include, among others, (i) the uncertainty associated with the commercialization and ultimate
success of the product, (ii) competition inherent at large national retail chains where product is expected to be sold (iii) general
economic conditions and (iv) the related volatility of prices pertaining to the cost of sales.
Cash and
Cash Equivalents
Cash and cash
equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions,
and all highly liquid investments with an original maturity of three months or less. The Company had $4,759,864 and $4,877,720
in money market as of March 31, 2018, and December 31, 2017, respectively. The Company has deposits in financial institutions
which exceeds the amount insured by the FDIC. The amount of uninsured deposits was $4,259,894 at March 31, 2018.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts receivable
are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary
course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts.
The Company
recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries.
The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future bad debts,
as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible.
The Company’s
net balance of accounts receivable at March 31, 2018 and December 31, 2017:
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(Unaudited)
March 31, 2018
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(Audited)
December 31, 2017
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Accounts
Receivable
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$
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1,816,372
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$
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1,049,965
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Allowance
for Doubtful Accounts
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—
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—
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Net
Accounts Receivable
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$
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1,816,372
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$
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1,049,965
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All amounts
are deemed collectible at March 31, 2018 and December 31, 2017 and accordingly, the Company has not incurred any bad debt expense
at March 31, 2018 and December 31, 2017.
Inventory
Inventories
are stated at the lower of cost, determined on the first-in, first-out (FIFO) method. Cost principally consists of the purchase
price (adjusted for lower of cost or market), customs, duties, and freight. The Company periodically reviews historical sales
activity to determine potentially obsolete items and evaluates the impact of any anticipated changes in future demand.
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(Unaudited)
March 31, 2018
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(Audited)
December 31, 2017
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Inventory finished
goods
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$
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1,611,644
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$
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1,887,034
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Inventory,
components parts
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653,883
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465,539
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Total
inventory
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$
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2,265,527
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$
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2,352,573
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The Company will maintain an allowance based
on specific inventory items that have shown no activity over a 24-month period. The Company tracks inventory as it is disposed,
scrapped or sold at below cost to determine whether additional items on hand should be reduced in value through an allowance method.
As of March 31, 2018, and December 31, 2017, the Company has determined that no allowance is required.
Valuation
of Long-lived Assets and Identifiable Intangible Assets
The Company
reviews for impairment of long-lived assets and certain identifiable intangible assets whenever events or changes in circumstances
indicate that the carrying amount of any asset may not be recoverable. In the event of impairment, the asset is written down to
its fair market value. The Company determined an impairment adjustment of $600,000 was necessary for the year ended 2017.
Property
and Equipment
Property and
equipment is stated at cost, less accumulated depreciation, and is reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Depreciation
of property and equipment is provided utilizing the straight-line method over the estimated useful lives, ranging from 5 to 7
years of the respective assets. Expenditures for maintenance and repairs are charged to expense as incurred.
Upon sale
or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain
or loss is reflected in the statements of operations.
Intangible
Asset Patent
The Company
developed various patents for an installation device used in light fixtures and ceiling fans. Costs incurred for submitting the
applications to the United States Patent and Trademark Office for these patents have been capitalized. Patent costs are being
amortized using the straight-line method over the related 15-year lives. The Company begins amortizing patent costs once a filing
receipt is received stating the patent serial number and filing date from the Patent Office.
The Company
incurs certain legal and related costs in connection with patent applications. The Company capitalizes such costs to be amortized
over the expected life of the patent to the extent that an economic benefit is anticipated from the resulting patent or alternative
future use is available to the Company. The Company also capitalizes legal costs incurred in the defense of the Company’s
patents when it is believed that the future economic benefit of the patent will be maintained or increased, and a successful defense
is probable. Capitalized patent defense costs are amortized over the remaining expected life of the related patent. The Company’s
assessment of future economic benefit or a successful defense of its patents involves considerable management judgment, and an
unfavorable outcome of litigation could result in a material impairment charge up to the carrying value of these assets.
GE Trademark
Licensing Agreement
The Company
entered into a Trademark License Agreement with General Electric on June 15, 2011 (the “License Agreement”) allowing
the Company to utilize the “GE trademark” on products which meet the stringent manufacturing and quality requirements
of General Electric (the “GE Trademark License”). As described further in Note 5 to these financial statements, the
Company and General Electric amended the License Agreement in August 2014. As a result of that amendment, the Company is required
to pay a minimum trademark licensing fee (the “Royalty Obligation”) to General Electric of $12,000,000. The repayment
schedule is based on a percent of sales, with any unpaid balance due in November 2018. Under SFAS 142 “Accounting for Certain
Intangible Assets” the Company has recorded the value of the Licensing Agreement and will amortize it over the life of the
License Agreement, which is 60 months. The Company determined an impairment adjustment of $600,000 was necessary for the year
ended 2017.
Fair Value
of Financial Instruments
The Company
measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair
value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability,
as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that
market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes
a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation
techniques, are assigned a hierarchical level.
The following
are the hierarchical levels of inputs to measure fair value:
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Level 1 –
Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
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Level 2 Inputs reflect
quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or
liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities;
or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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Level 3 –
Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair
value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
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The carrying
amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts
payable & accrued expenses, certain notes payable and notes payable – related party, approximate their fair values because
of the short maturity of these instruments.
The Company
accounts for its derivative liabilities, at fair value, on a recurring basis under Level 3. See Note 9.
Embedded
Conversion Features
The Company
evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to determine
whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at
fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under
ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration of
any beneficial conversion features.
Derivative
Financial Instruments
The Company does not use derivative
instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of it financial instruments,
including stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially
recorded at its fair value and is then revalued at each reporting date, with changes in the fair value reported as charges or
credits to income.
The Company
changed its method to estimate the valuation of valuation for fair market values of derivatives in 2017 to a lattice-binomial
option-pricing model (“lattice-binomial model”) from the Black-Scholes option-pricing model (“Black-Scholes
model”) which was previously used under SFAS 123 and are reflected on our condensed consolidated statement of operations
as other (income) expense at each reporting period. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. However, such new and/or complex
instruments may have immature or limited markets. As a result, the pricing models used for valuation of derivatives often incorporate
significant estimates and assumptions, which may impact the level of precision in the financial statements. Furthermore, depending
on the terms of a derivative or embedded derivative, the valuation of derivatives may be removed from the financial statements
upon conversion of the underlying instrument into some other security. The change in valuation methodology for accounting estimates
had no material impact on the Company’s previous calculations.
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.
The Company
has reserved for issuance 26,751,860 shares of Common stock associated with conversion features on Series A Preferred Stock, warrants
and options. These shares have been reserved for issuance by the Company’s stock transfer agent, and accordingly, no derivative
liability has been calculated on these shares.
Beneficial
Conversion Feature
For conventional
convertible debt where the rate of conversion is below market value, the Company records a “beneficial conversion feature”
(“BCF”) and related debt discount.
When the Company
records a BCF, the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt
instrument (offset to additional paid in capital) and amortized to interest expense over the life of the debt.
Debt Issue Costs and Debt Discount
The Company
may record debt issue costs and/or debt discounts in connection with raising funds through the issuance of debt. These costs may
be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense over the life of the
debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
Original
Issue Discount
For certain
convertible debt issued, the Company may provide the debt holder with an original issue discount. The original issue discount
would be recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the life of
the debt.
Extinguishments
of Liabilities
The Company
accounts for extinguishments of liabilities in accordance with ASC 86010 (formerly SFAS 140) “Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities”. When the conditions are met for extinguishment accounting,
the liabilities are derecognized and the gain or loss on the sale is recognized.
Stock Based
Compensation – Employees
The Company
accounts for its stock-based compensation in which the Company obtains employee services in share-based payment transactions under
the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting
Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which
goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value
of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
The measurement
date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete
or the date on which it is probable that performance will occur.
If the Company
is a newly formed corporation or shares of the Company are thinly traded, the use of share prices established in the Company’s
most recent private placement memorandum (based on sales to third parties), or weekly or monthly price observations would generally
be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread
between the bid and asked quotes and lack of consistent trading in the market.
The fair value
of share options and similar instruments is estimated on the date of grant using a lattice-binomial option pricing valuation model.
The ranges of assumptions for inputs are as follows:
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Expected term of
share options and similar instruments: 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 718-10-50-2(f)(2)(i) of the FASB Accounting
Standards Codification the expected term of share options and similar instruments represents the period of time the options
and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments
and employees expected exercise and post vesting employment termination behavior into the fair value (or calculated value)
of the instruments. 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.
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Expected volatility
of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f) (2)(ii) a thinly
traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for
the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected,
the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company
uses the average historical volatility of the comparable companies over the expected contractual life of the share options
or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price
observations would generally be more appropriate than the use of daily price observations as the volatility calculation using
daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes
and lack of consistent trading in the market
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Risk-free rate(s).
An entity that uses a method that employs different risk-free rates shall disclose the range of risk free rates used. The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected
term of the share options and similar instruments.
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Generally,
all forms of share-based payments, including stock option grants, warrants and restricted stock grants and stock appreciation
rights are measured at their fair value on the awards’ grant date, based on estimated number of awards that are ultimately
expected to vest.
The expense
resulting from share-based payments is recorded in general and administrative expense in the statements of operations.
Stock Based
Compensation – Nonemployees
Equity
Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
The Company
accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of Subtopic
505-50 of the FASB Accounting Standards Codification (“Subtopic 505-50”).
Pursuant to
ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity instruments
are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever
is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier
of the date on which the performance is complete or the date on which it is probable that performance will occur. If the Company
is a newly formed corporation or shares of the Company are thinly traded the use of share prices established in the Company’s
most recent private placement memorandum, or weekly or monthly price observations would generally be more appropriate than the
use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked
quotes and lack of consistent trading in the market.
The fair value
of share options and similar instruments is estimated on the date of grant using a Black-Scholes option pricing valuation model.
The ranges of assumptions for inputs are as follows:
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Expected term of
share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification
the expected term of share options and similar instruments represents the period of time the options and similar instruments
are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s expected
exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data to estimate
holder’s expected exercise behavior. If the Company is a newly formed corporation or shares of the Company are thinly
traded the contractual term of the share options and similar instruments is used as the expected term of share options and
similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which
to estimate expected term.
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Expected volatility
of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f) (2)(ii) a thinly
traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for
the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected,
the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company
uses the average historical volatility of the comparable companies over the expected contractual life of the share options
or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price
observations would generally be more appropriate than the use of daily price observations as the volatility calculation using
daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes
and lack of consistent trading in the market.
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Expected annual
rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term
shall disclose the range of expected dividends used and the weighted average expected dividends. The expected dividend yield
is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within
the expected term of the share options and similar instruments.
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Risk-free rate(s).
An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected
term of the share options and similar instruments.
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Pursuant to
ASC paragraph 505-50-257, if fully vested, no forfeitable equity instruments are issued at the date the grantor and grantee enter
into an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments),
then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement
date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement
is entered into). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized
as contra equity under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances. Pursuant to
ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return
for fully vested, non-forfeitable equity instruments that are issued at the date the grantor and grantee enter into an agreement
for goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such
an asset shall not be displayed as contra equity by the grantor of the equity instruments.
The transferability
(or lack thereof) of the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited
to transactions in which equity instruments are transferred to other than employees in exchange for goods or services. Section
505-50-30 provides guidance on the determination of the measurement date for transactions that are within the scope of this Subtopic.
Pursuant to
Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable
by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee
achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and
in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of
paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a share
option and similar instrument that the counterparty has the right to exercise expires unexercised.
Pursuant to
ASC paragraph 505-50-30-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable
equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received
(that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement
date and no entry should be recorded.
Equity
Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
The Company
accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of Sub-topic
505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).
Pursuant to
ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity instruments
are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever
is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier
of the date on which the performance is complete or the date on which it is probable that performance will occur. If the Company
is a newly formed corporation or shares of the Company are thinly traded the use of share prices established in the Company’s
most recent private placement memorandum (“PPM”), or weekly or monthly price observations would generally be more
appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between
the bid and asked quotes and lack of consistent trading in the market.
The fair value
of share options and similar instruments is estimated on the date of grant using a lattice-binomial option-pricing valuation model.
The ranges of assumptions for inputs are as follows:
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Expected
term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards
Codification the expected term of share options and similar instruments represents the period of time the options and similar
instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s
expected exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data
to estimate holder’s expected exercise behavior. If the Company is a newly formed corporation or shares of the Company
are thinly traded the contractual term of the share options and similar instruments is used as the expected term of share
options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis
upon which to estimate expected term.
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Expected
volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii)
a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable
for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has
selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index.
The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share
options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly
price observations would generally be more appropriate than the use of daily price observations as the volatility calculation
using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes
and lack of consistent trading in the market.
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Expected
annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual
term shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend
yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods
within the expected term of the share options and similar instruments.
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Risk-free rate(s).
An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected
term of the share options and similar instruments.
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Pursuant to
ASC paragraph 505-50-25-7, if fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee
enter into an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments),
then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement
date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement
is entered into). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized
as contra-equity under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances. Pursuant to
ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return
for fully vested, non-forfeitable equity instruments that are issued at the date the grantor and grantee enter into an agreement
for goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such
an asset shall not be displayed as contra-equity by the grantor of the equity instruments.
The transferability
(or lack thereof) of the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited
to transactions in which equity instruments are transferred to other than employees in exchange for goods or services. Section
505-50-30 provides guidance on the determination of the measurement date for transactions that are within the scope of this Subtopic.
Revenue
Recognition
The Company
derives revenues from the sale of GE branded fans and lighting fixtures to large retailers through retail and online sales.
Sales are
recognized at the time title transfers to the customer, generally upon shipment and when all the following have occurred: (1)
persuasive evidence of an arrangement exists, (2) asset is transferred to the customer without further obligation, (3) the sales
price to the customer is fixed or determinable, and (4) collectability is reasonably assured.
Trade allowances
and a provision for estimated returns and other allowances are recorded at the time sales are made, considering historical and
anticipated trends.
On January
1, 2017, we adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments
(“new revenue standard”) to all contracts using the modified retrospective method, while prior period amounts are
not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. The adoption has had an immaterial
impact to our comparative net income and as such comparative information has not been restated and continues to be reported under
the accounting standards in effect for those periods. We expect the impact of the adoption of the new standard to be immaterial
to our net income on an ongoing basis.
A majority
of our sales revenue continues to be recognized when products are shipped from our manufacturing facilities and from our third-party
logistics facility.
Cost of
Sales
Cost of sales
represents costs directly related to produce, acquire and source inventory for sale, and provisions for inventory shrinkage and
obsolescence. These costs include costs of purchased products, inbound freight, custom duties.
Shipping
and Handling Cost
Costs
incurred by the Company to deliver finished goods are expensed and recorded in selling, general and administrative expenses.
Selling, general
and administrative expenses include employee and related costs, stock compensation, marketing, professional fees, distribution,
warehouse costs, and other related selling costs. Stock compensation expense consists of non-cash charges resulting from
the issuance of stock units and stock options. Selling expenses include costs incurred in the selling of merchandise. General
and administrative expenses include costs incurred in the administration or general operations of the business.
Earnings
(Loss) Per Share
Basic net
earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common stock
outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) for the period by
the weighted average number of common stock, common stock equivalents and potentially dilutive securities outstanding during each
period.
The Company
uses the “treasury stock” method to determine whether there is a dilutive effect of outstanding convertible debt,
option and warrant contracts. For the three-months ended March 31, 2018 and 2017, the Company reflected net loss and a dilutive
net loss, and the effect of considering any common stock equivalents would have been antidilutive for the period. Therefore, separate
computation of diluted earnings (loss) per share is not presented for the periods presented.
The Company
has the following Common Stock equivalents at March 31, 2018 and December 31, 2017:
|
|
(Unaudited)
March
31, 2018
|
|
(Audited)
December
31, 2017
|
Stock
Warrants (Exercise price - $0.375 - $3.00/share)
|
|
8,419,924
|
|
|
8,419,924
|
|
Stock
Options (Exercise price $0.375 - $4.00/share)
|
|
4,875,000
|
|
|
4,875,000
|
|
Total
|
|
13,294,924
|
|
|
13,294,924
|
|
Related
Parties
The Company
follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure
of related party transactions.
Pursuant to
Section 850-10-20 the related parties include (a) Affiliates of the Company; (b) Entities for which investments in their
equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section
825–10–15, to be accounted for by the equity method by the investing entity; (c) Trusts for the benefit of employees,
such as pension and profit sharing trusts that are managed by or under the trusteeship of management; (d) Principal owners
of the Company; (e) Management of the Company; (f) Other parties with which the Company may deal if one party controls
or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties
might be prevented from fully pursuing its own separate interests; and (g) Other parties that can significantly influence
the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties
and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully
pursuing its own separate interests.
The consolidated
financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense
allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated
in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall
include: (a). the nature of the relationship(s) involved; (b). a description of the transactions, including transactions
to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such
other information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c).
the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change
in the method of establishing the terms from that used in the preceding period; and (d). amounts due from or to related parties
as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Contingencies
The Company
follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions
may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company, but which
will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings
that are pending against the Company or un-asserted claims that may result in such proceedings, the Company evaluates the perceived
merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected
to be sought therein.
If the assessment
of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated,
then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a
potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then
the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be
disclosed.
Loss contingencies
considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
However, there is no assurance that such matters will not materially and adversely affect the Company’s business, consolidated
financial position, and consolidated results of operations or consolidated cash flows.
Subsequent
Events
The Company
follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events.
The Company will evaluate subsequent events through the date when the financial statements are issued.
Pursuant to
ASU 201009 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued
when they are widely distributed to users, such as through filing them on EDGAR.
Recently
Issued Accounting Pronouncements
On January 1, 2017 We adopted the new accounting
standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) to
all contracts using the modified retrospective method, while prior period amounts are not adjusted and continue to be reported
in accordance with our historic accounting under Topic 605. The adoption of this guidance did not have a material impact on our
financial position, results of operations or cash flows. We expect the impact of the adoption of the new standard to be immaterial
to our net income on an ongoing basis.
In
August 2017, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2017-12, Derivatives and Hedging
(Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 expands
component and fair value hedging, specifies the presentation of the effects of hedging instruments, and eliminates the separate
measurement and presentation of hedge ineffectiveness. We are currently evaluating the impact of adopting this guidance. We do
not expect adoption of this guidance to have a material impact on our financial position, results of operations or cash flows.
In
November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”),
which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows.
The Company will adopt ASU 2016-18 in its first quarter of 2019. We do not expect adoption of this guidance to have a material
impact on our financial position, results of operations or cash flows.
In
March 2016, the FASB issued ASU 2016-09, Stock Compensation, which is intended to simplify the accounting for share-based payment
award transactions. The new standard will modify several aspects of the accounting and reporting for employee share-based payments
and related tax accounting impacts, including the presentation in the statements of operations and cash flows of certain tax benefits
or deficiencies and employee tax withholdings, as well as the accounting for award forfeitures over the vesting period. The guidance
is effective for fiscal years beginning after December 15, 2016, including interim periods within that year, and will be adopted
by the Company in the first quarter of fiscal 2017. The Company anticipates the new standard will result in an increase in the
number of shares used in the calculation of diluted earnings per share and will add volatility to the Company’s effective
tax rate and income tax expense. The magnitude of such impacts will depend in part on whether significant employee stock option
exercises occur.
In
March 2016, the FASB issued an accounting standard update which simplifies the accounting for share-based payment transactions,
inclusive of income tax accounting and disclosure considerations. This guidance is effective for fiscal and interim periods beginning
after December 15, 2016 and is required to be applied retrospectively to all impacted share-based payment arrangements. We adopted
this guidance on January 1, 2017. The adoption of this guidance did not have a material impact on our financial position,
results of operations or cash flows.
In
January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-01,
which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current
guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation
and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance
assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new
standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should
apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period
in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for
financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income.
We are currently evaluating the impact of adopting this guidance.
In
February 2016, the FASB issued an accounting standard update which modifies the accounting for leasing arrangements, particularly
those arrangements classified as operating leases. This update will require entities to recognize the assets and liabilities arising
from operating leases on the balance sheet. This guidance is effective for fiscal and interim periods beginning after December
15, 2018 and is required to be applied retrospectively to all leasing arrangements. We are currently assessing the effects this
guidance may have on our financial statements. Based on the lease portfolio as of March 31, 2018, we do not expect the
Company to have a material impact on its consolidated financial statements.
In
January 2017, the FASB issued Accounting Standards Update No. 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”).
The standard clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should
be accounted for as acquisitions of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15,
2017, and interim periods within those fiscal years. Under ASU 2017-01, to be considered a business, the assets in the transaction
need to include an input and a substantive process that together significantly contribute to the ability to create outputs. Prior
to the adoption of the new guidance, an acquisition or disposition would be considered a business if there were inputs, as well
as processes that when applied to those inputs had the ability to create outputs. Early adoption is permitted for certain transactions.
Adoption of ASU 2017-01 may have a material impact on our consolidated financial statements if we enter into future business combinations.
In
January 2017, the FASB issued Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU
2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test,
which requires a hypothetical purchase price allocation. ASU 2017-04 is effective for annual or interim goodwill impairment tests
in fiscal years beginning after December 15, 2019 and should be applied on a prospective basis. Early adoption is permitted for
interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not anticipate the adoption
of ASU 2017-04 will have a material impact on our consolidated financial statements.
In
September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement –Period Adjustments.”
Changes to the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is
required to retrospectively adjust the balance sheet amounts of the acquired business recognized at the acquisition date with
a corresponding adjustment to goodwill as a result of changes made to the balance sheet amounts of the acquired business. The
measurement period is the period after the acquisition date during which the acquirer may adjust the balance sheet amounts recognized
for a business combination (generally up to one year from the date of acquisition). The changes eliminate the requirement to make
such retrospective adjustments, and, instead require the acquiring entity to record these adjustments in the reporting period
they are determined. The new standard is effective for both public and private companies for periods beginning after December 15,
2015. We adopted this guidance in the first quarter 2016. The adoption of this guidance did not have a material impact on our
financial position, results of operations or cash flows.
In
July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-11, Inventory
(Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”), which applies guidance on the subsequent measurement
of inventory. ASU 2015-11 states that an entity should measure inventory at the lower of cost and net realizable value. Net realizable
value is the estimated selling price in the ordinary course of business, less reasonable predictable costs of completion, disposal
and transportation. The guidance excludes inventory measured using last in, first out or the retail inventory method. ASU 2015-11
is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company
is not planning to early adopt ASU 2015-11 and is currently evaluating ASU 2015-11 to determine the potential impact to its condensed
consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU 2014-09,
“Revenue from Contracts with Customers (Topic 606),” on revenue recognition. This guidance provides that an entity
should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires more detailed
disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash
flows arising from contracts with customers. The original effective date of this guidance was for interim and annual reporting
periods beginning after December 15, 2016, early adoption is not permitted, and the guidance must be applied retrospectively
or modified retrospectively. In July 2015, the FASB approved an optional one-year deferral of the effective date. On January
1, 2017 We adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new
revenue standard”) to all contracts using the modified retrospective method, while prior period amounts are not adjusted
and continue to be reported in accordance with our historic accounting under Topic 605. The adoption of this guidance did not
have a material impact on our financial position, results of operations or cash flows. We expect the impact of the adoption of
the new standard to be immaterial to our net income on an ongoing basis.
In
May 2015, the FASB issued ASU 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities
That Calculate Net Asset Value per Share (or Its Equivalent),” which removes the requirement to categorize within the fair
value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Further,
the amendments remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair
value using the net asset value per share practical expedient. This ASU is effective for annual periods, including interim periods
within those annual periods, beginning after December 15, 2015, and early adoption is permitted. The new guidance should be applied
on a retrospective basis to all periods presented. We adopted this guidance on January 1, 2016. The adoption of this guidance
did not have a material impact on our financial position, results of operations or cash flows.
In
April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest—Imputation of Interest (Topic 83530): Simplifying
the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to
a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by ASU 2015-03.
ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods
within those fiscal years. The Company has reclassified debt issuance costs from prepaid expenses and other current assets and
other assets as a reduction to debt in the condensed consolidated balance sheets.
In
February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis,”
which makes changes to both the variable interest model and voting interest model and eliminates the indefinite deferral of FASB
Statement No. 167, included in ASU 2010-10, for certain investment funds. All reporting entities that hold a variable interest
in other legal entities will need to re-evaluate their consolidation conclusions as well as disclosure requirements. This ASU
is effective for annual periods beginning after December 15, 2015, and early adoption is permitted, including any interim period.
We adopted this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial
position, results of operations or cash flows.
In
January 2015, the FASB issued ASU 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20),”
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. This update eliminates
from GAAP the concept of extraordinary items. We adopted this guidance on January 1, 2016. The adoption of this guidance
did not have a material impact on our financial position, results of operations or cash flows.
In
November 2014, the FASB issued ASU 2014-16, “Derivatives and Hedging (Topic 815).” Entities commonly raise capital
by issuing different classes of shares, including preferred stock, that entitle the holders to certain preferences and rights
over the other shareholders. The specific terms of those shares may include conversion rights, redemption rights, voting rights,
and liquidation and dividend payment preferences, among other features. One or more of those features may meet the definition
of a derivative under GAAP. Shares that include such embedded derivative features are referred to as hybrid financial instruments.
The objective of this update is to eliminate the use of different methods in practice and thereby reduce existing diversity under
GAAP in the accounting for hybrid financial instruments issued in the form of a share. The amendments are effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2015. We adopted this guidance on January 1,
2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.
In
August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40),
effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application
is permitted. This standard provides guidance about management’s responsibility to evaluate whether there is substantial
doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The guidance
is effective for annual reporting periods ending after December 15, 2016, and early adoption is permitted. We adopted this
guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results
of operations or cash flows.
Other
pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not
applicable or are not expected to be significant to the Company’s financial position, results of operations or cash flows.
NOTE
3 FURNITURE AND EQUIPMENT
Furniture, fixtures, and equipment consisted
of the following:
|
|
(Unaudited)
March 31,
|
|
(Audited)
December 31,
|
|
|
2018
|
|
2017
|
Machinery and equipment
|
|
$
|
31,456
|
|
|
$
|
31,456
|
|
Computer equipment
|
|
|
6,846
|
|
|
|
6,846
|
|
Furniture and fixtures
|
|
|
36,059
|
|
|
|
36,059
|
|
Tooling and production
|
|
|
207,016
|
|
|
|
207,016
|
|
Leasehold improvements
|
|
|
30,553
|
|
|
|
30,553
|
|
Total
|
|
|
311,930
|
|
|
|
311,930
|
|
Less: accumulated depreciation
|
|
|
(134,763
|
)
|
|
|
(117,058
|
)
|
Total, net
|
|
$
|
177,167
|
|
|
$
|
194,872
|
|
Depreciation
expense amounted to $17,705 and $6,547 for the for the three-months ended March 31, 2018 and 2017, respectively.
NOTE
4 INTANGIBLE ASSETS
Intangible
assets (patents) consisted of the following:
|
|
(Unaudited)
March 31, 2018
|
|
(Audited)
December 31, 2017
|
|
|
|
|
|
Patents
|
|
$
|
269,510
|
|
|
$
|
244,382
|
|
Less: Impairment Charges
|
|
|
—
|
|
|
|
—
|
|
Less: accumulated amortization
|
|
|
(44,458
|
)
|
|
|
(39,970
|
)
|
Total, net
|
|
$
|
225,052
|
|
|
$
|
204,412
|
|
Amortization expense on intangible assets amounted
to $4,488 and $2,277 for the three-months ended March 31, 2018 and 2017, respectively.
Assuming no impairment, the following
table sets forth the estimated amortization expense for future periods based on recorded amounts as
at
March 31, 2018:
Year Ending December 31
|
|
|
|
201
8
|
|
|
$
|
17,951
|
|
|
2019
|
|
|
|
17,951
|
|
|
2020
|
|
|
|
17,951
|
|
|
2021
|
|
|
|
17,951
|
|
|
2022
|
|
|
|
17,951
|
|
|
2023
and Thereafter
|
|
|
|
135,298
|
|
|
Total
|
|
|
$
|
225,052
|
|
Actual amortization
expense in future periods could differ from these estimates as a result of future acquisitions, divestitures, impairments and
other factors.
NOTE
5 GE TRADEMARK LICENSE AGREEMENT
The Company
entered into an amended License Agreement with General Electric regarding the GE Trademark License. The License Agreement is amortized
through its expiration in November 2018.
|
|
(Unaudited)
March
31, 2018
|
|
(Audited)
December
31, 2017
|
GE
Trademark License
|
|
$
|
12,000,000
|
|
|
$
|
12,000,000
|
|
Less:
Impairment charges
|
|
|
(600,000
|
)
|
|
|
(600,000
|
)
|
Less:
accumulated amortization
|
|
|
(10,206,934
|
)
|
|
|
(9,759,534
|
)
|
Total,
net
|
|
$
|
1,193,066
|
|
|
$
|
1,640,466
|
|
Amortization
expense associated with the GE Trademark License amounted to $447,400 and $602,007 for the three-months ended March 31, 2018 and
2017, respectively. The Company determined an impairment adjustment of $600,000 was necessary for the year ended 2017.
Assuming
no impairment, the following table sets forth the estimated amortization expense for future periods based on recorded amounts
as
at March 31, 2018:
Year
Ending December 31
|
|
2018
|
|
|
$
|
1,193,066
|
|
|
Thereafter
|
|
|
|
|
|
|
Total
|
|
|
$
|
1,193,066
|
|
NOTE
6 DEFERRED LEASE CREDITS
Cash or rent
abatements received upon entering certain office leases are recognized on a straight-line basis as a reduction to rent expense
over the lease term. The unamortized portion is included in Deferred Lease Credits, which are included in other current liabilities.
As of March 31, 2018, and December 31, 2017 the deferred credits were $39,262 and $42,332 respectively. Deferred Rent amortization
was $3,069 and ($20,548) for the three-months ended March 31, 2018 and 2017, respectively.
NOTE
7 NOTES PAYABLE
At March 31,
2018 and December 31, 2017, the Company had a note payable to a bank in the amount of $40,642 and $70,222, respectively. The note
bears interest at prime plus 1.5%, which was 6% as of March 31, 2018, and matures on August 28, 2018. The note is secured by the
assets of the Company and personal guarantees by a shareholder and an officer of the Company.
On April 13,
2016, the Company entered into a Line of Credit Promissory Note with a third party (the “Line of Credit”), as amended
and extended, in the principal sum of up to ten million U.S. Dollars (US $10,000,000) to support purchase orders, inventory and
general working capital needs. The Company may draw and/or repay this Line of Credit from time to time until the maturity hereof.
The Note provides for monthly payments of interest at nine percent (9%) per annum on outstanding principal and matures on January
10, 2019, at which time the full principal amount and accrued but unpaid interest become due.
The Line of
Credit note is secured by the assets of the Company. As of March 31, 2018, and December 31, 2017, the outstanding balance on this
note was $3,922,082 and $3,456,732, respectively.
The Company
received a $500,000 loan from a related party in January 2016. The note is on demand and carries interest of 12%. As of March
31, 2018, the outstanding balance is $200,000.
Principal
payments due under the terms of the notes described above are as follows:
Principal Due in Next 12 months
|
|
|
|
2018
|
|
|
$
|
240,642
|
|
|
2019
|
|
|
|
3,922,082
|
|
|
|
|
|
$
|
4,162,724
|
|
NOTE
8 CONVERTIBLE DEBT
The Company has recorded
derivative liabilities associated with convertible debt instruments, as more fully discussed at Note 9.
|
|
Third
Party
|
|
Related Party
|
|
Totals
|
Balance December 31, 2015
|
|
$
|
3,989,950
|
|
|
$
|
50,000
|
|
|
$
|
4,039,950
|
|
Add: Amortization of Debt Discount
|
|
|
474,283
|
|
|
|
0
|
|
|
|
474,283
|
|
Less Repayments/Conversions
|
|
|
(4,314,233
|
)
|
|
|
—
|
|
|
|
—
|
|
Balance December 31, 2016
|
|
|
150,000
|
|
|
|
50,000
|
|
|
|
200,000
|
|
Add: Amortization of Debt Discount
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Less Repayments/Conversions
|
|
|
(150,000
|
)
|
|
|
(50,000
|
)
|
|
|
(200,000
|
)
|
Balance December 31,
2017
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On November
26, 2013, May 8, 2014 and June 25, 2014 the Company completed closings in connection with its offering (the “Notes
Offering”) of its 12% and 15% Secured Convertible Promissory Notes in the aggregate principal amount of $4,270,100 (the
“Notes”), with certain accredited investors, as defined under Regulation D, Rule 501 of the Securities Act. Pursuant
to the Notes Offering, each Investor also received five (5) year common stock warrants to purchase the Company’s Common
Stock at $0.375 per share (each a “Warrant” and collectively, the “Warrants”). The Notes and Warrants
were treated as derivative liabilities.
In May 2016,
the Company invited the holders of all Notes, where such holders had not already made an election to redeem or convert their Notes,
to forbear or extend their forbearance period to make an election to convert or redeem their Notes (the “August 2016 Election”).
This also provided a third option to all noteholders (the “Preferred Option”), whereby such holders could convert
their respective Note(s) into shares of Series A Convertible Preferred Stock (“Preferred Stock”). Pursuant to the
August 2016 Election, the Company issued 13,456,936 shares of Preferred Stock, representing $3,364,234 in outstanding Note principal
balance.
All Notes
have either been re-paid in cash, separate debt obligation or by conversion, and all Notes have been terminated.
(A) Terms
of Debt
The Note debt
carried interest between 12% and 15%, and became due in November 2015, May 2016 and September 2016, as extended to July 31, 2016
pursuant to certain forbearance agreements. All Notes issued in connection with the Notes Offering were convertible at $0.25,
but are not terminated, and all Warrants issued in connection with the Notes Offering are convertible at $0.375 per share, subject
to the existence of a “ratchet feature”, which allows for a lower offering price if the Company offers shares to the
public at a lower price.
(B) Offer
to Convert Debt to Preferred Shares
For those
holders electing the Preferred Option, each holder has received shares of the Preferred Stock on a 1 to 1 ratio to the number
of shares of Common Stock which are then convertible under such holder’s respective Note. With respect to interest on junior
securities, dividends, distributions or liquidation preference, shares of Preferred Stock will rank senior to shares of Common
Stock or other junior securities. Along with other terms customary for a class of convertible preferred stock, the Preferred Stock
will be convertible into shares of Common Stock at the same conversion price as the Notes (i.e., USD $0.25 per share), and will
pay interest quarterly at a rate of six percent (6%). The Preferred Stock will be convertible upon the election of the holder
thereof. Shares of the Preferred Stock may be repurchased by the Company upon 30 days’ prior written notice, in whole or
in part, for USD $3.50 per share, provided that during such notice period the holder will continue to have the option and right
to convert its shares of Preferred Stock into shares of Common Stock. Holders will also have a put option, allowing them to sell
their shares of Preferred Stock back to the Company at USD $0.25 per share, the Note conversion price.
Each holder
electing the Preferred Option was required to enter into an amendment to its Note, providing that the Note will be convertible
into the Preferred Stock rather than Common Stock, and to thereafter elect to convert their Note, as amended, into Preferred Stock.
In addition, each holder entered into a lockup agreement, whereby the holder agreed not to offer, sell, contract to sell, pledge,
give, donate, transfer or otherwise dispose of (i) the shares of Common Stock it then holds, (ii) the shares of Preferred Stock
obtained upon conversion of its Note, and (iii) the shares of Common Stock underlying the Preferred Stock, for a period of twelve
(12) months following the date of such agreement. The Note amendments, conversion to Preferred Stock and lockup agreement have
been entered into on August 15, 2016. The Note amendments were approved by a majority of the holders of the then outstanding Notes.
NOTE
9 DERIVATIVE LIABILITIES
The fair value
at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following management
assumptions as:
|
|
(Unaudited)
March 31, 2018
|
|
(Audited)
December 31, 2017
|
Balance
Beginning of period
|
|
$
|
19,175,754
|
|
|
$
|
24,083,314
|
|
Reclassification
of derivative liabilities to additional paid in capital related to warrants exercised that ceased being a derivative liability
|
|
|
|
|
|
|
(13,229,681
|
)
|
Fair
value mark to market adjustment - stock options
|
|
|
|
|
|
|
2,036,621
|
|
Fair
value mark to market adjustment – warrants
|
|
|
(224,515
|
)
|
|
|
12,376,571
|
|
Reclassification
of derivative liability to Additional Paid in Capital due to share reservation
|
|
|
|
|
|
|
(6,091,070
|
)
|
Balance
at end of period
|
|
$
|
18,931,239
|
|
|
$
|
19,175,754
|
|
The Company
recorded a change in the value of embedded derivative liabilities income/(expense) $244,515 and ($13,517,422) for the three-months
ended March 31, 2018 and 2017, respectively.
|
|
Commitment
Date
|
|
|
Recommitment
Date
|
|
Expected dividends
|
|
|
0%
|
|
|
|
0%
|
|
Expected volatility
|
|
|
150%
|
|
|
|
150%
|
|
Expected term
|
|
|
0.90 – 9.56
years
|
|
|
|
1.16 – 9.56
years
|
|
Risk Free Interest Rate
|
|
|
0.76%-2.40%
|
|
|
|
1.47%-2.33%
|
|
NOTE 10 GE ROYALTY OBLIGATIONS
In 2011, the
Company executed a Trademark Licensing Agreement with General Electric, which allows the Company the right to market certain ceiling
light and fan fixtures displaying the GE brand. The License Agreement imposes certain manufacturing and quality control conditions
that the Company must maintain in order to continue to use the GE brand.
The License
Agreement is nontransferable and cannot be sublicensed. Various termination clauses are applicable; however, none were applicable
as of March 31, 2018, and December 31, 2017.
In August
2014, the Company entered into a second amendment to the License Agreement pertaining to its royalty obligations. Under the terms
of the amendment, the Company agreed to pay a total of $12,000,000 by November 2018 for the rights assigned in the original contract.
In case the Company does not pay GE a total of at least $12,000,000 in cumulative royalties over the term of the License Agreement,
the difference between $12,000,000 and the amount of royalties paid to GE is owed in December 2018.
Payments are due quarterly based upon the prior
quarters’ sales. The Company made payments of $178,837 and $137,084 for the three-months ended 31, 2018 and 2017, respectively.
The License Agreement obligation will be paid
from sales of GE branded product subject to the following repayment schedule:
Net
Sales in Contract Year
|
Percentage
of Contract Year Net Sales owed to GE
|
$0 to
$50,000,000
|
7%
|
$50,000,001 to $100,000,000
|
6%
|
$100,000,000+
|
5%
|
As of March 31, 2018, and December
31, 2017, the outstanding balance was $10,581,728 and $10,760,566, respectively.
NOTE
11 STOCKHOLDERS DEFICIT
(A) Common
Stock
For the three-months
ended March 31, 2018 and year ended December 31, 2017, the Company issued the following Common Stock:
Transaction
Type
|
|
|
|
|
Quantity
(shares)
|
|
|
Valuation
($)
|
|
|
Range
of Value
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
Equity Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Offering
|
|
|
(1)
|
|
|
|
69,667
|
|
|
$
|
209,000
|
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Issued per Exercise of Warrants
|
|
|
(2)
|
|
|
|
1,666,667
|
|
|
|
5,000,000
|
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Issued per Exercise of Options
|
|
|
(3)
|
|
|
|
30,000
|
|
|
|
78,000
|
|
|
|
2.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Issued
for the cashless exercise of Warrants
|
|
|
(4)
|
|
|
|
4,132,068
|
|
|
|
0
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2017 Equity Transactions
|
|
|
|
|
|
|
5,898,402
|
|
|
$
|
5,287,000
|
|
|
$
|
2.60-3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Issued per Employment Agreement
|
|
|
(5)
|
|
|
|
240,000
|
|
|
|
720,000
|
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
2018 Equity Transactions
|
|
|
|
|
|
|
240,000
|
|
|
$
|
720,000
|
|
|
$
|
3.00
|
|
The
following is a more detailed description of the Company’s stock issuance from the table above:
(1)
Shares
Issued for Common Stock
During the nine-months ended September 30,
2017, the Company received gross proceeds of $209,000 from the sale of 69,667 shares of its Common Stock at $3.00 per share to
three new Company employees. In connection therewith, the Company issued five-year options to purchase up to 315,000 shares of
Common Stock at an exercise price of $3.00 per share.
(2)
Shares
Issued Pursuant to Warrants Exercised
In March 2017, the Company issued 1,666,667
shares of Common Stock upon exercise in full of a warrant having an exercise price of $3.00 per share, and the Company received
gross proceeds of $5,000,000.
(3)
Shares
Issued Pursuant to Options Exercised
In April 2017, the Company issued 30,000 shares
of Common Stock upon exercise in full of an option having an exercise price of $2.60 per share, and the Company received gross
proceeds of $78,000.
(4)
Common
Stock Issued for the cashless Exercise of Warrants
In November 2017, the Company issued 4,132,068
shares of Common Stock upon the cashless exercise of Warrants.
(5)
Common
Stock Issued pursuant to Employment Agreements
In March 2018, the Company issued 120,000 shares
of Common Stock, with a total fair market value of $720,000, to each of Mr. Campi and Mr. Wells, which vested pursuant to their
respective employment agreements.
(B) Preferred
Stock
The following
is a summary of the Company’s Preferred Stock activity:
Transaction
Type
|
|
Quantity
|
|
|
Valuation
|
|
|
Range
of
Value per
Share
|
|
|
|
|
|
|
|
|
|
|
|
2016
Preferred Stock Transactions
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock Issued per August 2016 Election
|
|
|
13,056,936
|
|
|
$
|
44,393,569
|
|
|
$
|
3.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
2016 Preferred Stock Transactions
|
|
|
13,056,936
|
|
|
$
|
44,393,569
|
|
|
$
|
3.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
Preferred Stock Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock Issued per August 2016 Election
|
|
|
400,000
|
|
|
$
|
1,360,000
|
|
|
$
|
3.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
2017 Preferred Stock Transactions
|
|
|
400,000
|
|
|
$
|
1,360,000
|
|
|
|
3.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
2018 Preferred Stock Transactions
|
|
|
0
|
|
|
$
|
0
|
|
|
|
|
|
In accordance
with the August 2016 Elections (see Note 8(B)), the Company has issued 13,456,932 shares of 6% Preferred Stock in exchange for
Notes having a principal balance of $3,364,234. The Preferred Stock will be convertible upon the election of the holder thereof.
Shares of the Preferred Stock may be repurchased by the Company upon 30 days’ prior written notice, in whole or in part,
for USD $3.50 per share, provided that during such notice period the holder will continue to have the option and right to convert
its shares of Preferred Stock into shares of Common Stock. Holders also have a put option, allowing them to sell their shares
of Preferred Stock back to the Company at USD $0.25 per share, the Note conversion price, and therefore the stock is classified
as Mezzanine equity rather than permanent equity. The stock was valued based upon the value of shares of Common Stock publicly
traded nearest the conversion date. During the year ended December 31, 2017 the Company paid dividends in the amount of $149,737
to the Preferred Stock shareholders.
Redeemable preferred stock subject to redemption:
$0 par value; 20,000,000 shares authorized; 13,456,932 at December 31, 2017 and March 31, 2018.
(C) Stock
Options
The following
is a summary of the Company’s stock option activity:
|
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
Average
Remaining
Contractual Life
|
|
|
Aggregate
Intrinsic
|
|
|
|
|
Options
|
|
|
Exercise
Price
|
|
|
(In
Years)
|
|
|
Value
|
|
Balance, December 31, 2016
|
|
|
|
1,350,000
|
|
|
$
|
0.767
|
|
|
|
7.81
|
|
|
$
|
3,015,000
|
|
Exercised
|
|
|
|
(30,000)
|
|
|
|
2.60
|
|
|
|
—
|
|
|
|
(78,000)
|
|
Granted
|
|
|
|
3,555,000
|
|
|
|
1.307
|
|
|
|
7.47
|
|
|
|
6,230,250
|
|
Forfeited/Cancelled
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance, December 31, 2017
|
|
|
|
4,875,000
|
|
|
$
|
1.150
|
|
|
|
7.40
|
|
|
$
|
9,167,250
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited/Cancelled
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance, March 31, 2018
|
|
|
|
4,875,000
|
|
|
$
|
1.150
|
|
|
|
6.91
|
|
|
$
|
9,167,250
|
|
The Company
has issued, or the Company’s Board of Directors has authorized grants of, options, some of which have vested, to purchase
shares of Common Stock through its 2015 Plan. The Company has issued options to purchase, in the aggregate, up to 4,875,000 shares
of options to purchase shares of Common Stock, in conjunction with its 2015 Plan, agreements or otherwise. The Company has reserved
4,875,000 shares with the transfer agent for the future issuance for shares of Common Stock associated with options issued.
During the three-months ended March 31, 2018,
the Company recognized $181,068 of compensation expense related to the vesting of options. The expense computation is based on
61,667 shares of options at $3.00. The fair value of stock option is estimated using the Binomial valuation method of $2.9362.
(D) Warrants
Issued
The following
is a summary of the Company’s stock option activity:
|
|
|
Number
of
Warrants
|
|
|
Weighted
Average Exercise
Price
|
|
|
Weighted
Average Remaining Contractual Life (in Years)
|
|
Balance, December 31,
2016
|
|
|
|
13,555,651
|
|
|
$
|
0.72
|
|
|
|
1.5
|
|
Issued
|
|
|
|
898,040
|
|
|
|
3.31
|
|
|
|
4.63
|
|
Exercised
|
|
|
|
(6,033,767)
|
|
|
|
(3.00)
|
|
|
|
—
|
|
Cancelled/Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance,
December 31, 2017
|
|
|
|
8,419,924
|
|
|
$
|
1.64
|
|
|
|
2.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cancelled/Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance,
March 31, 2018
|
|
|
|
8,419,924
|
|
|
$
|
1.117
|
|
|
|
1.15
|
|
(E) 2015
Stock Plan
On April 27,
2015, the Board approved the Company’s 2015 Stock Incentive Plan (the “2015 Plan”). Under the 2015 Plan, the
Board has the sole authority to implement, interpret, and/or administer the 2015 Plan unless the Board delegates all or any portion
of its authority to implement, interpret, and/or administer the 2015 Plan to a committee of the Board, or (ii) the authority to
grant and administer awards under the 2015 Plan to an officer of the Company. The 2015 Plan relates to the issuance of up to 5,000,000
shares of Common Stock, subject to adjustment, and shall be effective for ten (10) years, unless earlier terminated. Certain options
to be granted to employees under the 2015 Plan are intended to qualify as Incentive Stock Options (“ISOs”) pursuant
to Section 422 of the Internal Revenue Code of 1986, as amended, while other options granted under the 2015 Plan will be nonqualified
options not intended to qualify as Incentive Stock Options ISOs (“Nonqualified Options”), either or both as provided
in the agreements evidencing the options described.
The 2015 Plan
further provides that awards granted under the 2015 Plan cannot be exercised until a majority of the Company’s shareholders
have approved the 2015 Plan. The 2015 Plan became effective July 31, 2016.
NOTE
12 COMMITMENTS
(A) Operating
Lease
On September 20, 2017, the Company entered
into an operating lease for its Georgia location. The new lease commenced on July 1, 2017 and expires on September 30, 2020. We
recognize rent expense under such arrangements on a straight-line basis.
On September 27, 2017 the Company entered into
two separate residential leases near the Florida office for two of its employees. The term for each lease is 12 months and, each
lease carries a rent of $2,000 per month. The collective rent payment is $4,000 per months and will reduce travel costs for the
Company.
The minimum
rent obligations are approximately as follows:
|
|
|
Minimum
|
|
Year
|
|
|
Obligation
|
|
2019
|
|
|
$
|
78,467
|
|
2020
|
|
|
|
60,320
|
|
|
|
|
$
|
138,787
|
|
(B) Employment
Agreement – Chief Executive Officer
On
September 1, 2016, the Company entered into an employment agreement with its Chief Executive Officer (the “Campi Agreement”).
The Campi Agreement provides for a base salary of $150,000; 120,000 shares of Common Stock in a “Sign on Bonus”
which will vest December 31, 2017; 0.25% of annual net sales, paid in cash on a quarterly basis, and 3% of annual adjusted
gross income in cash compensation and 0.50% of quarterly net income in options, the strike price to be determined at the time
of grant. Such options will expire 5 years after issuance. Pursuant to the Campi Agreement, if terminated without cause during
the initial term, the Company shall pay to Mr. Campi (a) an amount calculated by multiplying the monthly salary, at the time of
such termination, times the number of months remaining in the initial term, and (b) all unpaid incentive compensation then in
effect on a
pro rata
basis. In addition, the sign-on shares of Common Stock shall immediately vest. For any other termination
during the initial term, Mr. Campi shall receive an amount calculated by multiplying fifty percent of the monthly salary, in effect
at the time of such termination, times the number of months remaining in the initial, and shall not be entitled to incentive compensation
payments then in effect, prorated or otherwise.
For
the three-months ended March 31, 2018 and 2017, Mr. Campi earned approximately $42,081 and $46,715, respectively, under the Campi
Agreement.
(C) Chairman
Agreement
Effective
September 1, 2016, the Company entered into a Chairman Agreement with Mr. Kohen (the “Chairman’s
Agreement”), to serve
as the
Company’s Executive Chairman and Chairman of the Board. The Chairman’s Agreement provides that Mr. Kohen will
serve for an initial term of three years, which may be renewed by the mutual agreement of Mr. Kohen and the Company. Subject
to other customary terms and conditions of such agreements, the Chairman’s Agreement provides that Mr. Kohen will
receive (a) a base salary of $250,000 per year, which may be adjusted each year at the discretion of the Board; (b) stock
compensation equal to 340,000 shares of Common Stock per year, which shall vest on January 1 of the following year (the
“Chairman Compensation Shares”); (c) a sign-on bonus of 120,000 shares of Common Stock, which shall vest in its
entirety on January 1, 2020; (d) supplemental bonus compensation of stock options to purchase up to 4,000,000 shares of
Common Stock at an exercise price ranging between $3.00 and $5.00 per share, determined based on the achievement of specified
market capitalizations of the Company; and (e) incentive compensation equal to one half of one percent (0.50%) of the
Company’s gross revenue paid in cash, stock or options on an annual basis. Pursuant to the Chairman’s Agreement,
if terminated without cause during the initial term, the Company shall pay to Mr. Kohen (i) an amount calculated by
multiplying the monthly salary, at the time of such termination, times the number of months remaining in the initial term,
and (ii) all unpaid incentive compensation then in effect. In addition, the sign-on shares of Common Stock shall
immediately vest, and the Chairman Compensation Shares shall vest on a pro rata basis based on the number of days served
under the Chairman’s Agreement and the number of days from the beginning of the initial term through August 31, 2019.
For any other termination during the initial term, Mr. Kohen shall receive payment, at the then current rate, through the
date termination is effective.
For the three-months
ended March 31, 2018 and 2017, Mr. Kohen earned approximately $74,663 and $90,424, respectively, under the
Chairman’s
Agreement
.
(D) Employee
Agreement – President
Effective
August 17, 2016, the Company entered into an Executive Employment Agreement with Mr. Wells (the “Wells Agreement”),
to serve as the Company’s President. The Wells Agreement provides that Mr. Wells will serve for an initial term of three
years, which may be renewed by the mutual agreement of Mr. Wells and the Company. Subject to other customary terms and conditions
of such agreements, the Wells Agreement provides that Mr. Wells will receive (a) a base salary of $250,000 per year, which may
be adjusted each year at the discretion of the Board; (b) 1,025,000 shares of Common Stock, which shall vest on January 1, 2019
(the “Wells Compensation Shares”); (c) a sign-on bonus of 120,000 shares of Common Stock, which shall vest in its entirety
to Mr. Wells on January 1, 2018; and (d) incentive compensation equal to one quarter of one percent (0.25%) of the Company’s
net revenue, paid in cash on an quarterly basis. Pursuant to the Wells Agreement, if terminated without cause during the initial
term, the Company shall pay to Mr. Wells (i) an amount calculated by multiplying the monthly salary, at the time of such termination,
times the number of months remaining in the Initial Term, and (ii) all unpaid incentive compensation then in effect. In addition,
the sign-on bonus shares of Common Stock shall immediately vest, and the Wells Compensation Shares shall vest on
a pro rata
basis based on the number of days served under the Wells Agreement and the number of days in the vesting period. For any other
termination during the initial term, Mr. Wells shall receive payment of salary, at the then current rate, and all due but unpaid
incentive compensation through the date termination is effective.
For
the three-months ended March 31, 2018 and 2017, Mr. Wells earned approximately $67,081 and $73,638, respectively, under the Wells
Agreement.
(D) Employment
Agreement – Chief Operating Officer
Ms. Barron
entered into a three-year Executive Employment Agreement, effective as of September 1, 2016 (the “Barron Agreement”).
Under the terms of the Barron Agreement, Ms. Barron will receive (a) an annual salary of $120,000, and (b) incentive compensation
equal to
one-quarter of one percent (0.25%)
of net revenue,
paid
in cash on a quarterly basis.
In addition, The Board granted Ms. Barron (i) options to purchase up to 200,000 shares of
Common Stock at $0.60 per share, which vested on November 15, 2015; (ii) options to purchase up to 150,000 shares of Common Stock
at $1.20, which vested on November 15, 2016; and (iii) options to purchase up to 150,000 shares of Common Stock at $1.80, which
will vest on November 15, 2017.
For
the three-months ended March 31, 2018 and 2017, Ms. Barron earned approximately $34,581 and $40,670, respectively, under the Barron
Agreement.
NOTE
13 SUBSEQUENT EVENTS
On April 26, 2018, the Company’s Board
of Directors approved the Company’s 2018 Stock Incentive Plan (the “2018 Plan”), relating to the issuance of
up to 5,000,000 shares of Common Stock, to be effective for ten (10) years unless earlier terminated. The 2018 Plan is on substantially
the same terms as the Company’s 2015 Stock Incentive Plan. On the same date, the Board of Directors amended grants of options
to purchase up to 900,000 shares of Common Stock made under the 2015 Plan on April 19, 2017 to be issuable under the 2018 Plan
(the “Amended Grants”), because the number of such grants exceeded the number of shares of Common Stock issuable under
the 2015 Plan. In addition, on the same date, the Board of Directors approved grants under the 2018 Plan to an employee of the
Company consisting of a stock award of 100,000 shares of Common Stock vesting immediately, and an award of options to purchase
up to 100,000 shares of Common Stock, expiring two years from the date of grant and having an exercise price of $3.00 per share
(the “April 2018 Grants).
On or about May 14, 2018, the Company issued Stock Option Agreements representing all unissued grants made
on April 19, 2017 under the 2015 Plan, and the Amended Grants and April 2018 Grants under the 2018 Plan, for an aggregate total
of options to purchase up to 1,800,000 shares of Common Stock. Also on or about May 14, 2018, the Company issued a Stock Award
Agreement for 100,000 shares of Common Stock that vested on April 26, 2018, representing the April 2018 Grants under the 2018 Plan.
As of May 14, 2018, the Company has entered into Stock Option Agreements with all grantees of the April 2017 Grants, the Amended
Grants, and the April 2018 Grants, thereby issuing, in the aggregate, options to purchase up to 2,250,000 shares of our Common
Stock, with 835,000 of such options having vested on June 30, 2017 with an exercise price of $3.00 per share; 901,667 of such options
having vested on December 31, 2017 with exercise prices ranging from $3.00 to $4.00 per share; 100,000 of such options having vested
on April 26, 2018 with an exercise price of $3.00 per share; 246,667 of such options vesting on December 31, 2018 with exercise
prices ranging from $3.00 to $4.00 per share; and 166,666 of such options vesting on December 31, 2019 with an exercise price of
$5.00 per share.