[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D)
OF THE SECURITIES ACT OF 1934
For the fiscal year ended December 31, 2016
OR
[ ] TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(D)
OF THE SECURITIES ACT OF 1934
Commission File Number: 333-196735
SQL TECHNOLOGIES CORP.
(Exact name of registrant as specified in its
charter)
Florida
|
46-3645414
|
(State
or other jurisdiction of
Incorporation or organization)
|
(IRS
Employer Identification No.)
|
4400
North Point Parkway, Suite 154, Alpharetta, GA 30022
(Address, including zip code, of principal executive offices)
(770)
754-4711
(Registrant’s telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
None
|
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, no par value per share
Indicate by check mark if the registrant is
a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ]
No [X]
Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [X] No [ ]
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [ ]
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registration statement was required to submit and post such files).
Yes [X] No
[
]
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
|
|
|
Large
accelerated filer
|
[
]
|
Accelerated
filer
|
[
]
|
Non-accelerated
filer
|
[
]
|
Smaller
reporting company
|
[X]
|
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
[ ]
No
[X]
The aggregate value of the registrant’s
common stock held by non-affiliates of the registrant was $121,038,692 on June 30, 2016, based on the value per share of common
stock in the Company in its most recent private placement of securities on that date, which was $2.60 per share.
As of March 30, 2016, the registrant had 48,943,166
shares of common stock, no par value per share (“Common Stock”), issued and outstanding and 13,256,936 shares of Series
A Convertible Preferred Stock, no par value per share (“Series A Preferred Stock”), issued and outstanding.
TABLE OF CONTENTS
|
|
Page
|
PART
I
|
|
|
Item 1.
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Business
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1
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Item 1A.
|
Risk
Factors
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7
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Item 1B.
|
Unresolved
Staff Comments
|
7
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Item 2.
|
Properties
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8
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Item 3.
|
Legal
Proceedings
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8
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Item 4.
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Mine
Safety Disclosures
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8
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|
|
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PART
II
|
|
|
Item 5.
|
Market
for the Registrant’s Common Stock and Related Stockholder Matters
|
9
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Item 6.
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Selected
Financial Data
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12
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Item 7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
|
12
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Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
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21
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Item 8.
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Financial
Statements and Supplementary Data
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21
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Item 9.
|
Changes
in and/or Disagreements with Accountants on Accounting and Financial Disclosure
|
21
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Item 9A.
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Controls
and Procedures
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21
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Item 9B.
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Other
Information
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22
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|
|
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PART
III
|
|
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Item 10.
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Directors,
Executive Officers and Corporate Governance
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23
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Item 11.
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Executive
Compensation
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27
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
32
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Item 13.
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Certain
Relationships and Related Transactions and Director Independence
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35
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Item 14.
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Principal
Accountant Fees and Services
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35
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|
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PART
IV
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|
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Item 15.
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Exhibits
and Financial Statement Schedule
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36
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FINANCIAL
STATEMENTS
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F-1
|
Unless we have indicated
otherwise or the context otherwise requires, references in this Annual Report on Form 10-K to the “Company”, “we”,
“us”, and “our” or similar terms are to “SQL Technologies Corp.”
FORWARD-LOOKING STATEMENTS
Statements in this report may be “forward-looking
statements.” Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs,
expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions.
These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions
made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions
that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed
or forecasted in the forward-looking statements due to numerous factors, including those described above and those risks discussed
from time to time in this report, including the risks described under “Risk Factors” and any risks described in any
other filings we make with the SEC. Any forward-looking statements speak only as of the date on which they are made, and we do
not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this
report.
Management’s discussion and analysis
of financial condition and results of operations are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going
basis, we evaluate these estimates, including those related to useful lives of real estate assets, cost reimbursement income,
bad debts, impairment, net lease intangibles, contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can
be no assurance that actual results will not differ from those estimates.
PART I
ITEM 1. BUSINESS
Overview
We are a company engaged in the business of
developing proprietary technology that enables a quick and safe installation by the use of a weight-bearing power plug for electrical
fixtures, such as light fixtures and ceiling fans, into ceiling and wall electrical junction boxes. Our patented technology consists
of a 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 a non-conductive body that houses conductive rings connectable to an electric power supply
through terminals in its side exterior. The plug, also comprised of a non-conductive body that houses corresponding conductive
rings, attaches to the socket via a male post and is capable of feeding electric power to an appliance. The plug also includes
a second structural element allowing it to revolve with a releasable latching which, when engaged, provides a retention force
between the socket and the plug to prevent disengagement. The socket and plug can be detached by releasing the latch, 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, wall sconce fixtures and other electrical devices. The combined socket
and plug technology is referred to throughout this prospectus as “the SQL Technology”.
Corporate History and Information
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), and CE (for the European market). The Company maintains
offices in Georgia, Florida and in Foshan, Peoples Republic of China.
Our principal executive offices are located
at 4400 North Point Parkway, Suite 154, Alpharetta, Georgia, 30022 and our telephone number is (770) 754-4711. Our web address
is http://www.safetyquicklight.com.
Products
We currently manufacture and sell ceiling
fans and lighting fixtures branded with the General Electric logo and manufactured under General Electric’s guidance. Our
ceiling fans and lighting fixtures offer unique designs, and are manufactured with and without the SQL Technology.
The SQL Technology
The SQL Technology is basically characterized
as an attachment fitting plug and mounting receptacle used to install lighting fixtures and ceiling fans. The SQL Technology replaces
the traditional mounting bar found in existing electrical junction boxes, converting the mounting system into a weight bearing
plug with no exposed wires. Our technology could transform the lighting fixture and ceiling fan industry. Using the SQL Technology,
anyone can safely install lighting fixtures and ceiling fans in minutes. Professional electricians as well as “Do it Yourself”
installers will benefit from our technology. The SQL Technology is Underwriters Laboratories (UL) listed for USA and Canada, is
licensed by GE and achieved National Electrical Code (NEC) (or NFPA 70) status in its 2017 edition.
Our SQL Technology is comprised of two parts:
a ‘female’ socket receptacle that is secured to existing electrical junction boxes, into which electrical and ground
wires are simply inserted and secured into terminals on the device, and a ‘male’ plug fitting that is preinstalled
on the lighting fixture or fan. The receptacle is easily attached to the junction box, and any lighting fixture or fan with the
SQL Technology can be literally installed in seconds. Our manufacturing plan calls for the SQL Technology to be pre-installed
in all types of lighting fixtures, including holiday themed lighting, and ceiling fans.
In February 2015, we received an updated Underwriters
Laboratories (UL) Listing for the SQL Technology, which expanded the type of products that we will be able to use with the SQL
Technology. This listing expanded the voltage and amperage that our product is rated for and will allow for additional fixtures,
such as heating elements to be incorporated into our ceiling fans.
We have been working with several well established
factories producing ceiling fans and lights in Peoples Republic of China. Most, if not all, of these factories have been in business
for over 20 years and follow strict human rights and sustainability protocols.
Smart SQL
The Company is developing smart home technology
applications for products using the SQL Technology called “Smart SQL”, which incorporate Bluetooth and Wi-Fi capabilities
to enable remote control and automation of such products and appliances. The Company believes that the combination of its quick
connect technology, the inclusion of Smart SQL and its growing product lines will uniquely position the Company in the marketplace.
Intellectual Property
We believe the SQL Technology and the forthcoming
Smart SQL provides the Company with a competitive advantage in the lighting and ceiling fan fixture marketplace. We protect the
SQL Technology through the use of an intellectual property protection strategy that is focused on patent protection. As of July
15, 2016, we have three issued U.S. patents relating to our quick connect device for electrical fixtures. We also have patents
in China (two issued patents) and India (one issued patent and one pending patent application), which protects different aspects
of the same SQL Technology as the three issued U.S. patents. The Company sought intellectual property protection of the SQL Technology
in China due to its current manufacturing operations and prospective sales in China’s market, and sought protection in India
in anticipation of future growth into India’s developing market, both with respect to the sales of the SQL Technology and
potential operations of the Company. We intend to maintain this intellectual property protection for the SQL Technology.
The issued patents are directed to various
aspects of our plug and socket combination that comprise the quick connect device. The issued patents provide patent protection
for our quick connect device, regardless of the electrical fixture used with the quick connect device. As further innovations
are developed, we intend to seek additional patent protection to enhance our competitive advantage.
Company Name Change
The development of smart home applications
into the SQL Technology inspired management to change the Company’s name to one that better denotes the diversification
in its product line introduced by the inclusion of its Smart SQL. The Company’s Board of Directors (the “Board”),
and on June 8, 2016, a majority of the shareholders of the Company, approved a name change
from
Safety Quick Lighting &
Fans Corp.
to
SQL Technologies Corp. Henceforth, further reference to the Company will be “SQL Technologies Corp.”
or the “Company”.
Our Business Model and Strategy
Safety Quick Light LLC began marketing the
SQL Technology in 2007 for installation in light fixtures and ceiling fans during manufacturing and as a kit for installing the
SQL Technology in existing light fixtures and ceiling fans. The Company sold 800,000 units of the SQL Technology OEM (“Original
Equipment Manufacturer”) to lighting manufacturers and retailers who installed the socket and plug technology into their
lighting fixtures for sale at retail stores. The Company also sold, directly to the retailers, 100,000 ceiling fans with the SQL
Technology embedded into the product. With the achievement of the License Agreement (as defined below) with General Electric, our
management team determined that it could improve its gross margins if it were to market light fixtures and ceiling fans with the
SQL Technology already installed on fixtures, instead of marketing the SQL Technology as an add-on device. Our management team
also determined that it might be necessary to offer light fixtures and ceiling fans under the License Agreement without the SQL
Technology for initial orders from big box retailers, to achieve acceptance as a supplier and to provide retailers time to determine
market demand for the GE labeled products (collectively, our “Business Model”). During the first quarter of 2010, the
Company’s management took the first of several steps toward implementing our Business Model and discontinued marketing the
SQL Technology as an add-on device. To support the Company’s marketing efforts to its target market, entered into a sales
and marketing agreement with Design Solutions International, Inc. (“DSI”), a privately held, lighting industry design
and marketing firm, which was acquired by NBG Home, a leading global designer, manufacturer and marketer of home décor products,
in 2015. In the latter half of 2016, the Company took further steps to bolster its sales and marketing effort by hiring electronic
and lighting industry executives, all of whom had previously worked at General Electric.
The License Agreement
Company management then took the next step
in furtherance of our Business Model and sought the endorsement of the SQL Technology from General Electric. During 2010 and 2011,
GE tested the SQL Technology and in June 2011, GE and SQL Lighting & Fans, LLC, a subsidiary of the Company, entered into
a trademark licensing agreement (the “License Agreement”) under which SQL Lighting & Fans, LLC was licensed to
use the GE monogram logo on its devices and certain other trademarks on its ceiling fans and light fixtures through December 31,
2017. The License Agreement requires the Company to pay a percent of revenue generated on our products using the GE monogram logo
as a license fee, including a minimum license fee payment during the term, and in exchange, the License Agreement enables the
Company to market ceiling fans and light fixtures with and without the SQL Technology using the GE logo. The License Agreement
imposes certain manufacturing and quality control conditions that we must maintain. In addition to marketing ceiling fans and
light fixtures under the GE logo and trademarks, the Company has the right to offer private label ceiling fans and light fixtures
with its technology installed to retailers that market private label products.
The License Agreement was amended in April
2013 to extend its term through December 31, 2017 and to revise the required minimum license fees, and in July 2014 to remove
minimum license fees for 2014. The License Agreement was further amended in August 2014 to, among other things, extend the term
through November 30, 2018 and set forth a new royalty calculation beginning December 1, 2013 and continuing through the term of
the License Agreement. The current License Agreement provides that royalties due to GE will be tiered, based on a declining percentage
of net sales in each Contract Year, paid quarterly, as follows:
Net
Sales in Contract Year
|
|
Royalty
as a Percentage of Net Sales
|
$0
- $50,000,000
|
|
|
7
|
%
|
$50,000,001
- $100,000,000
|
|
|
6
|
%
|
$100,000,001+
|
|
|
5
|
%
|
Net
Sales Made
|
|
|
Quarterly
Payment Due Date
|
|
December
1 through February 28/29
|
|
|
26-Mar
|
|
March
1 through May 30
|
|
|
26-Jun
|
|
June
1 through August 31
|
|
|
26-Sep
|
|
September
1 through November 30
|
|
|
26-Dec
|
|
The Company is obligated to pay to GE a royalty
minimum of $12,000,000 in the aggregate during the term of the License Agreement. If, at the end of the term of the License Agreement,
the total of all royalty payments paid pursuant to the License Agreement does not total $12,000,000, the Company must pay to GE
the difference between $12,000,000 and the amount of royalties actually paid to GE through the end of the term of the License
Agreement.
Trade Distribution Channels
In furtherance of our Business Model, the
Company sought to establish trade distribution channels with key retailers. In July 2012, the Company entered into a sales and
marketing agreement with Design Solutions International, Inc. (“DSI”), a privately held, lighting industry design
and marketing firm. In 2015, DSI was acquired by NBG Home, a leading global designer, manufacturer and marketer of home décor
products. Under the terms of the DSI Agreement, which remains in effect, DSI serves as the Company’s exclusive sales representative
for all its products and goods in the United States and Canada. For its services, DSI receives a commission based on net sales.
In addition to DSI’s sales and marketing support, the Company’s products will also be sold through GE’s lighting
sales group as a condition of the License Agreement.
With the recent addition of lighting and electronic
sales and marketing professionals to its management team, the Company is further strengthening its distribution efforts to key
retailers and is launching a distribution effort to commercial entities such as home builders and hotels. In addition, the Company
expanded its target market to include commercial entities.
Third Party Manufacturing
The Company’s Business Model entails
the use of third party manufactures to produce the SQL Technology and the ceiling fans and light fixtures in which SQL Technology
is imbedded. The manufacturers currently used by the Company are located in Guangdong province of China and, as required by the
Licensing Agreement with GE, must be approved by GE to ensure quality standards are met. To further ensure that quality specifications
are maintained, the Company maintains an office in the Guangdong province staffed with GE trained auditors who will regularly
inspect its products produced by the third party manufacturer.
Line of Credit
On April 13, 2016, the Company entered into
a Line of Credit Promissory Note with a third party (the “Line of Credit”) in the principal sum of up to ten million
U.S. Dollars (USD $10,000,000). The Line of Credit provides for monthly payments of interest at eight percent (8%) per annum on
outstanding principal, and matures on December 31, 2017, at which time the full principal amount and accrued but unpaid interest
become due. The Line of Credit is used to fund the production of our products with our third-party manufacturers and is repaid
upon the sale or delivery of the product to our customers.
Management and Personnel
Beginning in 2015 and throughout 2016, we
began building our sales and marketing team by hiring electronic and lighting industry executives, many of whom had previously
worked at General Electric. Michael Perrillo, former CEO from DSI, joined the Company as a full-time consultant to enhance and
expand sales objectives, particularly toward construction/builders, hotels and other sales channels that the Company is targeting.
In June 2015, Mark Wells joined the Company as a consultant to provide product promotion and other sale consulting services, and
in August 2016, Mark Wells was hired as our President. Also during 2016, we hired a Vice President of Retail Sales, Vice President
of Commercial Sales and Senior Vice President or Product Development.
During 2016, the Company continued to expand
its staff and team of engineers to develop the SQL Technology and Smart SQL.
Capital Fundraising, Previous Offerings
and Stock Sales
In 2013 and 2014, the Company obtained capital
resources necessary to begin implementation of its Business Model pursuant to the Notes Offering (as defined below), and during
2015 and 2016, through additional stock offering and private sales, the Company obtained additional capital resources to further
implement its Business Model.
The Notes Offering; Issuance of Series
A Preferred Stock
From November 2013 through June 2014, the Company
raised capital resources pursuant to an offering (the “Notes Offering”) of its 12% and 15% Secured Convertible Promissory
Notes, convertible into shares of Common Stock at $0.25 per share (each a “Convertible Note” and collectively, the
“Convertible Notes”), and five (5) year common stock warrants to purchase shares of Common Stock at $0.375 per share
(each a “Note Warrant” and collectively, the “Note Warrants”). On November 26, 2013, May 8, 2014 and June
25, 2014 we concluded closings of the Notes Offering with certain accredited investors (which in all cases herein, is as defined
under Regulation D, Rule 501 of the Securities Act), in the aggregate principal amount of $4,270,100. Investors in the Notes Offering
also received registration rights, whereby the Company agreed to prepare and file a registration statement registering the shares
underlying the Convertible Notes and Note Warrants within sixty (60) days after the applicable closing, and to cause such registration
statement declared effective by the SEC within ninety (90) days thereafter (the “Note RRAs”).
Notes Offering Related Issuances
Pursuant to a letter agreement, dated January
23, 2015, between the Company and most holders of the November 26, 2013 and May 8, 2014 Convertible Notes, the Company issued 2,343,191
shares of Common Stock upon conversion of the following amounts, as applicable, at a price of $0.25 per share: (i) penalties accrued
under the Note RRAs, because the Company was unable to file a registration statement and to have it declared effective on time,
pursuant to the terms of the Note RRAs dated as of November 26, 2013 or May 8, 2014; (ii) interest accrued pursuant to an Agreement
and Waiver, dated December 11, 2014, between the Company and most holders of the November 26, 2013 Convertible Notes, which extended
the due date for the first interest payment under such holders’ Convertible Notes for 90 days, in exchange for capitalization
of such interest due at a rate of 12% per annum; and (iii) the first interest payment due under each such holder’s November
26, 2013 Convertible Note.
Forbearance
Between November 2015 and July 2016, most holders
of the Convertible Notes agreed to forbear making an election under their respective Convertible Notes until (ultimately) August
15, 2016, pursuant to one or more forbearance agreements, as applicable, during such time interest under their respective Convertible
Notes continued to accrue. Interest amounts due through August 15, 2016 were paid in full by such date.
The August 2016 Series A Preferred Stock
Election
In July 2016, the Company requested that each
holder of Convertible Notes indicate its election to (i) redeem its Convertible Note, (ii) convert its Convertible Note into shares
of Common Stock or (iii) convert its Convertible Note into shares of Class A Preferred Stock (the “Preferred Option”),
in each case by August 15, 2016. For those holders electing the Preferred Option, each holder received shares of Class A Preferred
Stock on a 1 to 1 ratio to the number of shares of Common Stock which were then convertible as unpaid principal under such holder’s
respective Convertible Note. The Class A Preferred Stock is convertible into shares of Common Stock at the same conversion price
as the Convertible Notes (i.e., USD $0.25 per share), and pays interest quarterly at a rate of six percent (6%). The Class A Preferred
Stock will be convertible upon the election of the holder thereof.
Each holder electing the Preferred Option entered
into an amendment to its Convertible Note, providing that the Convertible Note is convertible into shares of Series A Preferred
Stock, rather than shares of Common Stock (the “Note Amendment”). In addition, each holder entered into a lock-up agreement,
whereby such 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 held, (ii) the shares of Series A Preferred Stock obtained upon conversion of its Convertible Note,
and (iii) the shares of Common Stock underlying the Series A Preferred Stock (the “Note Lock-Up Agreement”). More than
a majority of the holders of the then-outstanding Convertible Notes entered into the Note Amendment or otherwise consented to the
Note Amendment, and the Note Amendments, conversion to Series A Preferred Stock and Note Lock-Up Agreement were entered into effective
as of August 15, 2016.
Prior to the August 2016 Election, several holders
of the Convertible Notes had previously elected to receive payment in cash, or convert their Convertible Notes into shares of
Common Stock, but most Convertible Notes remained outstanding. Pursuant to elections received and effective as of August 15, 2016,
the Company thereafter redeemed or issued shares of Common Stock or Series A Preferred Stock, as applicable, in exchange for the
principal balance of the Convertible Notes, as follows: (i) the payment of, in the aggregate, $200,000 in principal balance of
two Convertible Notes; (ii) the issuance of 240,000 shares of Common Stock, representing $60,000 in outstanding Convertible Note
principal balance; and (iii) the issuance of 13,256,936 shares of Series A Preferred Stock, representing $3,314,234 in outstanding
Convertible Note principal balance.
As of March 30, 2017, one Convertible Note
remains outstanding, which will be converted into 200,000 shares of Series A Preferred Stock, subject to receipt of complete paperwork
from the respective Convertible Note holder. Interest under all other Convertible Notes has been paid and all such Convertible
Notes have been terminated.
The 2015 Stock Offerings
Beginning in May 2015, we conducted
an offering of up to $4,000,000 of restricted shares of Common Stock, no par value per share, at $0.60 per share to certain accredited
and non-accredited investors (the “May 2015 Stock Offering”), and beginning in November 2015, we conducted an offering
of up to $2,000,000 of restricted shares of Common Stock, no par value per share, at $1.00 per share to certain accredited and
non-accredited investors (the “November 2015 Stock Offering”). In both offerings, the Company entered into a registration
rights agreement with each investor, whereby the Company agreed to, and did, file a registration statement to register the subscribed
for shares of Common Stock within one hundred fifty (150) days after the date of such agreement.
Between June 12, 2015 and November 6, 2015,
the Company completed three closings of the May 2015 Stock Offering, representing aggregate gross proceeds to the Company of $2,269,600,
and issued 3,782,666 shares of Common Stock. Between December 24, 2015 and February 19, 2016, the Company completed two closings
of the November 2015 Stock Offering, representing aggregate gross proceeds to the Company of $800,000, and issued 800,000 shares
of Common Stock.
The 2016 Stock Sales
On April 4, 2016, the Company entered into
a securities subscription agreement with an accredited investor, pursuant to which the Company sold 2,000,000 shares of Common
Stock at a purchase price of $2.50 per share, resulting in gross proceeds to the Company of $5,000,000 (the “April 2016 Stock
Sale”). In addition, the Company issued to the investor a one-year warrant to purchase up to 1,666,667 shares of Common Stock
at an exercise price of $3.00 per share. On March 24, 2017, such warrant was exercised in full, resulting in additional gross proceeds
to the Company of $5,000,000, and the Company issued 1,666,667 shares of Common Stock.
On May 10, 2016, the Company entered into a
securities subscription agreement with an accredited investor, pursuant to which the Company sold (i) 675,000 shares of Common
Stock at a purchase price of $2.60 per share; (ii) a three-year warrant to purchase up to 1,350,000 shares of Common Stock at an
exercise price ranging between $3.00 and $3.50 per share (depending on the date of exercise); and (iii) a right to subsequently
receive Volume Warrants to purchase up to 1,350,000 shares of Common Stock at $3.00 per share (the “May 2016 Stock Sale”).
On September 22, 2016, the Company entered
into a securities subscription agreement with an accredited investor, pursuant to which the Company sold (i) 30,000 shares of
Common Stock at a purchase price of $2.60 per share, (ii) an option to purchase an additional 30,000 shares of Common Stock at
a purchase price of $2.60 per share within 90 days (which such investor has provided notice of an intent to exercise), (iii) a
three-year warrant to purchase up to 60,000 shares of Common Stock (or 120,000 shares if the option in item (ii) is exercised)
at an exercise price ranging between $3.00 and $3.50 per share (depending on the date of exercise), and (iii) a right to subsequently
receive Volume Warrants to purchase up to 120,000 shares of Common Stock at $3.00 per share (the “September 2016 Stock Sale”).
“Volume Warrants” refer to unissued
warrants that will only become issuable upon (i) the Company meeting specified thresholds based on the Company generating earnings
before interest, taxes, depreciation and amortization (EBITDA) in a fiscal year during the warrant term, (ii) completion of a
private placement of a minimum of $15,000,000 at specified pre-money valuation thresholds, or (iii) the sale of at least fifty
percent (50%) of the Company’s assets at pre-money valuation thresholds ranging from $350,000,000 to $1,000,000,000.
The May 2016 Stock Sale resulted in aggregate
gross proceeds to the Company of $1,755,000 and the September 2016 Stock Sale resulted in aggregate gross proceeds to the Company
of $78,000. In addition, the Company could receive up to an amount between $4,230,000 and $4,935,000 in gross proceeds upon exercise
of warrants issued in both sales, depending on the timing of such exercise, and could receive additional proceeds of up to $4,410,000,
if all the Volume Warrants are subsequently issued and fully exercised by the holder thereof.
Also on September 22, 2016, the Company issued
150,000 shares of Common Stock to an accredited investor, in exchange for $405,000 in cash, for a price of $2.70 per share. In
connection with the sale, the Company granted warrants to purchase up to 750,000 shares of Common Stock exercisable at a price
per share of $3.00 per share, which expire on January 1, 2022.
Industry Overview and Competition
We currently face competition from traditional
lighting technologies. There are numerous traditional light manufacturing companies, worldwide, many of which are significantly
larger than us. Traditional lighting technologies have the advantage of a long history of market acceptance and developed relationships
with retailers and distributors. We will actively seek to educate our target markets as to the advantages of our technology compared
to traditional installation methods and believe the achievement of this objective is critical to our future. Although our technology
is proprietary and patent protected, there can be no assurance that a large conventional lighting company will not invent a competing
technology that offers similar installation efficiencies and enter the market and utilize its resources to capture significant
market share and adversely affect our operating results.
We believe our products with the SQL Technology
can effectively compete against traditional lighting in the areas of installation, maintenance and safety. The SQL Technology
offers the advantage of ease of installation and replacement. This feature is superior to other lighting systems, which can require
the service of professional electricians to install and remove. Once SQL’s socket is correctly installed in a ceiling or
wall electrical junction box, there is no exposure to live electrical wires resulting in an additional advantage in the area of
safety. Furthermore, the installation of our socket, which weighs approximately four (4) ounces, requires significantly less work
and exertion compared to traditional ceiling light or fan fixtures, which ordinarily weigh in excess of ten (10) pounds and can
weigh hundreds of pounds. There can be no assurance, however, that the current competitors directly involved in this industry
or a new competitor will not develop processes or technology which will allow them to decrease their costs, and consequently,
erode our price advantage.
There is significant competition in the ceiling
lighting and fan market place; however, we believe we have a competitive advantage due to the strength of the SQL Technology.
This competitive advantage extends to customers both in the residential as well as the commercial markets. The SQL Technology
is patented or trademarked in the United States of America, Canada, Mexico, Hong Kong, China, and Australia. The Company faces
competitive forces from traditional approaches towards ceiling lighting and fans installations. While it is unclear whether SQL’s
unique technology will gain significant market penetration, the Company believes that its safety and installation efficiency features
will gain market acceptance since it significantly reduces the time necessary to install such fixtures and, after a one-time installation
of the socket component, eliminates further exposure to electrical wires when used in conjunction with fixtures in which the plug
is installed.
To further bolster the Company’s competitive
position, the Company has engaged the support of DSI, a lighting design and marketing firm whose existing customer base includes
Walmart, Costco, The Home Depot, BJ’s Wholesale Club, Sam’s Club and other major retailers throughout North America.
In 2015, DSI was acquired by NBG Home, a leading global designer, manufacturer and marketer of home décor products. Under
the terms of the DSI Agreement, which remains in effect, DSI serves as the Company’s sales representative for all its products
and goods in the United States and Canada. For its services, DSI receives a commission based on net sales. The Company’s
products will also be sold through GE’s lighting sales group as a condition of it License Agreement. The Company’s
recent addition of lighting and electronic sales and marketing professionals will further strengthen its distribution efforts
to key retailers, in addition to launching a marketing program to commercial entities such as home builders and hotels.
Customers
We market our product to retailers and other
customers who purchase large quantities of ceiling fans and lighting fixtures. This includes OEM manufactures, electrical
distributors, large “big box” retailers, builders, hotels, casinos and industrial and commercial lighting and fan
manufactures.
We believe that this market will benefit from
the time saved in installing fixtures and the safety features achieved from the elimination of exposed electrical wires once the
SQL Technology socket is installed in the junction box.
Employees
As of March 25, 2017, we had ten full time
employees in the United States of America and six full time employees in the Peoples Republic of China. We have not experienced
any work stoppages and consider our relations with our employees to be good.
These salaried employees include the Company’s
founder, Executive Chairman and Chairman of our Board, Rani Kohen, who serves as an executive of the Company on operational activities;
John Campi, who serves as the Company’s Chief Executive Officer; Mark Wells, who serves as the Company’s President;
and Patricia Barron, who serves as the Company’s Chief Operations Officer. In the second half of 201,6 the Company hired
three former GE lighting executives: John Poole as Vice President of Retail Sales, David Martinsen as Vice President of Commercial
Sales, and Steve Briggs as Senior Vice President of Product Development.
Seasonality
Retailers purchase ceiling fans for early
spring and summer sales. As a result, the Company sells more of this product in the October through February time period. The
Company has begun to market lighting fixtures that will reduce the impact of seasonal influences to its sales growth, as lighting
products do not lend themselves to seasonal purchases. During periods of economic expansion or contraction our sales by quarter
may vary significantly from this seasonal pattern.
Government and Environmental Regulation
Our facilities and operations are subject
to federal, state and local laws and regulations relating to environmental protection and human health and safety. Some of these
laws and regulations may impose strict, joint and several liabilities on certain persons for the cost of investigation or remediation
of contaminated properties. These persons may include former, current or future owners or operators of properties and persons
who arranged for the disposal of hazardous substances. Our leased real property may give rise to such investigation, remediation
and monitoring liabilities under environmental laws. In addition, anyone disposing of certain products we distribute, such fluorescent
lighting, must comply with environmental laws that regulate certain materials in these products.
We believe that we are in compliance, in all
material respects, with applicable environmental laws. As a result, we do not anticipate making significant capital expenditures
for environmental control matters either in the current year or in the near future.
Emerging Growth Company
We are an “emerging growth company,”
as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable
to other public companies.
Section 107(b) of the JOBS Act provides that
an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of
the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company”
can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have
irrevocably opted out of the extended transition period for complying with new or revised accounting standards pursuant to Section
107(b) of the JOBS Act.
We could remain an “emerging growth
company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross
revenues are $1 billion, as adjusted, or more, (ii) the date that we become a “large accelerated filer” as defined
in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the
market value of Common Stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently
completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during
the preceding three-year period.
ITEM 1A. RISK FACTORS
As a “smaller reporting company”,
we are not required to provide the information required by this Item.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As a “smaller reporting company”,
we are not required to provide the information required by this Item.
ITEM 2. PROPERTIES
Our corporate offices are located at 4400
North Point Parkway, Suite 154, Alpharetta, Georgia. The monthly rent related to our leased 1179 square foot facility is currently
$1,854.96 per month, subject to increases in subsequent periods. The Company had previously rented office space located at One
Buckhead Plaza, 3060 Peachtree Road, Suite 390, Atlanta, Georgia 30305. The Company’s subleasing agreement for this property
expired November 30, 2016. The lease expires on this space March 31, 2017. In addition, we share offices with a supplier where
the development of our products occurs and where our Executive Chairman works, located at 2855 W. McNab Road, Pompano Beach, FL,
for which we pay no rent.
We do not own any property or land. We believe
that our facilities are adequate for our current needs and that, if required, we will be able to locate suitable new office space
and obtain a suitable replacement for our executive and administrative headquarters.
ITEM 3. LEGAL PROCEEDINGS
We are not party, nor is our property subject,
to any material pending legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
On September 15, 2015, the Financial Industry
Regulatory Authority (“FINRA”) cleared a request to establish a market in shares of our Common Stock. On October 8,
2015, OTC Markets Group announced that the Company was verified for trading on the OTCQB® Venture Market, and shares of our
Common Stock are currently quoted under the symbol “SQFL”. Presently, shares of our Common Stock not subject to restriction
are eligible for trading in the OTCQB® Venture Market. However, to the Company's knowledge, only a small percentage of our
total issued and outstanding shares of Common Stock have been deposited with broker/dealers as of the date of this prospectus,
and only a small number of shares of our Common Stock have been offered for sale. Therefore, while our shares of Common Stock
are eligible for trading, a liquid public market has not yet developed. We cannot predict the future prices at which our shares
will trade, or the liquidity of a public market for our shares of Common Stock, should one develop.
Holders
As of March 30, 2017, there were 107 holders
of record of the Common Stock. This number does not include beneficial owners whose shares may be held in the names of various
security brokers, dealers, and registered clearing agencies.
Dividend Policy
We have not paid any cash dividends on our
Common Stock and have no present intention of paying any dividends on the shares of our Common Stock. Holders of our Series A
Preferred Stock receive interest paid quarterly, at a rate of six percent (6%) per year, and rank senior with respect to interest
on junior securities, dividends, distributions or liquidation preference. Our current policy is to retain earnings, if any, for
use in our operations and in the development of our business. Our future dividend policy will be determined from time to time
by our Board.
Recent Sales of Unregistered Securities;
Use of Proceeds from Registered Securities
On March 1, 2017, we issued 200,000 shares
of Series A Preferred Stock to a holder of our Convertible Notes, in connection with such holder’s Note Amendment and election
to convert the full principal balance of its outstanding Convertible Note, at a conversion price of $0.25 per share.
Stock Incentive Plan Information
The following table sets forth equity compensation
plan information as of December 31, 2016:
Plan
category
|
|
(a)
Number
of securities to be issued upon exercise of outstanding options, warrants and rights
|
|
(b)
Weighted-average
exercise price of outstanding options, warrants and rights
|
|
(c)
Number
of securities remaining available for future issuance under equity compensation plans
(excluding securities reflected in column (a))
|
Equity
compensation plans not approved by security holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
Stock Incentive Plan (1)
|
|
|
3,885,000
|
|
|
$
|
0.81
|
|
|
|
1,115,000
|
|
Equity
compensation plans approved by security holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
3,885,000
|
|
|
$
|
0.81
|
|
|
|
1,115,000
|
|
(1)
|
|
Of the
grants authorized by the Board on November 15, 2015, which are discussed in more detail below, options to purchase up to 150,000
shares of Common Stock were granted with an exercise price to be determined by the Company. For the purposes of
calculating the weighted-average exercise price, an exercise price of $1.00 per share was assumed, based on the sales price
of the Company’s securities in a private placement on or about the time of the grant.
|
The 2015 Stock Incentive Plan
On April 27, 2015 and on June 8, 2016, our
Board and the holders of a majority of our issued and outstanding shares of Common Stock, respectively, approved the Company’s
2015 Stock Incentive Plan (the “Incentive Plan”). Under the Incentive Plan, the Board has the sole authority to implement,
interpret, and/or administer the Incentive Plan unless the Board delegates (i) all or any portion of its authority to implement,
interpret, and/or administer the Incentive Plan to a committee of the Board, or (ii) the authority to grant and administer awards
under the Incentive Plan to an officer of the Company. The Incentive Plan relates to the issuance of up to 5,000,000 shares of
Common Stock, subject to adjustment, and shall be effective for ten (10) years, unless earlier terminated. No single participant
under the Incentive Plan may receive more than 25% of all options awarded in a single year.
Any employee of the Company or an affiliate,
a director, or a consultant to the Company or an affiliate may be an “Eligible Person” under the Incentive Plan. The
Incentive Plan provides Eligible Persons the opportunity to participate in the enhancement of shareholder value by the award of
options and Common Stock, granted as stock bonus awards, restricted stock awards, deferred share awards and performance-based
awards, under the Incentive Plan. The Company may make payment of bonuses and/or consulting fees to certain Eligible Persons in
options and Common Stock, or any combination thereof.
Certain options to be granted to employees
under the Incentive Plan are intended to qualify as Incentive Stock Options (“ISOs”) pursuant to Section 422 of the
Internal Revenue Code of 1986, as amended (the “Code”), while other options granted under the Incentive Plan will
be nonqualified options not intended to qualify as Incentive Stock Options ISOs (“Nonqualified Options”), either or
both as provided in the agreements evidencing the options described.
The Incentive Plan further provides that awards
granted under the Incentive Plan cannot be exercised until a majority of the Company’s shareholders have approved the Incentive
Plan. As of March 25, 2016, a majority of the Company’s shareholders had not yet approved the Incentive Plan,
Stock Options
The Board, or the appointed committee, shall
have sole and absolute discretionary authority (i) to determine, authorize, and designate those persons pursuant to the Incentive
Plan who are to receive options under the Incentive Plan, (ii) to determine the number of shares of Common Stock to be covered
by such options and the terms thereof, (iii) to determine the type of option granted (ISO or Nonqualified Option), and (iv) to
determine other such details concerning the vesting, termination, exercise, transferability and payment of such options. The Committee
shall thereupon grant options in accordance with such determinations as evidenced by a written option agreement. Subject to the
express provisions of the Incentive Plan, the committee shall have discretionary authority to prescribe, amend and rescind rules
and regulations relating to the Incentive Plan, to interpret the Incentive Plan, to prescribe and amend the terms of the option
agreements and to make all other determinations deemed necessary or advisable for the administration of the Incentive Plan.
The exercise price per share for Common Stock
of options granted under the Incentive Plan shall be determined by the Committee, but in no case shall be less than one hundred
percent (100%) of the fair market value of Common Stock (determined in accordance with the Incentive Plan at the time the option
is granted), provided that, with respect to ISOs granted to a person who holds ten percent (10%) or more of the total combined
voting power of all classes of stock of the Company, the exercise price per share for Common Stock shall not be less than 110%
of the fair market value of the Common Stock. The fair market value of the Common Stock with respect to which ISOs may be exercisable
for the first time by any Eligible Person during any calendar year under all such plans of the Company and its affiliates shall
not exceed $100,000, or such other amount provided in Section 422 of the Code.
Bonus and Restricted Stock Awards
The Board, or the applicable committee, may,
in its sole discretion, grant awards of Common Stock in the form of bonus awards and restricted stock awards. Each stock award
agreement shall be in such form and shall contain such terms and conditions as the Board, or the committee, deems appropriate.
The terms and conditions of each stock award agreement may change from time to time and need not be uniform with respect to Eligible
Persons, and the terms and conditions of separate stock award agreements need not be identical.
Deferred Stock Awards
The Board, or the committee, may authorize
grants of shares of Common Stock to be awarded at a future date upon such terms and conditions as the Board, or the committee,
may determine. Such awards shall be conferred upon the Eligible Person as consideration for the performance of services and subject
to the fulfillment of specified conditions during the deferral period. Each deferred stock award agreement shall be in such form
and shall contain such terms and conditions as the Board, or the committee, deems appropriate. The terms and conditions of each
deferred stock award agreement may change from time to time and need not be uniform with respect to Eligible Persons, and the
terms and conditions of separate deferred stock award agreements need not be identical.
Performance Share Awards
The Board, or the committee, may authorize
grants of shares of Common Stock to be awarded upon the achievement of specified performance objectives, upon such terms and conditions
as the Board, or the committee, may determine. Such awards shall be conferred upon the Eligible Person upon the achievement of
specified performance objectives during a specified performance period, such objectives being set forth in the grant and including
a minimum acceptable level of achievement and, optionally, a formula for measuring and determining the number of performance shares
to be issued. Each performance share award agreement shall be in such form and shall contain such terms and conditions as the
Board, or the committee, deems appropriate. The terms and conditions of each performance share award may change from time to time
and need not be uniform with respect to Eligible Persons, and the terms and conditions of separate performance share award agreements
need not be identical.
Adjustments
If the Company shall effect a subdivision
or consolidation of shares or other capital readjustment, the payment of a stock dividend, or other increase or reduction of the
number of shares of the Common Stock outstanding, without receiving consideration therefore in money, services or property, then
(i) the number, class, and per share price of shares of Common Stock subject to outstanding options and other awards under the
Incentive Plan and (ii) the number of and class of shares then reserved for issuance under the Incentive Plan and the maximum
number of shares for which awards may be granted to an Eligible Person during a specified time period shall be appropriately and
proportionately adjusted. The Board, or a committee, shall make such adjustments, and its determinations shall be final, binding
and conclusive.
Change in Control
If the Company is merged or consolidated with
another entity or sells or otherwise disposes of substantially all of its assets to another company while options or stock awards
remain outstanding under the Incentive Plan, unless provisions are made in connection with such transaction for the continuance
of the Incentive Plan and/or the assumption or substitution of such options or stock awards with new options or stock awards covering
the stock of the successor company, or parent or subsidiary thereof, with appropriate adjustments as to the number and kind of
shares and prices, then all outstanding options and stock awards which have not been continued, assumed or for which a substituted
award has not been granted shall, whether or not vested or then exercisable, unless otherwise specified in the stock option or
stock award agreement, will terminate immediately as of the effective date of any such merger, consolidation or sale.
Federal Income Tax Consequences
Subject to other customary terms, the Company
may, prior to certificating any Common Stock, deduct or withhold from any payment pursuant to a stock option or stock award agreement
an amount that is necessary to satisfy any withholding requirement of the Company in which it believes, in good faith, is necessary
in connection with U.S. federal, state, local or transfer taxes as a consequence of the issuance or lapse of restrictions on such
Common Stock.
Outstanding Equity Awards
On November 15, 2015, the Board authorized
the Company to grant certain securities under the Incentive Plan and Directors Compensation Plan, in the aggregate amount of up
to 3,810,000 options to purchase shares of Common Stock at exercise prices ranging from $0.60 per share to $1.80 per share, vesting
entirely in two years from the date of the grant, and up to 75,000 shares of Common Stock, which vested immediately.
As of March 30, 2017, the Company has entered
into Option Award Agreements with thirteen grantees, pursuant to awards granted on November 15, 2015 under the Incentive Plan,
consisting of up to 3,660,000 options to purchase shares of Common Stock, of which options to purchase up to 2,010,000 shares
of Common Stock vested on November 15, 2015, options to purchase up to 950,000 shares of Common Stock vested on November 15, 2016,
and options to purchase up to 850,000 shares of Common Stock will vest on November 15, 2017. In addition, the Company entered
into Stock Award Agreements with two grantees to issue 75,000 shares of Common Stock, which vested immediately and were issued
by the Company in 2016. As of March 30, 2017, the Company had not yet entered into Option Award Agreements with respect to grants
of options to purchase up to 150,000 shares of Common Stock under the Incentive Plan.
ITEM 6. SELECTED FINANCIAL DATA
As a “smaller reporting company”,
we are not required to provide the information required by this Item.
ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with
the consolidated audited financial statements and notes thereto included in Part II, Item 8 of this Form 10-K. The following discussion
contains forward-looking statements. Forward-looking statements are not guarantees of future performance and our actual results
may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences
include, but are not limited to, those discussed under the explanatory note labeled “Forward-Looking Statements” found
at the beginning of this report. We assume no obligation to revise or update any forward-looking statements for any reason, except
as required by law.
US Dollars are denoted herein by “USD”,
“$” and “dollars”.
Overview
We are a company engaged in the business of
developing proprietary technology that enables a quick and safe installation by the use of a weight bearing power plug for electrical
fixtures, such as light fixtures and ceiling fans, into ceiling and wall electrical junction boxes. Our patented technology consists
of a 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 a non-conductive body that houses conductive rings connectable to an electric power supply
through terminals in its side exterior. The plug, also comprised of a non-conductive body that houses corresponding conductive
rings, attaches to the socket via a male post and is capable of feeding electric power to an appliance. The plug also includes
a second structural element allowing it to revolve with a releasable latching which, when engaged, provides a retention force
between the socket and the plug to prevent disengagement. The socket and plug can be detached by releasing the latch, 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.
We currently manufacture and sell ceiling
fans and lighting fixtures branded with the General Electric logo and manufactured under General Electric’s strict guidance,
pursuant to the License Agreement between us and General Electric. Our ceiling fans and lighting fixtures are manufactured by
several well established factories in the Peoples Republic of China. Most, if not all, of these factories have been in business
for over 20 years and follow strict human rights and sustainability protocols. Our ceiling fans and lighting fixtures offer unique
designs, and are manufactured with and without the SQL Technology.
We currently manufacture and sell ceiling
fans and lighting fixtures branded with the General Electric logo and manufactured under GE’s strict guidance, pursuant
to a License Agreement between us and General Electric. Our ceiling fans and lighting fixtures offer unique designs, and are manufactured
with and without the SQL Technology.
In December 2016, the SQL Technology was in
included the 2017 National Electrical Code (NEC).
The Company is developing smart home technology
applications for products using the SQL Technology called “Smart SQL”, which incorporate Bluetooth and Wi-Fi capabilities
to enable remote control and automation of such products and appliances. The Company believes that the combination of its quick
connect technology, the inclusion of Smart SQL and its growing product lines will uniquely position the Company in the marketplace.
Results of Operations
|
|
For
the years ended
|
|
|
|
|
|
|
December
31, 2016
|
|
December
31, 2015
|
|
$
Change
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
7,014,978
|
|
|
$
|
2,885,007
|
|
|
$
|
4,129,971
|
|
|
|
143.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
(6,136,395
|
)
|
|
|
(2,477,252
|
)
|
|
|
(3,659,143
|
)
|
|
|
147.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
878,583
|
|
|
|
407,755
|
|
|
|
470,828
|
|
|
|
115.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
(6,866,355
|
)
|
|
|
(5,236,747
|
)
|
|
|
1,629,608
|
|
|
|
31.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
(5,987,772
|
)
|
|
|
(4,828,992
|
)
|
|
|
(1,158,780
|
)
|
|
|
24.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income / (Expense)
|
|
|
(92,460,085
|
)
|
|
|
(22,061,218
|
)
|
|
|
(70,398,867
|
)
|
|
|
319.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(98,447,857
|
)
|
|
$
|
(26,890,210
|
)
|
|
$
|
(71,557,647
|
)
|
|
|
266.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.
|
|
Net
loss per share - basic and diluted
|
|
|
(2.60
|
)
|
|
|
(0.76
|
)
|
|
|
(1.85
|
)
|
|
|
243.4
|
%
|
Revenue
We had recorded revenue of $7,014,978 for the year ended
December 31, 2016, as compared to revenue of $2,885,007 for the year ended December 31, 2015. The 143.2% increase in revenue was
associated with additional SKU’s offered and increased sales activity with existing customers. Sales increased through all
sales channels, including internet sales for our customers.
Cost of Sales
We had a cost of sales of $6,136,395 for the
year ended December 31, 2016, as compared to a cost of sales of $2,477,252 for the year ended December 31, 2015. The increase in
cost of sales was associated with expanded offering and increase in sales noted above.
Gross Profit
We had gross profit of $878,583 for the year
ended December 31, 2016, as compared to gross profit of $407,755 for the year ended December 31, 2015. The gross profit as a percent
of sales was 12.5% in 2016, as compared with 14.1% in 2015. This change in gross profit as a percent of sales is primarily due
to the introduction of new SKU’s into the market place. Gross Profit as a percent of sales materially improved as the year
progressed.
General and Administrative Expenses
General and administrative
expense increased $1,629,608 during the year ended December 31, 2016 to $6,866,355, from
$5,236,747 for the year ended December 31, 2015.
The increases in the general and administrative expenses
were primarily due to additional business activity including:
·
|
$857,100 Consulting
expenses, $769,000 paid with equity, for business and web activities
|
·
|
$261,300
Warehouse and product quality/production oversite
|
·
|
$118,800
Commission expense associated with increased sales
|
·
|
$98,400
Tooling and trade for manufacturing quality reviews
|
·
|
$85,600
Payroll and related expenses
|
·
|
$65,700
Insurance for liability, Directors and Officers and Health
|
·
|
$56,000
Facility rent expense
|
·
|
$49,800
Increased travel
|
·
|
$40,900
Marketing expense
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Offsetting the above expenses
was a $35,200 decrease in Accounting and Legal fees
Loss from Operations
Loss from operations represents the change in general
and administrative expenses offset by the gross profit on sales for the periods presented.
Other Income (Expense)
Total other expenses of $92,460,085 represent
the following:
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($41,129,336) non-cash loss on the conversion of convertible debt to preferred shares and common shares. The shares exchanged for the debt were valued at $3.40 per share, the closing price closest to the conversion option date.
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($43,634,482) non-cash derivative expense on outstanding warrants, as a result of the share value increasing from $1.00 to $2.00, based on the Company’s recent OTC closing price of common stock and the impact on the Black Scholes calculation of the intrinsic value of the equity component.
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($9,678,390) in non-cash derivative expense associated with the fair value of options granted and warrants issued during the 2016.
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These non-cash charges to Other Income/(Expense)
were partially offset by a decrease in interest payments of $1,874,652 due to the maturity of the convertible debt instruments,
and by a $2,949,714 non-cash gain on debt extinguishment.
Net Loss and Net Loss per Share
The Company’s net loss and net loss per
share for the year ended December 31, 2016 was ($98,447,857), or ($2.60) per share, as compared ($26,890,210), or ($0.76) per share
for the year ended December 31, 2015. Given the reasons explained above, our loss increased by ($71,557,647) for the year ended
December 31, 2016.
Liquidity and Capital Resources
To date, the Company has not generated sufficient revenue
to cover its operating costs and continues to operate with negative cash flow. As a result, the Company has raised additional
funds through the sale of its Common Stock. The Company has also entered into a Line of Credit with a third party which will supply
it with $10,000,000 to support its purchase orders, inventory and other working capital needs. As of December 31, 2016, the Company
had $6,887,264 available under the Line of Credit, which expires December 31, 2017. In order for the Company to achieve sufficient
working capital to support its operations and sales growth, the Company may be required to find additional financing to replace
the expiring facility or raise additional capital to fund its working capital needs. It currently has no such financing commitment
in place.
For the year ended December 31, 2016, the Company
used ($6,460,289) of cash for operations as compared with ($3,767,470) used for the same period in 2015. The increase in cash used
for operations was due to the Company’s net loss of ($98,447,857), offset by non-cash expenses of $43,634,481 change in derivative
liability, $9,678,390 loss in derivative expense and $41,129,336 loss in extinguishment of debt and by non-cash expenses for depreciation
and amortization totaling $2,971,491. Net funds used for working capital was ($3,118,962) due to an increase in accounts receivable
(562,515), ($2,142,565) increase in inventory, ($493,432) decrease in GE royalty payable, partially offset by an increase of $252,367
in accounts payable.
For the year ended December 31, 2016, cash flows used
($43,694) for investing activities as compared with ($59,478) used for the same period in 2015. The investments were for patents
costs and fixed assets.
Cash flows provided from financing activities amounted
to $9,855,160 in cash equivalents for the year ended December 31, 2016, as compared with $3,036,327 during the same period in
2015. The company received $7,460,000 from the proceeds of Common Stock, $3,572,545 from the conversion of notes and interest
into Common Stock and preferred stock, $2,997,814 in proceeds from the line of credit, net of repayments, $200,000 in proceeds,
net of repayments from a related party. These amounts were offset by ($4,314,233) in repayment of the convertible notes at maturity
and ($30,966) in Preferred Stock dividend payments.
As a result of the above operating, investing and financing
activities, the Company provided $3,675,020 in cash equivalents for the year ended December 31, 2016, as compared with ($790,621)
used during the same period in 2015. The Company had $4,125,888 in cash and cash equivalents at December 31, 2016, as compared
to $450,868 at December 31, 2015.
The Company had a working capital deficit of
$(21,419,526) as of December 31, 2016, as compared to $(28,174,512) as of December 31, 2015, which includes $24,083,314 in derivative
liabilities.
A majority of the Company’s sales do not require
the Company to take delivery of inventory. Production of the SQL Technology and fixtures will be originated upon receipt of FOB
(free on board) purchase contracts from customers. Upon the completion of each purchase contract, the finished products will be
transported from the manufacturer directly to the ports and loaded on vessels secured by the customer, upon which the products
become the property of the customer.
Subsequent Events
On March 24, 2017, the holder of our one-year Common Stock
Purchase Warrant, issued on April 4, 2016, to purchase up to 1,666,667 shares of our Common Stock at an exercise price of $3.00
per share, exercised such warrant in full upon tender of $5,000,000 in cash to the Company.
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements
Critical Accounting Policies and Estimates
For a discussion of our accounting policies and related
items, please see below and the Notes to the Financial Statements included in this report.
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 our 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 non-conforming events. Accordingly, actual results could differ significantly from estimates.
Recently Issued Accounting Pronouncements
In April 2015, the FASB issued Accounting Standards
Update No. 2015-03, Interest—Imputation of Interest (Topic 835-30): 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, 2015, 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 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 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.
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.
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 write-offs, as well as an assessment of specific identifiable
customer accounts considered at risk or uncollectible.
Inventory
Inventory consist of finished goods purchased, which are
valued at the lower of cost or market value, with cost being determined on the first-in, first-out method. The Company
periodically reviews historical sales activity to determine potentially obsolete items and also evaluates the impact of any anticipated
changes in future demand.
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.
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 5-7 years of the respective assets. Expenditures for maintenance
and repairs are charged to expense as incurred.
Upon sale or retirement of property and equipment, the
related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the statements of
operations.
Intangible Asset - Patent
The Company developed a patent for an installation device
used in light fixtures and ceiling fans. Costs incurred for submitting the applications to the United States Patent and Trademark
Office for these patents have been capitalized. Patent costs are being amortized using the straight-line method over the related
15 year lives. The Company begins amortizing patent costs once a filing receipt is received stating the patent serial number and
filing date from the United States Patent and Trademark 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.
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.
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.
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 re-valued at each reporting date, with changes in the fair value reported as charges or credits to
income.
For option-based simple derivative financial instruments,
the Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation
dates. 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 27,952,586 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.
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) (“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 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: 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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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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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.
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 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 505-50-25-7, 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.
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.
Income Tax Provision
From the inception of the Company and through November
6, 2012, the Company was taxed as a pass-through entity (a limited liability company) under the Internal Revenue Code and was
not subject to federal and state income taxes; accordingly, no provision had been made.
The financial statements reflect the Company’s transactions
without adjustment, if any, required for income tax purposes for the period from November 7, 2012 to December 31, 2012. The net
loss generated by the Company for the period January 1, 2012 to November 6, 2012 has been excluded from the computation of income
taxes.
The Company accounts for income taxes under Section 740-10-30
of the FASB Accounting Standards Codification, which requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced
by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the Consolidated Statements of Operations in the period that includes the enactment date.
The Company adopted section 740-10-25 of the FASB Accounting
Standards Codification (“Section 740-10-25”). Section 740-10-25 addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under Section 740-10-25, the
Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized
in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty
(50) percent likelihood of being realized upon ultimate settlement. Section 740-10-25 also provides guidance on de-recognition,
classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
The estimated future tax effects of temporary differences
between the tax basis of assets and liabilities are reported in the accompanying consolidated balance sheets, as well as tax credit
carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its consolidated
balance sheets and provides valuation allowances as management deems necessary.
Management makes judgments as to the interpretation of
the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the
Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion,
adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates,
additional allowances or reversals of reserves may be necessary.
The Company’s tax returns are subject to examination
by the federal and state tax authorities for the years ended 2012 through 2016.
Uncertain Tax Positions
The Company did not take any uncertain tax positions and
had no adjustments to its income tax liabilities or benefits pursuant to the provisions of Section 740-10-25 for the reporting
periods ended December 31, 2016 and 2015.
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
(i) affiliates of the Company; (ii) 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; (iii) trusts for the benefit of employees, such as pension and profit-sharing trusts that are
managed by or under the trusteeship of management; (iv) principal owners of the Company; (v) management of the Company; (vi) 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 (vii) 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: (i) the nature of the relationship(s)
involved; (ii) 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; (iii) 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 (iv) 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
As a “smaller reporting company”, we are not
required to provide the information required by this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be included in this
report appear as indexed in the appendix to this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report (the
“Evaluation Date”), we carried out an evaluation, under the supervision and with the participation of our management,
including our Principal Executive Officer, who is also serving as our Principal Financial Officer and Principal Accounting Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Based upon this evaluation, our Principal Executive Officer
concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to provide reasonable assurance
that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and
that our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that
we file or submit under the Exchange Act is accumulated and communicated to our management including our Principal Executive Officer
as appropriate to allow timely decisions regarding required disclosure.
Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect
or uncover every situation involving the failure of persons within the Company to disclose material information otherwise required
to be set forth in the Company’s periodic reports.
Management’s Annual Report on Internal Controls
over Financial Reporting
The Company’s management is also responsible for
establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. The Company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect our transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary
to permit preparation of the financial statements in accordance with U.S. generally accepted accounting principles, and that our
receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In connection with the preparation of our annual financial
statements, management has undertaken an assessment of the effectiveness of our internal control over financial reporting as of
December 31, 2016 based on the framework in Internal Control—Integrated Framework (“1992 Framework”) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included an evaluation
of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls.
Based on this evaluation, under that framework, management
has concluded that our internal control over financial reporting was not effective as of December 31, 2016. Our Principal Executive
Officer, who is also serving as our Principal Financial Officer and Principal Accounting Officer, concluded that we have material
weaknesses in our internal control over financial reporting because we do not have an adequate segregation of duties due to a
limited number of employees among whom duties can be allocated. The lack of segregation of duties is due to the limited nature
and resources of the Company.
This Annual Report does not include an attestation report
of the Company’s registered public accounting firm regarding internal controls over financial reporting. Management’s
report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities
and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
Changes In Internal Controls over Financial Reporting
No changes were made in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The following is a list of our directors and executive
officers. All directors serve one-year terms or until each of their successors are duly qualified and elected. The officers are
elected by our Board.
Name
|
|
Age
|
|
Position
|
Mr. John P. Campi
|
|
72
|
|
Chief Executive Officer
|
Mr. Rani Kohen
|
|
51
|
|
Director, Executive Chairman
|
Mr. Mark Wells
|
|
46
|
|
President
|
Ms. Patricia Barron
|
|
56
|
|
Chief Operations Officer
|
Mr. Phillips Peter
|
|
85
|
|
Director
|
Mr. Thomas Ridge
|
|
71
|
|
Director
|
Mr. Dov Shiff
|
|
69
|
|
Director
|
Mr. Leonard
J. Sokolow
|
|
60
|
|
Director
|
John P. Campi
has served as the Company’s
Chief Executive Officer since November 2014. Mr. Campi founded Genesis Management, LLC in 2009, and retired in 2014 upon accepting
the role of Chief Executive Officer. Mr. Campi has extensive experience in the field of cost management, is recognized as a Founder
of the strategic cost-management discipline known as Activity-Based Cost Management, and is generally recognized as a national
leader in the field of supply chain management. From December 2007 to December 2008, Mr. Campi served as the Chief Procurement
Officer and an Executive Vice President for Chrysler LLC, where he was responsible for all worldwide purchasing and supplier quality
activities. From September 2003 to January 2007, Mr. Campi served as the Senior Vice President of Sourcing and Vendor Management
for The Home Depot, where he led the drive for standardization and optimization of The Home Depot Global Supply Chain. From April
2002 to September 2003, Mr. Campi served as the Chief Procurement Officer and Vice President for Du Pont Global Sourcing and Logistics.
Prior to 2002, Mr. Campi led the Global Sourcing activities for GE Power Energy, and held a variety of positions with Federal
Mogul, Parker Hannifin Corporation and Price Waterhouse Coopers. Mr. Campi also serves as a Trustee of Case Western Reserve University,
has served as a Member of the Advisory Board of Directors for three startup companies, and has served as a Member of the Financial
Executives Institute and the Institute of Management Accountants. Mr. Campi received his MBA from Case Western Reserve University.
Our Board believes Mr. Campi’s qualifications to serve as our Chief Executive Officer include his extensive executive and
advisory experience with established and startup companies, his expertise in cost-management, and his qualifications in the field
of supply chain management.
Rani Kohen
has served as a Chairman of the Board
since November 2012 and as Executive Chairman since September 2016. Mr. Kohen founded the Company and began development of the
Company’s power plug technology in 2004. Mr. Kohen served as the Company’s Chief Executive Officer until December
2012. Mr. Kohen has over twenty-five years in the retail lighting industry. He opened his first retail lighting showroom in 1988
in Israel, and built the business into the largest chain of retail lighting showrooms in the country. Our Board believes Mr. Kohen’s
qualifications to serve as Chairman of our Board include his deep understanding of the Company’s business and products,
his years of experience in the retail lighting industry, and his past experience as the Company’s Chief Executive Officer.
Mark J. Wells
has served as the Company’s
President since August 2016. Mr. Wells has held various senior leadership positions within the General Electric Company. From
December 2007 to June 2011, Mr. Wells was the General Manager of Consumer Lighting. From October 2005 to January 2007, Mr. Wells
was the President and Chief Executive Officer for GE Consumer & Industrial for Greater China. Following his MBA studies, from
October 2002 to October 2005, Mr. Wells served as Regional Manager for GE Consumer & Industrial’s Southeast Region.
Since 2011, Mr. Wells served as the Executive Vice President and General Manager of Independence Medical and Home Healthcare Solutions,
now a part of Cardinal Health. In sum, Mr. Wells has over fourteen years of experience in finance, sales and general management
with GE. Mr. Wells received his MBA from Case Western Reserve University. Our Board believes Mr. Wells’ qualifications to
serve as our President include his extensive industry experience, executive and advisory experience and his expertise in strategic
planning.
Patricia Barron
has served as the Company’s
Chief Operations Officer since June 2007. From April 1989 to June 2007, Ms. Barron was the President and owner of LTG Services,
Inc., a company focused on safety consulting services, specializing in the review and compliance of electrical products requiring
UL, CSA, and CE certifications. Prior to that, Ms. Barron worked as a consultant and engineer in the lighting, safety and approval
industry and from June 1977 to August 1984, worked as an engineering assistant for Underwriters Laboratories in the ceiling fan
category. Ms. Barron received her Master’s in Business Administration in International Business from Georgia State University
in 1989. Our Board believes Ms. Barron’s qualifications to serve as our Chief Operation Officer include her extensive industry
experience and qualifications, executive experience and her decade of demonstrated commitment and leadership with the Company.
Governor Thomas J. Ridge
has served as a director
since June 2013. In 2013, Mr. Ridge co-founded Ridge Schmidt Cyber, an executive services firm addressing the increasing demands
of cyber security. In April 2010, Mr. Ridge became a partner in Ridge Policy Group, a bipartisan, full-service government affairs
and issue management group. Mr. Ridge has served as President and Chief Executive Officer of Ridge Global, LLC, a global strategic
consulting company, since July 2006. From January 2003 to January 2005, Mr. Ridge served as the Secretary of the United States
Department of Homeland Security, and from 2001 through January 2003, Mr. Ridge served as the Special Assistant to the President
for Homeland Security. Mr. Ridge served two terms as Governor of the Commonwealth of Pennsylvania from 1995 to 2001, and served
as a member of the U.S. House of Representatives from 1983 through 1995. Mr. Ridge currently serves as a member of the board of
two public companies, The Hershey Company and Lifelock, and has previously served on the board of five other public companies.
Mr. Ridge is Chairman of the Board of the National Organization on Disability, and serves as a board member on the Board of Public
Finance Management, the Institute for Defense Analysis, the Center for the Study of the Presidency, and the Oak Ridge National
Lab. Our Board believes Mr. Ridge’s qualifications to serve as a member of our Board include his vast experience in both
government and industry, his service on other public and private company boards, and his expertise in retail, risk management,
and cyber security.
Phillips Peter
has served as a director since November
2012. Since December 2014, Mr. Peter has served as a Senior Vice President of Ridge Global. From 1994 to 2014, Mr. Peter practiced
law at Reed Smith LLP where he focused his practice on legislative and regulatory matters before Congress, the executive branch
of the federal government, and other administrative agencies. Prior to this, Mr. Peter was an officer at General Electric Company,
where he held executive positions from 1973 to 1994. He is also a veteran of the U.S. Army. Our Board believes Mr. Peter’s
qualifications to serve as a member of our Board include his role as a past advisor to the Company, his extensive experience in
regulatory affairs, his past industry experience, and his demonstrated leadership ability.
Dov Shiff
has served as a director since February
2014. Mr. Shiff is presently President and Chief Executive Officer of the Shiff Group of Companies. The Shiff Group owns and operates
hotels and other real estate in Israel, including Hayozem Resorts & Hotels Ltd., Marina Hotel Tel Aviv Ltd. and Zvidan Investments
Ltd. Our Board believes Mr. Shiff’s qualifications to serve as a member of our Board include his role as a past advisor
to the Company and his history of success developing and operating new businesses.
Leonard J. Sokolow
has served as a director since
November 2015. Mr. Sokolow currently serves as CEO & President of Newbridge Financial, Inc. and Chairman of its broker dealer
subsidiary, Newbridge Securities Corporation. Mr. Sokolow founded Finance, Inc. in 1997, which merged with National Holdings Corporation
(NASDAQ CM: NHLD), where he served as President and Vice Chairman of its Board of Directors. Mr. Sokolow also founded and served
as Chairman and CEO of Americas Growth Fund, Inc., a closed-end investment management company (NASDAQ: AGRO) until it was sold.
Prior to this, Mr. Sokolow was an executive for Applica, Inc. (formerly Windmere Corporation (NYSE: APN)), where he served as
Executive Vice President and General Counsel. Mr. Sokolow, is also a CPA and worked for Ernst Young and KPMG. Mr. Sokolow earned
a Bachelor of Arts degree in Economics and a concentration in Accounting. Mr. Sokolow also earned a Juris Doctorate degree from
the University of Florida School of Law and a Masters of Law degree in Taxation from the New York University School of Law. Mr.
Sokolow is on the board of directors, Chairman of the Audit Committee and a member of the Nominations and Corporate Governance
Committees for Consolidated Water Company Ltd. (NASDAQ GS: CWCO). In addition, Mr. Sokolow has served on the board of directors
of, and Chairman of the Audit Committee for, Marquee Energy Ltd. (TSXV: MQX). Our Board believes Mr. Sokolow’s qualifications
to serve as a member of our Board include his vast education and experience in the financial industry, his service on other public
company boards and his history of executive leadership in developing and operating businesses.
Corporate Governance
Board Structure
We have chosen to separate the Chief Executive Officer
and Board Chairman positions. We believe that this Board leadership structure is the most appropriate for the Company. Our
chairman, the founder of the Company, provides us with significant experience in research and development. Our Chief Executive
Officer is responsible for day to day operations, and brings significant experience to the Company.
Committees of the Board of Directors
On January 5, 2016, we established a separately-designated
standing audit committee (the “Audit Committee”), consisting of two members, Leonard J. Sokolow and Rani Kohen. Mr.
Sokolow is the Chairman of the Audit Committee and is deemed to be independent and the Board has determined that he is an audit
committee financial expert, as defined in Item 5(d)(5) of Regulation S-K. The Audit Committee reviews, acts on and
reports to the Board with respect to various auditing and accounting matters, including the recommendations and performance of
independent auditors, the scope of the annual audits, fees to be paid to the independent auditors, and internal accounting and
financial control policies and procedures.
On September 6, 2016, we established a Corporate Development
Committee, consisting of two members, Rani Kohen and Leonard J. Sokolow. Mr. Kohen is the Chairman of the Corporate Development
Committee. The purpose of the Corporate Development Committee is to oversee the implementation of the strategic plan and related
initiatives, identify and evaluate corporate development opportunities, develop criteria for use in evaluating potential strategic
investments, assist management to identify critical strategic issues facing the Company and assess potential merger and acquisition
opportunities.
We presently do not have a nominating committee, compensation
committee, or other committee or committees performing similar functions, as our management believes that until this point it
has been premature at the early stage of our management and business development to form such committees. Moving forward, at such
time as the Board believes that such committees are necessary or desirable, or that we are required to have such committees, we
will take steps to form such committees and adopt charters as may be required to comply with all applicable rules and regulations.
Code of Conduct
The Company does not currently have a Code of Conduct
and Ethics to apply to all of our directors, officers and employees. In the near future, our Board intends to adopt a code which
intended to promote ethical conduct and compliance with laws and regulations, to provide guidance with respect to the handling
of ethical issues, to implement mechanisms to report unethical conduct, to foster a culture of honesty and accountability, to
deter wrongdoing and to ensure fair and accurate financial reporting. Upon approval by the Board, a copy of the Code of Conduct
and Ethics will be available at our website www.safetyquicklight.com.
Board Diversity
While we do not have a formal policy on diversity, our
Board considers diversity to include the skill set, background, reputation, type and length of business experience of our Board
members as well as a particular nominee’s contributions to that mix. Our Board believes that diversity brings a variety
of ideas, judgments and considerations that benefit Safety Quick Lighting and our shareholders. Although there are many other
factors, the Board seeks individuals with experience in business, financial and scientific research and development.
Board Assessment of Risk
Our risk management function is overseen by our Board.
Our management keeps our Board apprised of material risks and provides our directors access to all information necessary for them
to understand and evaluate how these risks interrelate, how they affect the Company, and how management addresses those risks.
Mr. John Campi, as our Chief Executive Officer works closely together with the Board once material risks are identified on how
to best address such risk. If the identified risk poses an actual or potential conflict with management, our independent directors
may conduct the assessment.
Shareholder Communications
Although we do not have a formal policy regarding communications
with the Board, shareholders may communicate with the Board by writing to us at 4400 North Point Parkway, Suite 154, Alpharetta,
Georgia, 30022, Attention: Shareholder Communication. Shareholders who would like their submission directed to a member of the
Board may so specify, and the communication will be forwarded, as appropriate.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934
requires that the Company’s executive officers, directors and persons who own beneficially more than 10% percent of the
Company’s outstanding Common Stock, file reports of ownership and changes in ownership and furnish the Company with copies
of all Section 16(a) reports so filed. Based solely on a review of these reports filed with the SEC and certain written representations
furnished to the Company, the Company believes that its executive officers and directors complied with all applicable Section 16(a)
filing requirements during 2016, other than the following:
Mr. Sokolow filed a Form 3 with the SEC on
January 1, 2016 in connection with his appointment to the Board on November 15, 2015. Mr. Shiff filed a Form 4 with the SEC on
March 31, 2017, in connection with the conversion of his Convertible Note into shares of Series A Preferred Stock on August 15,
2016. Mr. Wells filed a Form 3 with the SEC on March 29, 2017, in connection with his appointment as President on November 7, 2016,
and filed a Form 4 with the SEC on March 29, 2017, in connection with issued and unvested securities in the Wells Agreement dated
August 17, 2016. Mr. Kohen filed a Form 4 with the SEC on March 31, 2017 in connection with unvested securities the Chairman’s
Agreement dated September 1, 2016. Mr. Campi filed a Form 4 with the SEC on March 30, 2017, in connection with issued and unvested
securities the Campi Agreement dated September 1, 2016.
Involvement in Legal Proceedings
We know of no pending proceedings to which any director,
member of senior management, or affiliate is either a party adverse to us, or our subsidiaries, or has a material interest adverse
to us or our subsidiaries.
None of our executive officers or directors have (i) been
involved in any bankruptcy proceedings within the last five years, (ii) been convicted in or has pending any criminal proceedings,
(iii) been subject to any order, judgment or decree enjoining, barring, suspending or otherwise limiting involvement in any type
of business, securities or banking activity or (iv) been found to have violated any federal, state or provincial securities or
commodities law and such finding has not been reversed, suspended or vacated.
Family Relationships
There are no family relationships among the directors
and executive officers.
Certain Relationships and Related Transactions
Unless otherwise stated in this Annual Report, none of
the following parties has, in our fiscal years ended 2015 and 2016, had any material interest, direct or indirect, in any transaction
with us or in any presently proposed transaction that has or will materially affect us:
|
·
|
any
of our directors or officers;
|
|
·
|
any
person who beneficially owns, directly or indirectly, shares carrying more than 10% of
the voting rights attached to our outstanding shares of Common Stock; or
|
|
·
|
any
member of the immediate family (including spouse, parents, children, siblings and in-
laws) of any of the above persons.
|
We are currently party to the Chairman’s Agreement
(as defined below) with Mr. Rani Kohen, Executive Chairman and Chairman of the Company’s Board, pursuant to which we are
required to pay cash compensation in the amount of $250,000 per year. During 2015 and through August 31, 2016, we were a party
to the Kohen Consulting Agreement (as defined below) with Mr. Kohen, pursuant to which we paid cash compensation in the amount
of $150,000 per year. Both agreements are more fully described in Item 11 of this report, in the subsection entitled “Narrative
Disclosure to Summary Compensation and Option Tables”.
ITEM 11. EXECUTIVE COMPENSATION
As a “smaller reporting company,” we have
elected to follow scaled disclosure requirements for smaller reporting companies. Under the scaled disclosure obligations, we
are not required to provide Compensation Discussion and Analysis and certain other tabular and narrative disclosures relating
to executive compensation. Nor are we required to quantify payments due to the named executives upon termination of employment.
Management believes that the scaled disclosure for the Company’s executive compensation policy and practices is appropriate
because we will are a small publicly-traded company, have a limited number of employees and executives and have a relatively simple
compensation policy and structure.
Named Executive Officers
Our “named executive officers” for the 2016
fiscal year consisted of the following individuals:
|
·
|
Rani
Kohen, Executive Chairman
|
|
·
|
John
P. Campi, our Chief Executive Officer
|
|
·
|
Patricia
Barron, Chief Operating Officer
|
Summary Compensation Table
The table below summarizes all compensation awarded to,
earned by, or paid to our Chief Executive Officer and our two most highly compensated executive officers (the “named executive
officers” listed above) at the end of our last fiscal year for all services rendered in all capacities to us during the
years during which they served as executive officers. Where a named executive officer is also a director, all compensation related
to such individuals position as an officer.
Name and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-equity
Incentive
Plan
Compensation
($)
(1)
|
|
All
Other
Compensation
($)
|
|
Total
|
Rani
Kohen
(2)(3)
Executive
Chairman, Director
|
|
|
2016
|
|
|
|
83,333
|
|
|
|
35,424
|
|
|
|
—
|
|
|
|
1,981,504
(4)
|
|
|
|
35,423
|
|
|
|
12,000
|
|
|
$
|
2,147,684
|
|
|
|
|
2015
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,376
|
|
|
|
161,640
|
|
|
$
|
176,016
|
|
John
P. Campi
(5)(6)
Chief
Executive Officer
|
|
|
2016
|
|
|
|
127,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31,585
|
|
|
|
—
|
|
|
$
|
159,085
|
|
|
|
|
2015
|
|
|
|
102,000
|
|
|
|
—
|
|
|
|
187,500
(6)
|
|
|
|
—
|
|
|
|
13,376
|
|
|
|
—
|
|
|
$
|
290,064
|
|
Mark
Wells
(7)
President
|
|
|
2016
|
|
|
|
83,333
|
|
|
|
—
|
|
|
|
260,000
(8)
|
|
|
|
—
|
|
|
|
3,839
|
|
|
|
—
|
|
|
$
|
347,172
|
|
|
|
|
2015
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Patricia
Barron
(9)
Chief
Operating Officer
|
|
|
2016
|
|
|
|
105,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
988,744
(10)
|
|
|
|
17,712
|
|
|
|
—
|
|
|
$
|
1,111,456
|
|
|
|
|
2015
|
|
|
|
100,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
100,000
|
|
|
(1)
|
Non-equity
Incentive Plan Compensation reflects incentive and bonus compensation or commission payable
pursuant to each individual’s respective employment agreement, typically as a percent
of the Company’s net revenue or sales earned, and in each case as described below.
|
|
(2)
|
Mr.
Kohen was named Executive Chairman on November 7, 2016, effective as of September 1,
2016. Pursuant to the terms of the Chairman’s Agreement (as defined below), Mr.
Kohen received or will receive (i) an annual salary of $250,000; (ii) options to purchase
up to 340,000 shares of Common Stock each year, will vest in its’ entirety January
1, 2019; (iii) annual incentive compensation of one half of one percent (0.50%) of the
Company’s net revenue; (iv) a ‘sign-on bonus’ of 120,000 shares of
Common Stock ,which will vest in its’ entirety on January 1, 2020; (v) a supplemental
bonus consisting of an option to purchase up to 1,500,000 shares of Common Stock at $3.00
per share, accruing in increments of 500,000 shares, each upon the achievement of the
Company’s market capitalization reaching milestones of $300 million, $500 million
and $750 million; (vi) a supplemental bonus consisting of an option to purchase up to
1,500,000 shares of Common Stock at $4.00 per share, accruing in increments of 500,000
shares, each upon the achievement of the Company’s market capitalization reaching
milestones of $1 billion, $1.5 billion and $2 billion; and (vii) a supplemental bonus
consisting of an option to purchase up to 1,000,000 shares of Common Stock at $5.00 per
share, accruing in increments of 500,000 shares, each upon the achievement of the Company’s
market capitalization reaching milestones of $2.5 billion and $3 billion.
|
|
(3)
|
For
the first eight months of 2016, Mr. Kohen was compensated pursuant to a Consulting Agreement,
whereby he was paid an annual fee of $150,000, a $1,000 per month automobile allowance,
and annual incentive compensation equal to one half of one percent (0.50%) of the Company’s
net revenue
.
All amounts included for 2015 represent the compensation as previously
disclosed regarding his role solely as Chairman of the Board, including the amount of
“All Other Compensation”, which reflects compensation paid pursuant to the
Kohen Consulting Agreement. The amounts included for 2016 include compensation paid to
Mr. Kohen in his capacity as Chairman as the Board through August 31, 2016, and as both
Executive Chairman and Chairman of the Board thereafter.
|
|
(4)
|
On
November 15, 2015, the Board granted Mr. Kohen (i) options to purchase up to 400,000
shares of Common Stock at $0.60, which vested November 15, 2015; (ii) options to purchase
up to 300,000 shares of Common Stock at $0.60, which vested November 15, 2016; and (iii)
options to purchase up to 400,000 shares of Common Stock at $0.60, which will vest November
15, 2017. The value of the option award was calculated at $2.00 per share; for assumptions
made in the valuation of the option awards, see Note 2 to our Audited Consolidated Financial
Statements.
|
|
(5)
|
Pursuant
to the terms of the
Campi Agreement (as defined
below)
, Mr. Campi received or will receive (i) an annual salary of $150,000; (ii)
options to purchase up to 120,000 shares of Common Stock as a “sign-on bonus”,
which will vest in its’ entirety on December 31, 2017; (iii) an incentive bonus
of one quarter of one percent (0.25%) of the Company’s net revenue; (iv) 3% of
adjusted net income; and (v) options to purchase a number of shares of Common Stock equal
to one half of one percent (0.5%) of
the Company’s
quarterly net income
, at a strike price to be determined by the Board at the time
of issuance.
|
|
(6)
|
Pursuant
to Mr. Campi’s previous employment agreement, Mr. Campi received (i) a gross annual
salary of $102,000 per year; (ii) 750,000 shares of Common Stock, 250,000 shares of which
vested on May 20, 2015, and 500,000 shares of which vested on December 31, 2015; and
(iii) incentive compensation equal to one half of one percent (0.50%) of the Company’s
net revenue. The value of the stock award was $0.25 per share, based on the value of
shares sold in connection with the Company’s most recent sale of securities in
a private placement as of the time of such agreement.
|
|
(7)
|
Mr.
Wells was named President of the Company on November 7, 2016, effective as of August
17, 2016. Pursuant to the terms of the Wells
Agreement
(as defined below)
, Mr. Wells received or will receive (i) an annual salary of
$250,000; (ii) 1,025,000 shares of Common Stock which will vest in its’ entirety
on January 1, 2019; (iii) incentive compensation equal to one quarter of one percent
(0.25%) of the Company’s net revenue; and (iv) a “sign-on” bonus
of
120,000 shares of Common Stock
, which will vest in its’ entirety on January
1, 2018.
|
|
(8)
|
Mr.
Well’s received 100,000 shares of Common Stock pursuant to a consulting agreement
dated June 1, 2015, which vested on June 1, 2016; the value of the stock award was $2.60
per share, based on the value of shares sold in connection with the Company’s most
recent sale of securities in a private placement as of the time of such vesting.
|
|
(9)
|
Pursuant
to the terms of the Barron
Agreement (as defined
below)
, Ms. Barron will received or will receive an annual salary of $120,000,
and incentive compensation equal to one quarter of one percent (0.25%) of the Company’s
net revenue.
|
|
(10)
|
Ms.
Barron received (i) options to purchase up to 200,000 shares of Common Stock at $0.60
per share, which vested November 15, 2015; (ii) options to purchase up to 150,000 shares
of Common Stock at $1.20 per share, which vested November 15, 2016; and (iii) options
to purchase up to 150,000 shares of Common Stock at $1.80 per share, which will vest
November 15, 2017. The value of the option award was calculated at $2.00 per share; for
assumptions made in the valuation of the option awards, see Note 2 to our Audited Consolidated
Financial Statements.
|
Outstanding Equity Awards at December 31, 2016 Fiscal
Year End
As of December 31, 2016, the following named executive
officers had the following unexercised options, stock that has not vested, and equity incentive plan awards
|
|
|
Option
Awards
|
|
|
|
|
|
Stock
Awards
|
|
|
Name
|
|
|
Number
of
Securities
underlying
unexercised
options
exercisable
|
|
|
|
Number
of
Securities
underlying
unexercised
options
not exercisable
|
|
|
|
Option
exercise or
base price per share
|
|
|
|
Option
Expiration Date
|
|
|
|
Number
of
Shares or
Units of Stock Not Vested
|
|
|
|
|
Market
Value
of
Shares or Units Not Vested
|
|
|
|
Equity
Incentive Plan Awards:
Number
of Unearned Shares, Units or Other Rights Not Vested
|
|
|
|
Value
of Unearned Shares, Units or Other Rights Not Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
P. Campi
Chief Executive Officer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
120,000
|
|
|
|
|
$ 240,000
|
|
|
|
—
|
|
|
|
$ 240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rani
Kohen
Executive Chairman
|
|
|
700,000
|
|
|
|
300,000
|
|
|
|
$0.60
|
|
|
|
11/15/2025
|
|
|
|
1,140,000
|
|
|
|
|
$ 2,280,000
|
|
|
|
—
|
|
|
|
$ 2,876,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark
J. Wells
President
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,145,000
|
|
|
|
|
$ 2,290,000
|
|
|
|
—
|
|
|
|
$ 2,290,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patricia
Barron
Chief Operating Officer
|
|
|
200,000
|
|
|
|
—
|
|
|
|
$0.60
|
|
|
|
11/15/2025
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$ 395,193
|
|
|
|
150,000
|
|
|
|
—
|
|
|
|
$1.20
|
|
|
|
11/15/2025
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$ 296,246
|
|
|
|
—
|
|
|
|
150,000
|
|
|
|
$1.80
|
|
|
|
11/15/2025
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$ 297,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Narrative Disclosure to Summary Compensation and Option
Tables
John P. Campi
In
connection with Mr. Wells’ appointment as President of the Company, Mr. Campi withdrew from his position as the Company’s
President effective upon Mr. Well’s appointment, and has continued in his position as the Company’s Chief Executive
Officer.
Effective September 1, 2016,
the Company entered into a new Executive Employment Agreement with Mr. Campi (the “Campi Agreement”), to serve as
the Company’s Chief Executive Officer, which superseded and replaced the executive employment agreement between the Company
and Mr. Campi dated November 21, 2014. The Campi Agreement provides that Mr. Campi will serve for an initial term of one year,
which may be renewed by the mutual agreement of Mr. Campi and the Company. Subject to other customary terms and conditions of
such agreements, the Campi Agreement provides that Mr. Campi will receive (i) a base salary of $150,000 per year; (ii) a sign-on
bonus of 120,000 shares of Common Stock, which shall vest in its entirety on December 31, 2017; (iii) incentive compensation equal
to (a) one quarter of one percent (0.25%) of the Company’s gross revenue and (b) three percent (3%) of the Company’s
annual net income paid in cash on an annual basis; and (iv) five-year options to purchase shares of Common Stock in an amount
equal to one half of one percent (0.50%) of the Company’s quarterly net income, the exercise price of which will be determined
at the time such options are granted.
Pursuant to the Campi Agreement,
if terminated without cause during the initial term, the Company shall pay to Mr. Campi (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 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.
Mark J. Wells
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 (i) a base salary of $250,000 per year, which may
be adjusted each year at the discretion of the Board; (ii) 1,025,000 shares of Common Stock, which shall vest on January 1, 2019
(the “Wells Compensation Shares”); (iii) a sign-on bonus of 120,000 shares of Common Stock, with shall vest in its
entirety to Mr. Wells on January 1, 2018; and (iv) incentive compensation equal to one quarter of one percent (0.25%) of the Company’s
net revenue, paid in cash on an annual 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.
Rani Kohen
On November 25, 2013, we entered
into a Consulting Agreement with our founder and the Chairman or our Board, Rani Kohen (the “Kohen Consulting Agreement”).
The term of the Consulting Agreement was for three (3) years, beginning on December 1, 2013. Subject to the customary terms and
conditions of such agreements, the Consulting Agreement provided that Mr. Kohen would receive an annual consulting fee of $150,000,
incentive compensation in the form cash, stock and/or options (i) equal to one-half a one percent (0.50%) of our annual gross
revenue; and (ii) to be determined by our Board on a project-by-project basis.
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, which supersedes and replaced the Consulting Agreement.
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
(i) a base salary of $250,000 per year, which may be adjusted each year at the discretion of the Board; (ii) 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”); (iii) a sign-on bonus of 120,000 shares of Common Stock, with shall vest in its entirety on January 1, 2020; (iv)
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
(v) 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.
Patricia Barron
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 (i) an annual salary of $120,000, and (ii) incentive compensation equal to
one-quarter
of one percent (0.25%)
of net revenue. In addition, The Board granted Ms. Barron (a) options to purchase up to 200,000
shares of Common Stock at $0.60 per share, which vested on November 15, 2015; (b) options to purchase up to 150,000 shares of
Common Stock at $1.20, which vested on November 15, 2016; and (c) options to purchase up to 150,000 shares of Common Stock at
$1.80, which will vest on November 15, 2017.
Director Compensation
We do not pay cash compensation to our directors for service
on our Board. Directors are reimbursed for reasonable expenses incurred in attending meetings and carrying out duties
as board members, and in accordance with our Director Compensation Policy.
Director Compensation Table
The following table shows for the fiscal year ended December
31, 2016, certain information with respect to the compensation of all non-employee directors of the Company:
Name
|
|
Fees Earned or
Paid in Cash
|
|
Stock
Awards
|
|
Option
Awards
|
|
Total
|
Rani Kohen
(1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Phillips Peter
(2)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Thomas Ridge
(2)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Dov Shiff
(2)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Leonard Sokolow
(2)(3)
|
|
$
|
—
|
|
|
$
|
12,000
|
|
|
$
|
—
|
|
|
$
|
12,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Mr.
Kohen has served as a Chairman of the Board since November 2012. Fees earned in 2016
in connection with his role as Executive Chairman and as Chairman of the Board have been
reported as Executive Compensation.
|
|
(2)
|
Messrs.
Ridge, Peter, Shiff and Sokolow have each served as a member of our Board since June
2013, November 2012, February 2014, and November 2015, respectively.
|
|
(3)
|
The
Company issued 12,000 shares of Common Stock pursuant to the Director Compensation Policy
in connection with Mr. Sokolow’s appointment as the Chairman of our Audit Committee
on January 5, 2016. The value of the shares was based on the value of shares sold in
connection with the Company’s recent sale of securities in a private placement
as of the time of issuance, which was $1.00 per share.
|
Director Compensation Policy
On November 15, 2015, our Board approved the Company’s
Director Compensation Policy (the “Director Compensation Policy”) applicable to members of the Board who are not employees
of the Company (each, an “Eligible Director”). Under the Director Compensation, upon election to the Board, a new
Eligible Director shall be entitled to a grant of 50,000 shares of Common Stock and an option to purchase up to 150,000 shares
of Common Stock, vested monthly and fully vested after one year, at a price per share determined as of the date of grant, based
on (i) the prior days’ closing price if there is a public market for Common Stock, or (ii) if there is no public market
for Common Stock, the price per share in our most recently completed private placement of Common Stock or convertible securities
(“Director Options”). The amount of shares and Director Options shall be prorated based on the date of a new Eligible
Director’s appointment relative to the term remaining, if applicable.
Eligible Directors will also receive Director Options
to purchase either (i) 10,000 shares of Common Stock for each Board meeting in which such Eligible Director attends in person,
or (ii) 5,000 shares of Common Stock for each Board meeting in which such Eligible Director attends telephonically. Eligible Directors
will also receive Director Options to purchase 25,000 shares of Common Stock following each year in which he or she has served
on the Board. Director Options will vest monthly over the course of the year following the date such Director Options are granted,
and must be exercised within five years of the grant date.
In addition, the Director Compensation Policy provides
that (i) the chairperson of the Board will receive Director Options to purchase 100,000 shares of Common Stock as an annual retainer,
payable quarterly, unless otherwise provided by an independent compensation agreement; (ii) the chairperson of the Corporate Governance
and Nominating Committee of the Board, if applicable, will receive Director Options to purchase 25,000 shares of Common Stock
as an annual retainer, payable quarterly; (iii) the chairperson of the Audit Committee of the Board, if applicable, will receive
a number of shares of Common Stock equal to $12,000, based on the same price per share method applied to Director Options, and
Director Options to purchase 50,000 shares of Common Stock, both as an annual retainer, payable quarterly; (iv) the chairperson
of the Compensation Committee of the Board, if applicable, will receive Director Options to purchase 30,000 shares of Common Stock
as an annual retainer, payable quarterly; (v) other members of the Audit Committee of the Board, if applicable, will receive Director
Options to purchase 15,000 shares of Common Stock as an annual retainer, payable quarterly; and (vi) other members of the Corporate
Governance Committee and Nominating and Compensation Committee of the Board, if applicable, will receive Director Options to purchase
10,000 shares of Common Stock as an annual retainer, payable quarterly.
Narrative Disclosure to Summary Compensation and
Option Tables
As of March 30, 2017, the Company has issued shares of
Common Stock and Director Options under the Director Compensation Policy only to Mr. Sokolow. On January 25, 2016, the Company
issued to Mr. Sokolow 50,000 shares of Common Stock in connection with his appointment to the Board on November 15, 2016 and Director
Options to purchase up to 150,000 shares of Common Stock at $0.60 per share in connection with his appointment to the Board on
November 15, 2016. All such amounts were reported as paid in 2015.
In connection with Mr. Sokolow’s appointment as
the Chairman of our Audit Committee on January 5, 2016, we issued 12,000 shares of Common Stock pursuant to the Director Compensation
Policy, the value of which was based on the value of shares sold in connection with the Company’s recent sale of securities
in a private placement as of the time of issuance, which was $1.00 per share.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information with
respect to the beneficial ownership of Common Stock by: (i) each director, (ii) each of the executive officers of the
Company, (iii) all current directors and executive officers as a group, and (iv) each stockholder known to the Company
to be the beneficial owner of more than 5% of the outstanding shares of Common Stock.
Unless otherwise indicated in the footnotes to the table,
all information set forth in the table is as of March 15, 2015. The addresses for the greater than 5% stockholders are set forth
in the footnotes to this table.
Unless otherwise indicated in the footnotes to the table,
all information set forth in the table is as of March 30, 2017, and the address for each director and executive officer of the
Company is: c/o 4400 North Point Parkway, Suite 154, Alpharetta, GA 30022. The addresses for the greater than 5% stockholders
are set forth in the footnotes to this table.
Directors and Named Executive Officers
Name
and Address
of
Beneficial Owner
|
|
Amount
and Nature of Beneficial Ownership
(1)
|
|
Percent
of Class
(1)
|
|
KRNB
Holdings LLC
(2)
|
|
8,703,969
|
|
17.43%
|
|
|
|
|
|
|
|
Mr.
Phillips Peter
(3)
|
|
500,000
|
|
1.02%
|
|
|
|
|
|
|
|
Mr.
Thomas Ridge
(4)
|
|
1,225,000
|
|
2.57%
|
|
|
|
|
|
|
|
Mr.
Dov Shiff
(5)
|
|
14,964,618
|
|
28.11%
|
|
|
|
|
|
|
|
Mr.
Leonard Sokolow
(6)
|
|
262,000
|
|
0.55%
|
|
|
|
|
|
|
|
Mr.
John P. Campi
(7)
|
|
1,050,000
|
|
2.15%
|
|
|
|
|
|
|
|
Mr.
Mark J. Wells
(8)
|
|
1,000,000
|
|
2.01%
|
|
|
|
|
|
|
|
Ms.
Patricia Barron
(9)
|
|
450,000
|
|
*
|
|
|
|
|
|
|
|
All
Directors and Officers as a Group (8 persons)
|
|
28,155,587
|
|
50.43%
|
|
Stockholders
with 5% Beneficial Ownership
Name
and Address
of Beneficial Owner
|
|
Amount
and Nature of Beneficial Ownership
(1)
|
|
Percent
of Class
(1)
|
|
Motek
7 SQL LLC
(10)
19101
Mystic Pointe Drive
Apt.
2808
Aventura,
FL 33180
|
|
7,771,566
|
|
15.88%
|
|
|
|
|
|
|
|
David
S. Nagelberg 2003 Revocable Trust DTD 7/2/03
(11)
99 Coast
Boulevard, Unit 21 DE
LaJolla,
CA 92037
|
|
3,615,865
|
|
6.92%
|
|
|
|
|
|
|
|
Pitch
Energy Corporation
(12)
P.O. Box 400
Ruidoso, NM 88355
|
|
3,666,667
|
|
7.49%
|
|
|
|
|
|
|
|
Mr.
Steven Siegelaub
(13)
2801 N. University Dr. Suite
301
Coral Springs, FL 33065
|
|
4,677,875
|
|
9.02%
|
|
* Less than 1%
|
(1)
|
Applicable
percentages are based on 48,943,166 shares outstanding, adjusted as required by rules
of the SEC. Beneficial ownership is determined under the rules of the SEC and generally
includes voting or investment power with respect to securities. Shares of Common Stock
subject to options, warrants and convertible notes currently exercisable or convertible,
or exercisable or convertible within 60 days are deemed outstanding for computing the
percentage of the person holding such securities but are not deemed outstanding for computing
the percentage of any other person. Unless otherwise indicated in the footnotes to this
table, the Company believes that each of the shareholders named in the table has sole
voting and investment power with respect to the shares of Common Stock indicated as beneficially
owned by them. Shares of Series A Preferred Stock are convertible, at any time at the
holder’s election, into an equal number of shares of Common Stock.
|
|
(2)
|
Mr.
Rani Kohen beneficially owns these 8,703,969 shares of Common Stock as Manager of KRNB
Holdings LLC, which includes (i) 8,003,969 shares of Common Stock held by KRNB Holdings
LLC and (ii) 700,000 shares of Common Stock issuable upon exercise of options issued
under the Incentive Plan and held by KRNB Holdings LLC.
|
|
(3)
|
Mr.
Phillips Peter beneficially owns 500,000 shares of Common Stock, including (i) 200,000
shares of Common Stock, and (ii) 300,000 shares of Common Stock issuable upon exercise
of options held by Mr. Peter.
|
|
(4)
|
Mr.
Thomas Ridge beneficially owns 1,225,000 shares of Common Stock, including (i) 875,000
shares of Common Stock, (ii) 100,000 shares of Common Stock issuable upon exercise of
options held by Mr. Thomas Ridge, (iii) 50,000 shares of Common Stock issuable upon exercise
of warrants issued pursuant to the Notes Offering and (iv) 200,000 shares of Common Stock
issuable upon conversion of the convertible notes issued pursuant to the Notes Offering.
|
|
(5)
|
Mr.
Dov Shiff beneficially owns 14,964,618 shares of Common Stock, including (i) 10,674,618
shares of Common Stock, (ii) 1,690,000 shares of Common Stock issuable upon exercise
of warrants issued pursuant to the Notes Offering, and (iii) 2,600,000 shares of Common
Stock issuable upon conversion of Series A Preferred Stock.
|
|
(6)
|
Mr.
Leonard J. Sokolow beneficially owns 262,000 shares of Common Stock, including (i) 62,000
shares of Common Stock, (ii) 50,000 shares of Common Stock obtained pursuant to the November
2015 Stock Offering, and (iii) 150,000 shares of Common Stock issuable upon the exercise
of Director Options.
|
|
(7)
|
Mr.
John P. Campi beneficially owns 1,050,000 shares of Common Stock, including (i) 750,000
shares of Common Stock, (ii) 250,000 shares of Common Stock obtained pursuant to the
May 2015 Stock Offering, and (iii) 50,000 shares of Common Stock obtained pursuant to
the November 2015 Stock Offering.
|
|
(8)
|
Mr.
Mark J. Wells beneficially owns 1,000,000 shares of Common Stock, including (i) 100,000
shares of Common Stock obtained pursuant to that certain consultant agreement between
Mr. Wells and the Company, dated June 1, 2015, (ii) 150,000 shares of Common Stock purchased
by Mr. Wells pursuant to the Wells Agreement, and (iii) 750,000 shares of Common Stock
issuable upon exercise of warrants issued pursuant to the Wells Agreement.
|
|
(9)
|
Ms.
Patricia Barron beneficially owns 450,000 shares of Common Stock, including (i) 100,000
shares of Common Stock, (ii) 350,000 shares of Common Stock issuable upon the exercise
of options issued under the Incentive Plan.
|
|
(10)
|
Mr.
Hillel Bronstein beneficially owns these shares of Common Stock as Manager of Motek 7
SQL LLC.
|
|
(11)
|
The
David S. Nagelberg 2003 Revocable Trust DTD 7/2/03 beneficially owns 3,615,865 shares
of Common Stock, including (i) 315,865 shares of Common Stock, (ii) 1,300,000 shares
of Common Stock issuable upon exercise of warrants issued pursuant to the Notes Offering,
and (iii) 2,000,000 shares of Common Stock issuable upon conversion of Series A Preferred
Stock.
|
|
(12)
|
Mr.
Johnny Gray and Mr. T L Chandler, as Trustees of the J C Gray Trust and T L Chandler
Trust, respectively, have joint voting and dispositive control over these shares of Common
Stock, as such trusts are equal 50% shareholders of Pitch Energy Corporation.
|
|
(13)
|
Mr.
Steven Siegelaub, in his personal capacity and as the Managing Member of 301 Office Ventures,
LLC, Enterprise 2013, LLC, Investment 2013, LLC, and Safety Investors 2014, LLC beneficially
owns 4,577,875 shares of Common Stock, including (i) 83,333 shares of Common Stock held
by him and his wife personally; (ii) 875,000 shares of Common Stock owned by 301 Office
Ventures, LLC; (iii) 762,254 shares of Common Stock beneficially owned by Enterprise
2013, LLC, consisting of (a) 577,046 shares of Common Stock and (b) 185,208 shares of
Common Stock issuable upon exercise of warrants owned by Enterprise 2013, LLC; (iv) 1,189,972
shares of Common Stock beneficially owned by Investment 2013, LLC, consisting of (a)
219,303 shares of Common Stock, (b) 194,134 shares of Common Stock issuable upon exercise
of warrants issued pursuant to the Notes Offering, and (c) 776,535 shares of Common Stock
issuable upon conversion of Series A Preferred Stock; (v) 1,667,316 shares of Common
Stock beneficially owned by Safety Investors 2014, LLC, consisting of (a) 17,316 shares
of Common Stock, (b) 650,000 shares of Common Stock issuable upon exercise of Warrants
issued pursuant to the Notes Offering, and (c) 1,000,000 shares of Common Stock issuable
upon conversion of Series A Preferred Stock; and (vi) 100,000 shares of Common Stock
issuable upon the exercise of options issued under the Incentive Plan and held by Mr.
Siegelaub.
|
Changes in Control
We are unaware of any contract, or other arrangement or
provision, the operation of which may at any subsequent date result in a change in control of our Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
Except as described herein, none of the following parties
(each a “Related Party”) has, in our fiscal years ended December 31, 2015 and December 31, 2016, had any material
interest, direct or indirect, in any transaction with us or in any presently proposed transaction that has or will materially
affect us, any of our directors or officers, any person who beneficially owns, directly or indirectly, shares carrying more than
10% of the voting rights attached to our outstanding shares of Common Stock or any member of the immediate family (including spouse,
parents, children, siblings and in-laws) of any of the above persons.
We are currently party to the Chairman’s
Agreement with Mr. Rani Kohen, Executive Chairman and Chairman of the Company’s Board, pursuant to which we are required
to pay cash compensation in the amount of $250,000 per year. During 2015 and through August 31, 2016, we were a party to the Kohen
Consulting Agreement with Mr. Kohen, pursuant to which we paid cash compensation in the amount of $150,000 per year. Both agreements
are more fully described in Item 11 of this report, in the subsection entitled “Narrative Disclosure to Summary Compensation
and Option Tables”.
In February
2016, Mr. Dov Shiff, a member of our Board, loaned $500,000 to the Company pursuant to an unsecured promissory note. Subject to
other customary terms, the note is payable on demand and accrues interest at a rate or 12% per annum. As of December 31, 2016,
the outstanding balance under the note was $200,000.
Director Independence
We are not currently subject to any listing standards
of any national exchange. However, were we to apply the standards of the New York Stock Exchange, Messrs. Kohen and Shiff would
not be considered “independent” under such standards.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees billed
to us for the years ended December 31, 2015 and December 31, 2016 by our independent auditors, L&L CPAS, PA, f/k/a Bongiovanni
& Associates, PA:
|
|
2016
|
|
2015
|
Audit Fees
|
|
$
|
35,000
|
|
|
$
|
25,000
|
|
Audit-Related Fees
|
|
|
16,500
|
|
|
|
16,000
|
|
Tax Fees
|
|
|
|
|
|
|
|
|
Other Fees
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
51,500
|
|
|
$
|
41,000
|
|
Audit fees represent amounts billed for professional services
rendered for the audit of our annual financial statements. Audit-Related Fees include amounts billed for professional services
rendered in connection with our SEC filings and discussions with the SEC that occurred during fiscal 2014 for us to remain a fully
reporting public company. Our Board is of the opinion that the Audit-Related Fees charged by L&L CPAS, PA were consistent
with companies of our size maintaining its independence from us.
The audit committee of the Company approves all auditing
services and the terms thereof and non-audit services (other than non-audit services published under Section 10A(g) of the Exchange
Act or the applicable rules of the SEC or the Pubic Company Accounting Oversight Board) to be provided to us by the independent
auditor; provided, however, the pre-approval requirement is waived with respect to the provisions of non-audit services for us
if the “de minimis” provisions of Section 10A(i)(1)(B) of the Exchange Act are satisfied.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
Report of Independent Registered Public Accounting Firm
Audited Consolidated Balance Sheets as of December 31,
2015 and December 31, 2014
Audited Consolidated Statements of Operations for the
Year Ended December 31, 2015 and 2014
Audited Consolidated
Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2015, and 2014
Audited Consolidated
Statements of Cash Flows for the Year Ended December 31, 2015 and 2014
Notes to Audited
Financial Statements
(b) Exhibit Index
Exhibit
No.
|
|
Description
of Exhibit
|
|
Footnote
|
|
3.1
|
|
|
Articles
of Incorporation of Registrant, as amended.
|
|
|
(9)
|
|
|
3.2
|
|
|
Bylaws
of Registrant.
|
|
|
(2)
|
|
|
4.1
|
|
|
Form
of Common Stock Certificate.
|
|
|
(2)
|
|
|
10.1
|
|
|
GE
Trademark License Agreement, dated as of June 15, 2011, by and between GE Trademark Licensing, Inc. and SQL Lighting &
Fans, LLC, as amended.
|
|
|
(2)
|
|
|
10.2
|
|
|
Form
of 2013 Director Stock Option Agreement.
|
|
|
(2)
|
|
|
10.3
|
|
|
Forms
of Security Purchase Agreement, Registration Rights Agreement, Note Subscription Agreement, Common Stock Purchase Warrant
and Secured Convertible Promissory Note for the Notes Offering closed November 26, 2013, May 8, 2014 and June 25, 2014.
|
|
|
(2)
|
|
|
10.4
|
|
|
Forms
of Agreement and Waiver, dated December 10, 2014, between the Registrant and 2012 Investors, Letter Agreement to Convert,
dated January 23, 2014, between the Registrant and holders of Notes dated November 26, 2013 and May 8, 2014.
|
|
|
(4)
|
|
|
10.5
|
|
|
Form
of November 2015 Election Letter and Forbearance Agreement.
|
|
|
(5)
|
|
|
10.6
|
|
|
Form
of February 2016 Forbearance Agreement.
|
|
|
(6)
|
|
|
10.7
|
|
|
Form
of May 2016 Forbearance Agreement.
|
|
|
(8)
|
|
|
10.8
|
|
|
Forms
of Subscription Agreements for U.S. Persons and Non-US Persons ad Registration Rights Agreement utilized in the May 2015 Stock
Offering.
|
|
|
(5)
|
|
|
10.9
|
|
|
Forms
of Subscription Agreements and Registration Rights Agreement utilized in the November 2015 Stock Offering
|
|
|
(6)
|
|
|
10.10
|
|
|
Form
of Securities Subscription Agreement and Common Stock Purchase Warrant used in the April 2016 Stock Sale.
|
|
|
(11)
|
|
|
10.11
|
|
|
Form
of Securities Subscription Agreement, including the terms to issue Volume Warrants, and form of Common Stock Purchase Warrant
used in the May 2016 Stock Sale.
|
|
|
(7)
|
|
|
10.12
|
|
|
Form
of Securities Subscription Agreement, including the terms to issue Volume Warrants, and form of Common Stock Purchase Warrant
used in the August 2016 Stock Sale.
|
|
|
(9)
|
|
|
10.13
|
|
|
Form
of Amendment No. 1 to Secured Convertible Promissory Note
|
|
|
(8)
|
|
|
10.14
|
|
|
Form
of Lock-Up Agreement
|
|
|
(8)
|
|
|
|
|
|
Office
Lease dated October 24, 2014 between the Company and Highwoods DLF 98/29, LLC.
|
|
|
(4)
|
|
|
10.15
|
|
|
Executive
Employment Agreement, dated August 17, 2016 between the Company and Mark J. Wells. *
|
|
|
(10)
|
|
|
10.16
|
|
|
Executive
Employment Agreement, dated September 1, 2016 between the Company and John P. Campi. *
|
|
|
(10)
|
|
|
10.17
|
|
|
Chairman’s
Agreement, dated September 1, 2016 between the Company and Rani Kohen. *
|
|
|
(10)
|
|
|
10.18
|
|
|
Executive
Employment Agreement, dated July 1, 2016 between the Company and Patty Barron. *
|
|
|
(9)
|
|
|
10.19
|
|
|
Director
Compensation Policy. *
|
|
|
(5)
|
|
|
10.22
|
|
|
The
2015 Stock Incentive Plan. *
|
|
|
(6)
|
|
|
21.1
|
|
|
List
of Subsidiaries.
|
|
|
(6)
|
|
|
31.1
|
|
|
Certification
of Principal Executive Officer as required by Rule 13a-14 or 15d-14 of the Exchange Act, as adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
|
(1)
|
|
|
31.2
|
|
|
Certification
of Principal Accounting Officer as required by Rule 13a-14 or 15d-14 of the Exchange Act, as adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
|
(1)
|
|
|
32.1
|
|
|
C
ertification
of Principal Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
(1)
|
|
|
32.2
|
|
|
Certification
of Principal Accounting Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
(1)
|
|
|
101
|
|
|
The
following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 are formatted
in XBRL (eXtensible Business Reporting Language): (i) the Audited Balance Sheets, (ii) the Audited Statements of
Operations, (iii) the Audited Statements of Stockholders’ Equity (Deficit), (iv) the Audited Statements of Cash Flows,
and (iv) the Notes to the Audited Financial Statements.
|
|
|
(1)
|
|
* Indicates management
contract or compensatory plan or arrangement.
|
(2)
|
Incorporated
by reference from the Company’s registration statement on Form S-1 filed with the
SEC on August 1, 2014 and, declared effective on October 22, 2014.
|
|
(3)
|
Incorporated
by reference from the Company’s current report on Form 8-K filed with the SEC on
November 26, 2014.
|
|
(4)
|
Incorporated
by reference from the Company’s annual report on Form 10-K filed with the SEC on
March 31, 2015.
|
|
(5)
|
Incorporated
by reference from the Company’s registration statement on Form S-1 filed with the
SEC on January 11, 2016, and declared effective on January 20, 2016.
|
|
(6)
|
Incorporated
by reference from the Company’s annual report on Form 10-K filed with the SEC on
March 30, 2016.
|
|
(7)
|
Incorporated
by reference from the Company’s quarterly report on Form 10-Q filed with the SEC
on May 16, 2016.
|
|
(8)
|
Incorporated
by reference from the Company’s quarterly report on Form 10-Q filed with the SEC
on August 15, 2016.
|
|
(9)
|
Incorporated
by reference from the Company’s quarterly report on Form 10-Q filed with the SEC
on November 14, 2016.
|
|
(10)
|
Incorporated
by reference from the Company’s current report on Form 8-K filed with the SEC on
November 8, 2016.
|
(11) Incorporated
by reference to the Company’s current report on Form 8-K filed with the SEC on April 7, 2016.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SQL TECHNOLOGIES CORP.
By:
/s/ John P. Campi
John P. Campi
Chief Executive Officer
(Principal Executive Officer)
(Principal Accounting Officer)
|
|
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ John P. Campi
|
|
Chief Executive Officer
|
|
March 31, 2017
|
|
John P. Campi
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Rani Kohen
|
|
Executive Chairman, Director
|
|
March 31, 2017
|
|
Rani Kohen
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Phillips
Peter
|
|
Director
|
|
March 31, 2017
|
|
Phillips Peter
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Tom Ridge
|
|
Director
|
|
March 31, 2017
|
|
Tom Ridge
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Dov Shiff
|
|
Director
|
|
March 31, 2017
|
|
Dov Shiff
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Leonard Sokolow
|
|
Director
|
|
March 31, 2017
|
|
Leonard Sokolow
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
SAFETY QUICK LIGHTING &
FANS CORP AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2016 AND 2015
Index to Consolidated Financial
Statements
|
|
Pages
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-1
|
|
|
|
Consolidated Balance
Sheets – December 31, 2016 and 2015
|
|
F-2
|
|
|
|
Consolidated Statements
of Operations – December 31, 2016 and 2016
|
|
F-4
|
|
|
|
Consolidated Statement
of Stockholders’ Deficit – December 31, 2016 and 2015
|
|
F-5
|
|
|
|
Consolidated Statements
of Cash Flows – December 31, 2016 and 2015
|
|
F-7
|
|
|
|
Notes to Consolidated
Financial Statements
|
|
F-9
|
|
NC
Office
19720
Jetton Road, 3rd Floor
Cornelius,
NC 28031
Tel:
704-897-8336
Fax:
704-919-5089
|
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board
of Directors and Shareholders
Safety Quick
Lighting & Fans Corp. and Subsidiary
We have audited
the accompanying consolidated balance sheets of SQL Technologies Corp. and Subsidiary (“the Company”) as of December
31, 2016 and 2015 and the related consolidated statements of operations, stockholders’ deficit, and consolidated cash flows
for the years ended December 31, 2016 and 2015. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of their internal control over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion,
the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position
of the Company as of December 31, 2016 and 2015, and the results of its operations, changes in stockholders’ deficit and
cash flows for the years ended December 31, 2016 and 2015 in conformity with accounting principles generally accepted in the United
States of America.
/s/ L&L CPAS, PA
L&L CPAS, PA
F.K.A. Bongiovanni & Associates, PA
Certified Public Accountants
Cornelius, North Carolina
The United States of America
March 31, 2016
SQL Technologies Corp. and Subsidiary
Consolidated Balance Sheets
(Audited)
|
|
December
31, 2016
|
|
December
31, 2015
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
4,125,888
|
|
|
$
|
450,868
|
|
Accounts receivable
|
|
|
796,824
|
|
|
|
234,309
|
|
Inventory
|
|
|
2,401,048
|
|
|
|
263,871
|
|
Prepaid expenses
|
|
|
41,229
|
|
|
|
35,769
|
|
Other
current assets
|
|
|
—
|
|
|
|
210
|
|
Total current
assets
|
|
|
7,364,989
|
|
|
|
985,028
|
|
|
|
|
|
|
|
|
|
|
Furniture
and Equipment - net
|
|
|
113,605
|
|
|
|
127,521
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Patent - net
|
|
|
106,342
|
|
|
|
83,174
|
|
Debt issue costs
- net
|
|
|
—
|
|
|
|
14,605
|
|
GE trademark license
- net
|
|
|
4,675,585
|
|
|
|
7,123,746
|
|
Other
assets
|
|
|
202,346
|
|
|
|
65,714
|
|
Total other
assets
|
|
|
4,984,273
|
|
|
|
7,287,239
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
12,462,867
|
|
|
$
|
8,399,788
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
& accrued expenses
|
|
$
|
1,060,163
|
|
|
$
|
807,798
|
|
Convertible debt
- net of debt discount $-0- and $474,283 at
|
|
|
150,000
|
|
|
|
3,989,950
|
|
December 31, 2016
and December 31, 2015 respectively
|
|
|
|
|
|
|
|
|
Convertible debt
- related parties - net of debt discount $-0- and
|
|
|
50,000
|
|
|
|
50,000
|
|
$-0- at December
31, 2016 and December 31, 2015 respectively
|
|
|
|
|
|
|
|
|
Notes payable -
current portion
|
|
|
3,225,961
|
|
|
|
107,944
|
|
Notes payable -
related party
|
|
|
200,000
|
|
|
|
—
|
|
Derivative liabilities
|
|
|
24,083,314
|
|
|
|
24,157,838
|
|
Other
current liabilities
|
|
|
15,077
|
|
|
|
46,010
|
|
Total current
liabilities
|
|
|
28,784,515
|
|
|
|
29,159,540
|
|
|
|
|
|
|
|
|
|
|
Long term liabilities:
|
|
|
|
|
|
|
|
|
Convertible debt
|
|
|
—
|
|
|
|
—
|
|
Convertible debt
- related parties - net
|
|
|
—
|
|
|
|
—
|
|
Notes payable
|
|
|
73,598
|
|
|
|
193,800
|
|
GE
royalty obligation
|
|
|
11,302,423
|
|
|
|
11,795,855
|
|
Total long term
liabilities
|
|
|
11,376,021
|
|
|
|
11,989,655
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
40,160,536
|
|
|
|
41,149,195
|
|
Commitments and contingent
liabilities:
|
|
|
|
|
|
|
|
|
Redeemable preferred
stock - subject to redemption: $0 par value;
|
|
|
|
|
|
|
|
|
20,000,000 shares
authorized; 13,056,932 and -0- shares issued
|
|
|
|
|
|
|
|
|
and outstanding
at December 31, 2016 and December 31, 2015
|
|
|
|
|
|
|
|
|
respectively
|
|
|
44,393,569
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit:
|
|
|
|
|
|
|
|
|
Common stock: $0
par value, 500,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
47,276,499 and
41,501,251 shares issued and outstanding
|
|
|
|
|
|
|
|
|
at December 31,
2016 and December 31, 2015 respectively
|
|
|
12,294,391
|
|
|
|
2,892,078
|
|
Common stock to
be issued
|
|
|
—
|
|
|
|
625,000
|
|
Additional paid-in
capital
|
|
|
56,910,107
|
|
|
|
6,472,427
|
|
Subscription receivable
|
|
|
(78,000
|
)
|
|
|
—
|
|
Accumulated
deficit
|
|
|
(141,182,294
|
)
|
|
|
(42,703,470
|
)
|
Total Stockholders'
deficit
|
|
|
(72,055,796
|
)
|
|
|
(32,713,965
|
)
|
Noncontrolling
interest
|
|
|
(35,442
|
)
|
|
|
(35,442
|
)
|
Total
Deficit
|
|
|
(72,091,238
|
)
|
|
|
(32,749,407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities, redeemable preferred stock, and stockholders' deficit
|
|
$
|
12,462,867
|
|
|
$
|
8,399,788
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
SQL Technologies Corp. and Subsidiary
Consolidated Statements of Operations
Years Ended December 31,
(Audited)
(Unaudited)
|
|
2016
|
|
2015
|
Sales
|
|
$
|
7,014,978
|
|
|
$
|
2,885,007
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
(6,136,395
|
)
|
|
|
(2,477,252
|
)
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
878,583
|
|
|
|
407,755
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
6,866,355
|
|
|
|
5,236,747
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,987,772
|
)
|
|
|
(4,828,992
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(980,867
|
)
|
|
|
(2,855,519
|
)
|
Derivative expenses
|
|
|
(9,678,390
|
)
|
|
|
—
|
|
Change in fair
value of embedded derivative liabilities
|
|
|
(43,634,482
|
)
|
|
|
(19,416,295
|
)
|
Loss on debt extinguishment
|
|
|
(41,129,336
|
)
|
|
|
—
|
|
Other income
|
|
|
13,275
|
|
|
|
992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on Debt Extinguishment
|
|
|
2,949,714
|
|
|
|
209,604
|
|
Total other income
(expense) - net
|
|
|
(92,460,086
|
)
|
|
|
(22,061,218
|
)
|
|
|
|
|
|
|
|
|
|
Net loss including noncontrolling interest
|
|
|
(98,447,858
|
)
|
|
|
(26,890,210
|
)
|
Less:
net loss attributable to noncontrolling interest
|
|
|
—
|
|
|
|
—
|
|
Net loss attributable
to Safety Quick Lighting & Fans Corp.
|
|
$
|
(98,447,858
|
)
|
|
$
|
(26,890,210
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share
- basic and diluted
|
|
$
|
(2.60
|
)
|
|
$
|
(0.76
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
during the year -
|
|
|
|
|
|
|
|
|
basic
and diluted
|
|
|
37,916,952
|
|
|
|
35,409,521
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
SQL Technologies Corp. and Subsidiary
Consolidated Statement of Stockholders'
Deficit
Years Ended December 31, 2016
and December 31, 2015
(Audited)
|
|
Common Stock,
$0 Par Value
|
|
Subscription
|
|
Paid-In
|
|
Accumulated
|
|
Noncontrolling
|
|
Stockholders'
|
|
|
Shares
|
|
To Be Issued
|
|
Amount
|
|
Receivable
|
|
Capital
|
|
Deficit
|
|
Interest
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014
|
|
|
35,750,000
|
|
|
|
13,812
|
|
|
|
$189,900
|
|
|
|
—
|
|
|
|
$6,282,814
|
|
|
|
$(15,813,260
|
)
|
|
|
$(35,442
|
)
|
|
|
$(9,362,177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in exchange for interest due ($0.25/share)
|
|
|
1,718,585
|
|
|
|
|
|
|
|
429,646
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
429,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued per mutual release and waiver
|
|
|
250,000
|
|
|
|
111,188
|
|
|
|
62,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
173,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of derivative liability related to penalty and Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189,613
|
|
|
|
|
|
|
|
|
|
|
|
189,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued ($0.60/share), net of issuance cost
|
|
|
3,782,666
|
|
|
|
|
|
|
|
2,210,032
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,210,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued ($1.00/share), net of issuance cost
|
|
|
—
|
|
|
|
500,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(26,890,210
|
)
|
|
|
—
|
|
|
|
(26,890,210
|
)
|
Balance,
December 31, 2015
|
|
|
41,501,251
|
|
|
|
625,000
|
|
|
|
$2,892,078
|
|
$
|
|
—
|
|
$
|
|
6,472,427
|
|
|
|
$(42,703,470
|
)
|
|
|
$(35,442
|
)
|
|
|
$(32,749,407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in exchange for interest
due
|
|
|
1,000,000
|
|
|
|
(625,000
|
)
|
|
|
625,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued, net of issuance cost
|
|
|
3,155,000
|
|
|
|
—
|
|
|
|
7,538,000
|
|
|
|
(78,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,460,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services rendered
|
|
|
265,000
|
|
|
|
—
|
|
|
|
769,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
769,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued pursuant to stock award
|
|
|
25,000
|
|
|
|
—
|
|
|
|
65,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
65,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant Director Compensation Policy, appointment
to Board and Chair of Audit Committee
|
|
|
62,000
|
|
|
|
—
|
|
|
|
62,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
62,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in exchange for principal
and interest due
|
|
|
790,092
|
|
|
|
—
|
|
|
|
197,524
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
197,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible notes to common stock
|
|
|
443,156
|
|
|
|
—
|
|
|
|
110,789
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
110,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of derivative liability related
to convertible notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45,161,472
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45,161,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of derivative liability related
to interest payable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,798,750
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,798,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of derivative liability related
to options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
477,458
|
|
|
|
—
|
|
|
|
—
|
|
|
|
477,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Paid
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(30,966
|
)
|
|
|
—
|
|
|
|
(30,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(98,447,858
|
)
|
|
|
—
|
|
|
|
(98,447,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December
31, 2016
|
|
|
47,276,499
|
|
|
|
—
|
|
|
|
$12,294,391
|
|
|
$
|
(78,000
|
)
|
|
$
|
56,910,107
|
|
|
|
$(147,182,294
|
)
|
|
|
$(35,442
|
)
|
|
|
$(72,091,238
|
)
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
SQL Technologies Corp. and Subsidiary
Consolidated Statements of Cash
Flows
Years Ended December 31,
(Audited)
|
|
2016
|
|
2015
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
loss attributable to Safety Quick Lighting & Fans Corp.
|
|
$
|
(98,447,858
|
)
|
|
$
|
(26,890,210
|
)
|
Net loss attributable
to noncontrolling interest
|
|
|
—
|
|
|
|
—
|
|
Adjustments to
reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
26,483
|
|
|
|
22,464
|
|
Amortization of
debt issue costs
|
|
|
14,605
|
|
|
|
147,341
|
|
Amortization of
debt discount
|
|
|
474,283
|
|
|
|
2,100,957
|
|
Amortization of
patent
|
|
|
7,958
|
|
|
|
5,347
|
|
Amortization of
GE trademark license
|
|
|
2,448,162
|
|
|
|
2,441,471
|
|
Change in fair
value of derivative liabilities
|
|
|
43,634,481
|
|
|
|
19,416,295
|
|
Derivative expense
|
|
|
9,678,390
|
|
|
|
—
|
|
Loss on debt extinguishment
|
|
|
41,129,336
|
|
|
|
—
|
|
Loss (Gain) on
debt forgiveness
|
|
|
(2,949,714
|
)
|
|
|
(209,604
|
)
|
Stock options issued
for services - related parties
|
|
|
931,000
|
|
|
|
173,688
|
|
Change in operating
assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(562,515
|
)
|
|
|
(234,309
|
)
|
Prepaid expenses
|
|
|
(5,460
|
)
|
|
|
(6,126
|
)
|
Inventory
|
|
|
(2,137,177
|
)
|
|
|
(263,871
|
)
|
Deferred royalty
|
|
|
—
|
|
|
|
—
|
|
Royalty payable
|
|
|
(493,432
|
)
|
|
|
(204,147
|
)
|
Other
|
|
|
(167,356
|
)
|
|
|
(32,822
|
)
|
Deferred rent
|
|
|
—
|
|
|
|
—
|
|
Accounts
payable & accrued expenses
|
|
|
252,367
|
|
|
|
(233,944
|
)
|
Net
cash used in operating activities
|
|
|
(6,166,446
|
)
|
|
|
(3,767,470
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property
& equipment
|
|
|
(12,567
|
)
|
|
|
(17,376
|
)
|
Payment
of patent costs
|
|
|
(31,127
|
)
|
|
|
(42,102
|
)
|
Net
cash used in investing activities
|
|
|
(43,694
|
)
|
|
|
(59,478
|
)
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Repayments of convertible
notes
|
|
|
(4,314,233
|
)
|
|
|
—
|
|
Reduction of Notes
converted to Preferred Stock
|
|
|
3,264,233
|
|
|
|
—
|
|
Proceeds from note
payable
|
|
|
5,293,016
|
|
|
|
—
|
|
Proceeds from note
payable - related party
|
|
|
500,000
|
|
|
|
—
|
|
Stock issued in
exchange for interest
|
|
|
158,312
|
|
|
|
429,646
|
|
Stock issued in
exchange for principal
|
|
|
150,000
|
|
|
|
—
|
|
Dividends paid
|
|
|
(30,966
|
)
|
|
|
—
|
|
Repayments of note
payable
|
|
|
(2,295,202
|
)
|
|
|
(103,351
|
)
|
Repayments of note
payable - related party
|
|
|
(300,000
|
)
|
|
|
—
|
|
Proceeds from issuance
of stock
|
|
|
7,460,000
|
|
|
|
2,710,032
|
|
Net
cash provided by financing activities
|
|
|
9,885,160
|
|
|
|
3,036,327
|
|
|
|
|
|
|
|
|
|
|
(Decrease) cash and cash equivalents
|
|
|
3,675,020
|
|
|
|
(790,621
|
)
|
Cash and cash equivalents
at beginning of period
|
|
|
450,868
|
|
|
|
1,241,489
|
|
Cash and cash
equivalents at end of period
|
|
$
|
4,125,888
|
|
|
$
|
450,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosure of non-cash financing
activities:
|
|
|
|
|
|
|
|
|
Reclassification
of derivative liability to additional paid-in-capital
|
|
$
|
50,437,681
|
|
|
$
|
189,613
|
|
Gain
on debt extinguishment
|
|
$
|
2,949,714
|
|
|
$
|
209,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
315,631
|
|
|
$
|
563,637
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
SQL Technologies Corp. and Subsidiary
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), and CE (for the European market). 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 light fixtures and ceiling fans, by the
use of a power plug installed in ceiling and wall electrical junction boxes. The Company’s main 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 a nonconductive body that houses conductive rings connectable to an electric
power supply through terminals in its side exterior.
The plug is also comprised of a nonconductive body that
houses corresponding conductive rings, attaches to the socket via a male post and is capable of feeding electric power to an appliance.
The plug includes a second structural element allowing it to revolve and a releasable latching which, when engaged, provides a
retention force between the socket and the plug to prevent 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 Company markets consumer friendly, energy saving “plugin”
ceiling fans and light fixtures under the General Electric Company (“GE” or “General Electric”) brand
as well as “conventional” ceiling lights and fans carrying the GE brand. The Company also owns 98.8% of SQL Lighting
& Fans LLC (the “Subsidiary”). The Subsidiary was formed in Florida on April 27, 2011, and is in the business
of manufacturing the patented device that the Company owns. The Subsidiary had no activity during the periods presented.
The Company’s fiscal year end is December 31.
Note 2 Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of
the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.
GAAP) under the accrual basis of accounting.
Use of Estimates
The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Such estimates and assumptions impact both assets and
liabilities, including but not limited to: net realizable value of accounts receivable and inventory, estimated useful lives and
potential impairment of property and equipment, the valuation of intangible assets, estimate of fair value of share based payments
and derivative liabilities, estimates of fair value of warrants issued and recorded as debt discount, estimates of tax liabilities
and estimates of the probability and potential magnitude of contingent liabilities.
Making estimates requires management to exercise significant
judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances
that existed at the date of the financial statements, which management considered in formulating its estimate could change in
the near term due to one or more future nonconforming events. Accordingly, actual results could differ significantly from estimates.
Risks and Uncertainties
The Company’s operations are subject to risk and
uncertainties including financial, operational, regulatory and other risks including the potential risk of business failure.
The Company has experienced, and in the future expects
to continue to experience, variability in its sales and earnings. The factors expected to contribute to this variability include,
among others, (i) the uncertainty associated with the commercialization and ultimate success of the product, (ii) competition
inherent at large national retail chains where product is expected to be sold (iii) general economic conditions and (iv) the related
volatility of prices pertaining to the cost of sales.
Principles of Consolidation
The consolidated financial statements include the accounts
of SQL Technologies Corp. (f/k/a Safety Quick Lighting and Fans Corp.) and the Subsidiary, SQL Lighting & Fans LLC. All intercompany
accounts and transactions have been eliminated in consolidation.
Non-controlling Interest
In May 2012, in connection with the sale of the Company’s
membership units in the Subsidiary, the Company’s ownership percentage in the Subsidiary decreased from 98.8% to 94.35%.
The Company then reacquired these membership units in September 2013, increasing the ownership percentage from 94.35% back to
98.8%. During 2016 and 2015, there was no activity in the Subsidiary.
Cash and Cash Equivalents
Cash and cash equivalents are carried at cost and represent
cash on hand, demand deposits placed with banks or other financial institutions, and all highly liquid investments with an original
maturity of three months or less. The Company had $4,125,888 and $450,868 in money market as of December 31, 2016, and December
31, 2015, respectively. The Company has deposits in financial institutions which exceeds the amount insured by the FDIC. The amount
of uninsured deposits was $3,366,685.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount
and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates
the associated risks by performing credit checks and actively pursuing past due accounts.
The Company recognizes an allowance for losses on accounts
receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical
bad debt experience, current receivables aging, and expected future bad debts, as well as an assessment of specific identifiable
customer accounts considered at risk or uncollectible.
The Company’s net balance of accounts receivable
for years ended December 31, 2016 and 2015:
|
|
December
31, 2016
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
$
|
796,824
|
|
|
$
|
234,309
|
|
Allowance for Doubtful
Accounts
|
|
|
—
|
|
|
|
—
|
|
Net Accounts
Receivable
|
|
$
|
796,824
|
|
|
$
|
234,309
|
|
All amounts are deemed collectible at December 31, 2016
and December 31, 2015 and accordingly, the Company has not incurred any bad debt expense at December 31, 2016 and December 31,
2015.
Inventory
Inventory consists of finished goods purchased, which
are valued at the lower of cost or market value, with cost being determined on the first-in, first-out (FIFO) method. The Company
periodically reviews historical sales activity to determine potentially obsolete items and also evaluates the impact of any anticipated
changes in future demand.
At December 31, 2016 and December 31, 2015,
the Company had $2,401,048 and $263,871 in inventory, respectively. 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 December 31, 2016,
and December 31, 2015, 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
no impairment adjustment was necessary for the periods presented.
Property and Equipment
Property and equipment is stated at cost, less accumulated
depreciation, and is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
Depreciation of property and equipment is provided utilizing
the straight-line method over the estimated useful lives, ranging from 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 a patent for an installation device
used in light fixtures and ceiling fans. Costs incurred for submitting the applications to the United States Patent and Trademark
Office for these patents have been capitalized. Patent costs are being amortized using the straight-line method over the related
15 year lives. The Company begins amortizing patent costs once a filing receipt is received stating the patent serial number and
filing date from the Patent Office.
The Company incurs certain legal and related costs in
connection with patent applications. The Company capitalizes such costs to be amortized over the expected life of the patent to
the extent that an economic benefit is anticipated from the resulting patent or alternative future use is available to the Company.
The Company also capitalizes legal costs incurred in the defense of the Company’s patents when it is believed that the future
economic benefit of the patent will be maintained or increased and a successful defense is probable. Capitalized patent defense
costs are amortized over the remaining expected life of the related patent. The Company’s assessment of future economic
benefit or a successful defense of its patents involves considerable management judgment, and an unfavorable outcome of litigation
could result in a material impairment charge up to the carrying value of these assets.
GE Trademark Licensing Agreement
The Company entered into a Trademark License Agreement
with General Electric on September, 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 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:
|
•
|
Level 1 – Observable inputs that reflect quoted
market prices in active markets for identical assets or liabilities.
|
|
•
|
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.
|
|
•
|
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.
|
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.
For option based simple derivative financial instruments,
the Company uses the Black Scholes option pricing model to value the derivative instruments at inception and subsequent valuation
dates. 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.
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 Black Scholes option pricing valuation model. The ranges of assumptions for
inputs are as follows:
|
•
|
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.
|
|
•
|
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
|
|
•
|
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.
|
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 – Non-Employees
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:
|
•
|
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.
|
|
•
|
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.
|
|
•
|
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.
|
|
•
|
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.
|
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.
Revenue Recognition
The Company derives revenues from the sale of GE branded
fans and lighting fixtures to large retailers through retail and online sales.
Revenue is recorded when all of the following have occurred:
(1) persuasive evidence of an arrangement exists, (2) asset is transferred to the customer without further obligation, (3) the
sales price to the customer is fixed or determinable, and (4) collectability is reasonably assured.
Cost of Sales
Cost of sales represents costs directly related to the
production and third party manufacturing of the Company’s products.
Product sold is typically shipped directly to the customer
from the third-party manufacturer; cost associated with shipping and handling is shown as a component of cost of sales.
Earnings (Loss) Per Share
Basic net earnings (loss) per share is computed by dividing
net income (loss) for the period by the weighted average number of common stock outstanding during each period. Diluted earnings
(loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common stock, common
stock equivalents and potentially dilutive securities outstanding during each period.
The Company uses the “treasury stock” method
to determine whether there is a dilutive effect of outstanding convertible debt, option and warrant contracts. For the years ended
December 31, 2016 and 2015, 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 December 31, 2016 and December 31, 2015:
|
|
December
31, 2016
|
|
December
31, 2015
|
|
|
|
|
|
|
|
Convertible Debt (Exercise
price - $0.25/share)
|
|
800,000
|
|
|
18,056,935
|
|
Stock Warrants (Exercise price - $0.001
- $3.00/share)
|
|
13,555,651
|
|
|
9,728,984
|
|
Stock Options (Exercise price $0.35 -
$3.50/share)
|
|
1,350,000
|
|
|
200,000
|
|
Total
|
|
15,705,651
|
|
|
27,985,919
|
|
Income Tax Provision
The financial statements reflect the Company’s transactions
without adjustment, if any, required for income tax purposes. The net loss generated by the Company for the period January 1,
2012 to November 6, 2012 has been excluded from the computation of income taxes due to the company’s tax designation as
an LLC during that period.
The Company accounts for income taxes under
Section 740-10-30 of the FASB Accounting Standards Codification, which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets
are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be
realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the Consolidated Statements of Operations in the period that includes the enactment date.
The Company adopted section 740-10-25 of the
FASB Accounting Standards Codification (Section 740-10-25). Section 740-10-25 addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under Section 740-10-25, the
Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will
be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized
in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty
(50) percent likelihood of being realized upon ultimate settlement. Section 740-10-25 also provides guidance on derecognition,
classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
The estimated future tax effects of temporary differences
between the tax basis of assets and liabilities are reported in the accompanying consolidated balance sheets, as well as tax credit
carrybacks and carryforwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its consolidated
balance sheets and provides valuation allowances as management deems necessary.
Management makes judgments as to the interpretation of
the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the
Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion,
adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates,
additional allowances or reversals of reserves may be necessary.
The Company’s tax returns are subject to examination
by the federal and state tax authorities.
Uncertain Tax Positions
The Company did not take any uncertain tax
positions and had no adjustments to its income tax liabilities or benefits pursuant to the provisions of Section 740-10-25 for
the reporting periods ended December 31, 2016 and 2015
Related Parties
The Company follows subtopic 850-10 of the
FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.
Pursuant to Section 850-10-20 the related parties
include (a) Affiliates of the Company; (b) Entities for which investments in their equity securities would be required, absent
the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted
for by the equity method by the investing entity; (c) Trusts for the benefit of employees, such as pension and profit sharing
trusts that are managed by or under the trusteeship of management; (d) Principal owners of the Company; (e) Management
of the Company; (f) Other parties with which the Company may deal if one party controls or can significantly influence the
management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing
its own separate interests; and (g) Other parties that can significantly influence the management or operating policies of
the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the
other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The consolidated financial statements shall
include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other
similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of
consolidated or combined financial statements is not required in those statements. The disclosures shall include: (a). the nature
of the relationship(s) involved; (b). a description of the transactions, including transactions to which no amounts or nominal
amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary
to an understanding of the effects of the transactions on the financial statements; (c). the dollar amounts of transactions
for each of the periods for which income statements are presented and the effects of any change in the method of establishing the
terms from that used in the preceding period; and (d). amounts due from or to related parties as of the date of each balance
sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Contingencies
The Company follows subtopic 450-20 of the
FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the
consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one
or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company
or un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings
or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is
probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability
would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency
is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability,
and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not
disclosed unless they involve guarantees, in which case the guarantees would be disclosed. However, there is no assurance that
such matters will not materially and adversely affect the Company’s business, consolidated financial position, and consolidated
results of operations or consolidated cash flows.
Subsequent Events
The Company follows the guidance in Section
855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent
events through the date when the financial statements are issued.
Pursuant to ASU 201009 of the FASB Accounting Standards
Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users,
such as through filing them on EDGAR.
Recently Issued Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09,
Stock Compensation,
which is intended to simplify the accounting for share-based payment award transactions. The new standard
will modify several aspects of the accounting and reporting for employee share-based payments and related tax accounting impacts,
including the presentation in the statements of operations and cash flows of certain tax benefits or deficiencies and employee
tax withholdings, as well as the accounting for award forfeitures over the vesting period. The guidance is effective for fiscal
years beginning after December 15, 2016, including interim periods within that year, and will be adopted by the Company in the
first quarter of fiscal 2017. The Company anticipates the new standard will result in an increase in the number of shares used
in the calculation of diluted earnings per share and will add volatility to the Company’s effective tax rate and income tax
expense. The magnitude of such impacts will depend in part on whether significant employee stock option exercises occur.
In April 2015, the FASB issued Accounting Standards
Update No. 2015-03, Interest—Imputation of Interest (Topic 83530): Simplifying the Presentation of Debt Issuance Costs (“ASU
2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance
sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and
measurement guidance for debt issuance costs is not affected by ASU 2015-03. ASU 2015-03 is effective for financial statements
issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company has reclassified
debt issuance costs from prepaid expenses and other current assets and other assets as a reduction to debt in the condensed consolidated
balance sheets.
In 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.
Other pronouncements issued by the FASB or other authoritative
accounting standards groups with future effective dates are either not applicable or are not expected to be significant to the
Company’s financial position, results of operations or cash flows.
Note 3 Furniture and Equipment
Property and
equipment consisted of the following at December 31, 2016 and December 31, 2015:
|
|
December
31, 2016
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
|
Office Equipment
|
|
$
|
9,327
|
|
|
$
|
8,096
|
|
Furniture and Fixtures
|
|
|
33,578
|
|
|
|
30,561
|
|
Tooling and Production
|
|
|
136,835
|
|
|
|
128,515
|
|
Total
|
|
|
179,740
|
|
|
|
167,172
|
|
Less: Accumulated Depreciation
|
|
|
(66,135
|
)
|
|
|
(39,651
|
)
|
Property and Equipment
- net
|
|
$
|
113,605
|
|
|
$
|
127,521
|
|
Depreciation expense amounted to $26,483 and $22,430 for
the twelve months ended December 31, 2016 and 2015, respectively.
Note 4 Intangible Assets
Intangible assets (patents) consisted of the following
at December 31, 2016 and December 31, 2015:
|
|
December
31, 2016
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
134,919
|
|
|
$
|
103,792
|
|
Less: Impairment Charges
|
|
|
—
|
|
|
|
—
|
|
Less: Accumulated Amortization
|
|
|
(28,575
|
)
|
|
|
(20,618
|
)
|
Patents - net
|
|
$
|
106,344
|
|
|
$
|
83,174
|
|
Amortization expense associated with patents amounted
to $7,958 and $5,347 for the twelve months ended December 31, 2016 and 2015, respectively.
At December 31, 2016, future amortization of intangible
assets:
Year Ending December 31
|
|
|
|
|
2017
|
|
|
$
|
8,995
|
2018
|
|
|
|
8,995
|
2019
|
|
|
|
8,995
|
2020
|
|
|
|
8,995
|
2021
|
|
|
|
8,995
|
2022 and Thereafter
|
|
|
|
61,369
|
|
|
|
$
|
106,344
|
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.
|
|
December
31, 2016
|
|
December
31, 2015
|
GE Trademark License
|
|
$
|
12,000,000
|
|
|
$
|
12,000,000
|
|
Less: Impairment Charges
|
|
|
—
|
|
|
|
—
|
|
Less: Accumulated Amortization
|
|
|
(7,324,415
|
)
|
|
|
(4,876,254
|
)
|
Patents – net
|
|
$
|
4,675,585
|
|
|
$
|
7,123,746
|
|
Amortization expense associated with the GE Trademark
License amounted to $2,448,161 and $2,441,472 for the twelve months ended December 31, 2016 and 2015, respectively
At December 31, 2016, future amortization of intangible
assets is as follows for the remaining:
Year
Ending December 31
|
|
2017
|
|
|
|
2,441,472
|
|
|
2018
|
|
|
|
2,234,113
|
|
|
|
|
|
$
|
4,675,585
|
|
Note 6 Notes Payable
At December 31, 2016 and December 31, 2015,
the Company had a note payable to a bank in the amount of $186,823 and $301,744, respectively. The note, dated May 2007, is
due in monthly payments of $10,000 and carries interest at 4.75%. The note is secured by certain assets of the Company
compensating balances, and is due August 2018.
On April 13, 2016, the company entered in to an agreement
with a third party for a $10,000,000 line of credit. The primary purpose of this line of credit is to fund manufacturing and product
related obligations. The note carries interest of 8%, due monthly with principal and unpaid interest due December 31, 2017. The
note is secured by the assets of the company. The outstanding balance on this note was $3,112,737 at December 31, 2016.
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 December 31, 2016, 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
|
|
|
|
|
|
2017
|
|
|
$
|
3,425,961
|
|
2018
|
|
|
|
73,598
|
|
|
|
|
$
|
3,422,294
|
Note 7 Convertible Debt Net
The Company has recorded derivative liabilities associated
with convertible debt instruments, as more fully discussed at Note 8.
|
|
Third
Party
|
|
Related
Party
|
|
Totals
|
Balance
December 31, 2014
|
|
$
|
1,911,995
|
|
|
$
|
26,999
|
|
|
$
|
1,938,994
|
|
Add: Amortization of Debt Discount
|
|
|
2,077,955
|
|
|
|
23,001
|
|
|
|
2,100,956
|
|
Balance December
31, 2015
|
|
|
3,989,950
|
|
|
|
50,000
|
|
|
|
4,039,950
|
|
Add: Amortization of Debt Discount
|
|
|
474,283
|
|
|
|
—
|
|
|
|
474,283
|
|
Less Repayments/Conversions
|
|
|
(4,314,233)
|
|
|
|
—
|
|
|
|
(4,314,233)
|
|
Balance December 31, 2016
|
|
|
150,000
|
|
|
|
50,000
|
|
|
|
200,000
|
|
Less Current portion
|
|
|
(150,000)
|
|
|
|
(50,000)
|
|
|
|
(200,000)
|
|
Long-Term Convertible Debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
On November 26, 2013, May 8, 2014 and September 25, 2014
the Company completed closings in connection with its offering (the “Notes Offering”) of its 12% Secured Convertible
Promissory Notes (the “12% Notes”) in the aggregate principal amount of $4,240,100 and/or its 15% Secured Convertible
Promissory Notes in the aggregate principal amount of $30,000 (the “15% Notes”, and together with the 12% Notes, each
a “Note” and collectively, the “Notes”), as applicable, with certain “accredited investors”
(the “Investors”), as defined under Regulation D, Rule 501 of the Securities Act. The entire aggregate principal amount
of the Notes of $3,574,234 outstanding as of December 31, 2016 and $4,270,100 was outstanding as of December 31, 2015, such amount
being exclusive of securities converted into the Notes separate from the Notes Offering. Pursuant to the Notes Offering, the Company
received $1,752,803, $1,400,000 and $800,500 in net proceeds on November 26, 2013, May 8, 2014 and September 25, 2014, respectively.
In addition to the terms customarily included in such
instruments, the Notes began accruing interest on the date that each Investor submitted the principal balance of such Investor’s
Note, with the interest thereon becoming due and payable on the one year anniversary, and quarterly thereafter. Upon a default
of the Notes, the interest rate will increase by 2% for each 30 day period until cured. The principal balance of each Note and
all unpaid interest became payable twenty-four (24) months after the date of issuance. The principal and outstanding interest
under the Notes are convertible into shares of the Company’s common stock at $0.25 per share and are secured by a first
priority lien (subject only to an existing note with Signature Bank of Georgia on the Company’s intellectual property and
all substitutes, replacements and proceeds of such intellectual property) pursuant to the terms of a Security Purchase Agreement,
dated as of November 26, 2013, May 8, 2014 and September 25, 2014, as applicable, by and between the Company and each Investor.
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”). Investors of the 12% Notes received Warrants with 25% coverage based on a predetermined
valuation of the Company. Investors of the 15% Notes received Warrants with 15% coverage based on the predetermined valuation
of the Company. Investors with a principal investment amount equal to or greater than $250,000 received Warrants with a bonus
40% coverage (“Bonus Coverage”); however, if an Investor previously invested $250,000 or more in the Notes Offering,
such Investor received Bonus Coverage if such Investor subsequently invested $100,000 or more in the Notes Offering. In addition
to the terms customarily included in such instruments, the Warrants may be exercised by the Investors by providing to the Company
a notice of exercise, payment and surrender of the Warrant.
The Notes and Warrants were treated as derivative liabilities.
In connection with the Notes Offering, the Company entered
into Registration Rights Agreements, each dated as of November 26, 2013, May 8, 2014 and September 25, 2014, and each by and between
the Company and each of the Investors (collectively, the “Registration Rights Agreements”), whereby the Company agreed
to prepare and file a registration statement with the SEC within sixty (60) days after execution of the applicable Registration
Rights Agreement and to have the registration statement declared effective by the SEC within ninety (90) days thereafter.
Because the Company was unable to file a registration
statement pursuant to the terms of each Registration Rights Agreements dated as of November 26, 2013 or May 8, 2014, the Company
was in default under such Registration Rights Agreements (the “Filing Default Damages”), and because the Company was
unable to have a registration statement declared effective pursuant to the terms of the Registration Rights Agreements dated as
of November 26, 2013, the Company was in default under such Registration Rights agreements (the “Effectiveness Default Damages”).
The Filing Default Damages stopped accruing on the date such registration statement was filed, and the Effectiveness Default Damages
stopped accruing on the date it was declared effective.
The Company invited the Investors holding Notes dated
November 26, 2013 to extend the first interest payment that was scheduled to be paid pursuant to the Notes dated November 26,
2013 (the “Interest Due”) to February 24, 2015 and in exchange offered to capitalize the Interest Due at a rate of
12% through payment (the “Additional Interest”), all of which was convertible into the Company’s common stock
at a price of $0.25 per share. Through December 31, 2016, the Company has issued in total 2,343,191 shares of its common stock
representing $585,798 in Additional Interest, Interest Due, Filing Default Damages and Effectiveness Default Damages. As of December
31, 2016, all Additional Interest, Interest Due, Filing Default Damages and Effectiveness Default Damages was repaid by the Company.
During 2015, five Investors requested that the Company
withhold payments of interest due under their Notes at no cost to the Company, to allow the Company to address working capital
needs. Such interest due has been or will be paid to the five Investors, and none of such amounts have been or will be paid in
shares of the Company’s capital stock.
In November 2015, the Company invited the holders of Notes
dated November 26, 2013, with respect to outstanding principal and interest due under their respective Notes, to (i) receive payment
in cash, (ii) convert their Notes into shares of the Company’s common stock, or (iii) forbear an election for three (3)
months, or until February 26, 2016, pursuant to a forbearance agreement, during such time interest under their respective Notes
would continue to accrue. In February 2016, the Company invited the same holders to extend their forbearance period to make an
election to convert or redeem their Notes for an additional three months, or until May 26, 2016, under the same terms as the first
forbearance agreements. In May 2016, the Company invited the holders of all Notes, where such holders had not already made an
election to redeem or convert their Notes, to forbear or extend their forbearance period to make an election to convert or redeem
their Notes until July 31, 2016, which the Company thereafter extended to August 15, 2016 (the “August 2016 Election”).
This also provided a third option to all noteholders, whereby such holders could convert their respective Note(s) into shares
of Series A Convertible Preferred Stock (“Preferred Stock”).
In May 2016, the Company invited the holders of all Notes,
where such holders had not already made an election to redeem or convert their Notes, to forbear or extend their forbearance period
to make an election to convert or redeem their Notes until July 31, 2016, which the Company thereafter extended to August 15,
2016 (the “August 2016 Election”). This also provided a third option to all noteholders, whereby such holders could
convert their respective Note(s) into shares of Series A Convertible Preferred Stock (“Preferred Stock”).
Through December 31, 2016, the Company received
elections, in connection with the August 2016 Election, to (i) convert three (3) Notes into 240,000 shares of common stock of the
Company representing an aggregate principal balance of $60,000, and (ii) convert 31 Notes into 13,056,936 shares of Preferred Stock
representing an aggregate principal balance of $3,264,234. Also through December 31, 2016, the Company received no elections in
connection with the August 2016 Election to redeem Notes and four (4) Investors holding Notes representing an aggregate principal
balance of $200,000 had not responded to the August 2016 Election. Other than the three (3) aforementioned Investors, all Investors
had elected to redeem or convert their Notes into shares of common stock or Preferred Stock. (See Note 7(c))
During 2016 six (6) notes with an aggregate
principal balance of $900,000 were repaid in accordance the agreement, in each case prior to the August 2016 Election.
All issuances of capital stock in the August 2016 Election
have been or will be made only for principal balances due under the Notes, and all interest has been or will be paid directly
to the Investors.
The debt carries interest between 12% and 15%, and was
due in November 2015, May 2016 and September 2016, as extended to July 31, 2016 pursuant to certain forbearance agreements.
All Notes and Warrants issued in connection with the Notes
Offering are convertible at $0.25 and $0.375/share, respectively, subject to the existence of a “ratchet feature”,
which allows for a lower offering price if the Company offers shares to the public at a lower price.
At December 31, 2016, the Company has outstanding
convertible debt of $150,000 and $50,000 from a related party which will be repaid when the appropriate documentation is received
from the Noteholder, within the next twelve months.
|
(C)
|
Offer to Convert Debt to Preferred Shares
|
By letter to each holder of the Notes, dated July 22,
2016, the Company requested that each holder indicate its election to (i) redeem its Note, (ii) convert its Note into the Company’s
common stock or (iii) elect to convert its Note into shares of Preferred Stock (the “Preferred Option”), in each case
by August 15, 2016.
For those holders electing the Preferred Option, each
holder has received or will receive shares of the Preferred Stock on a 1 to 1 ratio to the number of shares of the Company’s
common stock which are then convertible under such holder’s respective Note. With respect to interest on junior securities,
dividends, distributions or liquidation preference, shares of Preferred Stock will rank senior to shares of the Company’s
common stock or other junior securities. Along with other terms customary for a class of convertible preferred stock, the Preferred
Stock will be convertible into shares of the Company’s common stock at the same conversion price as the Notes (i.e., USD
$0.25 per share), and will pay interest quarterly at a rate of six percent (6%). The Preferred Stock will be convertible upon
the election of the holder thereof. Shares of the Preferred Stock may be repurchased by the Company upon 30 days’ prior
written notice, in whole or in part, for USD $3.50 per share, provided that during such notice period the holder will continue
to have the option and right to convert its shares of Preferred Stock into shares of the Company’s common stock. Holders
will also have a put option, allowing them to sell their shares of Preferred Stock back to the Company at USD $0.25 per share,
the Note conversion price.
Each holder electing the Preferred Option was required
to enter into an amendment to its Note, providing that the Note will be convertible into the Preferred Stock rather than the Company’s
common stock, and to thereafter elect to convert their Note, as amended, into Preferred Stock. In addition, each holder will be
required to enter into a lockup agreement, whereby the holder will agree not to offer, sell, contract to sell, pledge, give, donate,
transfer or otherwise dispose of (i) the shares of the Company’s common stock it then holds, (ii) the shares of Preferred
Stock obtained upon conversion of its Note, and (iii) the shares of the Company’s common stock underlying the Preferred
Stock. The Note amendments, conversion to Preferred Stock and lockup agreement have been entered into on August 15, 2016. The
Note amendments were approved by a majority of the holders of the then outstanding Notes. See above for more details related to
the results of that offering
Note 8 Derivative Liabilities
The Company identified conversion features
embedded within convertible debt and warrants issued in 2013 and 2014 and warrants attached to stock purchases in 2016. The Company
has determined that the features associated with the embedded conversion option, in the form a ratchet provision, should be accounted
for at fair value, as a derivative liability, as the Company cannot determine if a sufficient number of shares would be available
to settle all potential future conversion transactions. Additionally, the Company has issued options that have vested to purchase
stock through our Incentive Plan. Shares have not been reserved with our transfer agent, therefore, they are considered “tainted”
and should be accounted for at fair value, as a derivative liability,
As a result of the application of ASC No. 815, the fair
value of the ratchet feature related to convertible debt and warrants is summarized as follow:
The fair value at the commitment and re-measurement dates
for the Company’s derivative liabilities were based upon the following management assumptions as:
|
|
December 31, 2016
|
|
December 31, 2015
|
Balance Beginning of period
|
|
$
|
24,157,838
|
|
|
$
|
5,140,758
|
|
Reclassification of derivative liabilities to additional paid in capital related to warrants exercised that ceased being a derivative liability
|
|
|
—
|
|
|
|
(189,613
|
)
|
Extinguishment of Derivative Liability - Conversion of Interest to Shares
|
|
|
—
|
|
|
|
(209,604
|
)
|
Fair value mark to market adjustment - stock options
|
|
|
(268,098
|
)
|
|
|
134,162
|
|
Fair value at the commitment date for options granted
|
|
|
4,625,002
|
|
|
|
—
|
|
Fair value mark to market adjustment - convertible debt
|
|
|
34,088,543
|
|
|
|
18,835,664
|
|
Fair value mark to market adjustment – warrants
|
|
|
6,264,132
|
|
|
|
446,471
|
|
Fair
value at commitment date for warrants issued
|
|
|
5,053,387
|
|
|
|
—
|
|
Debt settlement on the derivative
liability associated with interest
|
|
|
3,549,904
|
|
|
|
—
|
|
Reclassification of derivative
liability to Additional Paid in Capital due to share reservation
|
|
|
(50,437,681
|
)
|
|
|
—
|
|
Gain
on debt settlement
|
|
|
(2,949,714
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
24,083,313
|
|
|
$
|
24,157,838
|
|
|
|
|
Commitment
Date
|
|
|
|
Recommitment
Date
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
150
|
%
|
|
|
150
|
%
|
Expected term
|
|
|
2-5
years
|
|
|
|
0.00
– 2.48 years
|
|
Risk Free Interest Rate
|
|
|
.29%-2.61%
|
|
|
|
1.20%-.1.47%
|
|
Note 9 Debt Discount
The Company
recorded the debt discount to the extent of the gross proceeds raised, and expensed immediately the remaining fair value of the
derivative liability, as it exceeded the gross proceeds of the note.
Accumulated
amortization of derivative discount amounted to $4,402,773 as of December 31, 2016 and $4,153,611 for the year ended December
31, 2015.
The Company
recorded a change in the value of embedded derivative liabilities income/(expense) of ($43,634,482) and ($19,416,295) for the
twelve months ended December 31, 2016 and 2015, respectively.
The Company
recorded derivative expense of ($2,268,021) and $0 for the three months ended and ($9,678,390) and $0 for the twelve months ended
December 31, 2016 and 2015, respectively.
The Company
recorded loss on disposition of debt as a result of conversion to Common Stock and Preferred Stock of ($47,879,109). The loss
was a result of the conversion value of the shares received exceeded the face value of the note.
Note 10 Debt Issue Costs
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
|
|
|
Debt Issuance Costs
|
|
$
|
316,797
|
|
|
$
|
316,797
|
|
Total
|
|
|
316,797
|
|
|
|
316,797
|
|
Less: Accumulated Amortization
|
|
|
(316,797
|
)
|
|
|
(302,192
|
)
|
Debt Issuance Costs
|
|
$
|
—
|
|
|
$
|
14,605
|
|
The Company recorded amortization expense of $14,605 and
$117,098 for the twelve months ended December 31, 2016 and 2015, respectively.
Note 11 GE Royalty Obligation
In 2011, the Company executed a Trademark Licensing Agreement
with General Electric, which allows the Company the right to market certain ceiling light and fan fixtures displaying the GE brand.
The License Agreement imposes certain manufacturing and quality control conditions that the Company must maintain in order to
continue to use the GE brand.
The License Agreement is nontransferable and cannot be
sublicensed. Various termination clauses are applicable; however, none were applicable as of December 31, 2016, and December 31,
2015.
In August 2014, the Company entered into a second amendment
to the License Agreement pertaining to its royalty obligations. Under the terms of the amendment, the Company agreed to pay a
total of $12,000,000 by November 2018 for the rights assigned in the original contract. In case the Company does not pay GE a
total of at least $12,000,000 in cumulative royalties over the term of the License Agreement, the difference between $12,000,000
and the amount of royalties actually paid to GE is owed in December 2018.
Payments are due quarterly based upon the prior quarters’
sales. The Company made payments of $489,108 and $196,800 for the twelve months ended December 31, 2016 and 2015, respectively.
The License Agreement obligation will be paid from sales
of GE branded product subject to the following repayment schedule:
Net Sales in Contract Year
|
Percentage of
Contract Year Net Sales owed to GE
|
|
$0 $50,000,000
|
|
7%
|
$50,000,001 $100,000,000
|
|
6%
|
$100,000,000+
|
|
5%
|
The Company has limited operating history and does not
have the ability to estimate the sales of GE branded product, the liability is classified as long-term. As sales are recognized,
the Company will estimate the portion it expects to pay in the current year and classify as current.
Note 12 Income Taxes
Income taxes
are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due. Deferred
taxes relate to differences between the basis of assets and liabilities for financial and income tax reporting which will be either
taxable or deductible when the assets or liabilities are recovered or settled.
At December
31, 2016, the Company has a net operating loss carryforward of approximately $15,465,000 available to offset future taxable income
expiring through 2036. Utilization of future net operating losses may be limited due to potential ownership changes under Section
382 of the Internal Revenue Code.
In assessing
the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the
deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become deductible. Management considers
the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making
this assessment. Based on consideration of these items, management has determined that enough uncertainty exists relative to the
realization of the deferred income tax asset balances to warrant the application of a full valuation allowance as of December
31, 2016, and 2015.
The effects
of temporary differences that gave rise to significant portions of deferred tax assets at December 31, 2016 and December 31, 2015
are approximately as follows:
|
|
December 31, 2016
|
|
December 31, 2015
|
Net operating loss carryforward
|
|
$
|
(15,512,000
|
)
|
|
$
|
(9,248,000
|
)
|
Gross Deferred Tax Assets
|
|
|
6,64,000
|
|
|
|
3,745,000
|
|
Less Valuation Allowance
|
|
|
(6,264,000
|
)
|
|
|
(3,745,000
|
)
|
Total Deferred Tax Assets –
Net
|
|
$
|
—
|
|
|
$
|
—
|
|
There was no
income tax expense for the years ended December 31, 2015 and 2014 due to the Company’s net losses
The Company’s
tax expense differs from the “expected” tax expense for the years ended December 31, 2015 and December 31, 2014 (computed
by applying the Federal Corporate tax rate of 35% to loss before taxes and 5.5% for Florida State Corporate Taxes, are approximately
as follows:
|
|
December
31, 2016
|
|
December
31, 2015
|
Computed
"expected" tax expense (benefit) – Federal
|
|
$
|
(34,457,000
|
)
|
|
$
|
(9,411,000
|
)
|
Computed "expected"
tax expense (benefit) - State
|
|
|
(5,415,000
|
)
|
|
|
(1,479,000
|
)
|
Derivative
expense
|
|
|
3,920,000
|
|
|
|
7,871,000
|
|
Change in Fair Value
of Embedded Derivative
|
|
|
17,672,000
|
|
|
|
—
|
|
Loss/(Gain) on Debt
Extinguishment
|
|
|
16,657,000
|
|
|
|
(85,000
|
)
|
Change
in valuation allowance
|
|
|
1,623,000
|
|
|
|
3,104,000
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Note 13 Stockholders Deficit
(A) Common Stock
For the twelve months ended December 31, 2016 and year
ended December, 31 2015, the Company issued the following common stock:
Transaction
Type
|
|
|
|
Quantity
|
|
Valuation
|
|
Range
of Value per Share
|
|
2015
Equity Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued per Waiver and Conversion Agreement
|
|
|
(1)
|
|
|
|
1,718,585
|
|
|
$
|
429,646
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued per Employment Agreement of CEO
|
|
|
(2)
|
|
|
|
750,000
|
|
|
|
173,688
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued per Stock Rights Offering
|
|
|
(3)
|
|
|
|
3,782,666
|
|
|
|
2,210,032
|
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued per Stock Rights Offering- to be issued
|
|
|
(4)
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
1.00
|
|
|
December
31 2015
|
|
|
|
|
|
|
6,751,251
|
|
|
$
|
3,313,366
|
|
|
$
|
0.25-1.00
|
|
|
Common
Stock issued Board of Directors Compensation
|
|
|
(5)
|
|
|
|
62,000
|
|
|
|
62,000
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued per Waiver and Conversion Agreement
|
|
|
(6)
|
|
|
|
1,790,092
|
|
|
|
822,524
|
|
|
|
0.25-0.625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock offering
|
|
|
(7)
|
|
|
|
3,155,000
|
|
|
|
7,538,000
|
|
|
|
1.00-2.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Award
|
|
|
(8)
|
|
|
|
25,000
|
|
|
|
65,000
|
|
|
|
2.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued for Services
|
|
|
(9)
|
|
|
|
300,000
|
|
|
|
804,000
|
|
|
|
1.00-3.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued for Conversion of Debt
|
|
|
(10)
|
|
|
|
443,156
|
|
|
|
110,789
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
|
|
|
|
5,575,248
|
|
|
$
|
9,370,563
|
|
|
$
|
0.25-2.70
|
|
|
The following is a more detailed description of the Company’s
stock issuance from the table above:
|
(1)
|
Agreement and Waiver and Agreement
to Convert
|
The Company issued 1,718,585 shares at $0.25 per share,
representing $429,646 in penalties and interest, in connection with the Agreement and Waiver and the Agreement to Convert. For
a complete description of the Agreement and Waiver and the Agreement to Convert, see Note 7 above.
|
(2)
|
Shares Issued to Chief Executive Officer
|
In November 2014, the Company entered into an Employment
Agreement with its current Chief Executive Officer, which provided for stock based compensation equal to 750,000 of restricted
shares, of which 250,000 shares vested in May 2015 and 500,000 shares vested in December 2015. These shares were issued at $0.25
per share and were issued subsequent to December 31, 2015.
|
(3)
|
Shares Issued in Connection with Stock Offering
|
In May 2015,
the Company offered to existing shareholders a maximum of 6,666,667 shares of common stock at an issuance cost of $0.60 per share
for a total of $4,000,000 (the “May Stock Offering”). The May Stock Offering concluded on November 15, 2015 the Company
will issue 3,782,666 shares in connection with three closings.
|
(4)
|
Shares Issued in Connection with Stock Offering
|
In November 2015, the Company offered to new and existing
shareholders a maximum of 2,000,000 shares of common stock at an issuance cost of $1.00 per share for a total of $2,000,000 (the
“November Stock Offering”). On December 24, 2015, the Company closed subscriptions for 500,000 shares of common stock
pursuant to the November Stock Offering, and on January 4, 2016, the stock certificates representing those shares were issued.
Shares Issued in Board of Directors Compensation.
|
(5)
|
Shares issued to Board of Directors
|
The Company added a new Director in November 2015. The
Company issued the Director 50,000 shares of Common Stock at $0.60 per share as compensation in February 2016. In addition, this
Director agreed to serve as the Company’s Audit Committee Chair, and received 12,000 shares of Common Stock at $1.00 per
share as compensation for these additional responsibilities.
|
(6)
|
Shares Issued in Connection with the Notes or Agreements
to Convert
|
In connection
with the Agreement and Waiver and Agreement to Convert, as of the twelve months ended December 31, 2016, the Company issued an
additional 2,343,191 shares of its common stock as payment for Additional Interest, Interest Due, Filing Default Damages and Effectiveness
Default Damages, representing payment to Investors of $1,210,798. Of this amount, $625,000 is prior year stock awards/grants not
issued until 2016.
|
(7)
|
Shares Issued in Connection with Offering
|
On February 19, 2016, the Company completed a second closing
of the November Stock Offering representing aggregate gross proceeds to the Company of $300,000, and thereafter issued 300,000
shares of its common stock.
In April 2016, the Company completed an offering of 2,000,000
shares at an offering price of $2.50 and 1,666,667 in warrants with a conversion price of $3.00 per share.
In May 2016, the Company completed an offering of 675,000
shares at an offering price of $2.60 and 1,350,000 of warrants with a conversion price between $3.00 and $3.50 over the next three
anniversary dates.
In July 2016, the Company completed an offering for 30,000
shares at $2.60 and an additional 150,000 shares at $2.70 in two separate offerings.
|
(8)
|
Shares Issued Pursuant to Stock Awards.
|
In September 2016, the Company issued 25,000 shares in
stock awards at $0.60 per share.
|
(9)
|
Shares Issued for Services
|
In September 2016, the Company issued 300,000 shares issued
representing $136,250 in services received. The share conversions were in a range of $0.25 to $1.00 per share.
|
(10)
|
Shares Issued in Conjunction
with Retirement of Debt
|
In accordance
with the Notes, 443,156 shares were issued for the retirement of debt during the period.
(B) Preferred Stock
The following is a summary of the Company’s Preferred
Stock Activity
Transaction
Type
|
|
|
|
Quantity
|
|
Valuation
|
|
Range
of Value per Share
|
|
2015 Preferred
Stock Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31 2015
|
|
|
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued per Waiver and Conversion Agreement
|
|
|
|
|
|
|
13,056,932
|
|
|
|
44,393,469
|
|
|
|
$3.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
|
|
|
|
5,575,248
|
|
|
$
|
44,393,469
|
|
|
$
|
$3.40
|
|
|
In accordance
with the Company’s Convertible Notes Payable Preferred Option offering (Note 7 (C) ) 13,056,932 shares of 6% Preferred Stock.
The Preferred Stock will be convertible upon the election of the holder thereof. Shares of the Preferred Stock may be repurchased
by the Company upon 30 days’ prior written notice, in whole or in part, for USD $3.50 per share, provided that during such
notice period the holder will continue to have the option and right to convert its shares of Preferred Stock into shares of the
Company’s common stock. Holders will also have a put option, allowing them to sell their shares of Preferred Stock back
to the Company at USD $0.25 per share, the Note conversion price, and therefore the stock is classified as Mezzanine equity rather
than permanent equity The stock was valued based upon the value of Common Shares publicly traded nearest the conversion date.
During the year ended December 31, 2016, the Company distributed $30,966 to the Preferred Stock shareholders.
(C) Stock Options
The following is a summary of the Company’s stock
option activity:
|
|
|
|
|
|
Weighted
Average
|
|
Aggregate
|
|
|
|
|
Weighted
Average
|
|
Remaining
Contractual Life
|
|
Intrinsic
|
|
|
Options
|
|
Exercise
Price
|
|
(In
Years)
|
|
Value
|
Balance- December 31, 2014
|
|
|
200,000
|
|
|
|
0.375
|
|
|
|
2.18
|
|
|
$
|
324,829
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited/Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance- December 31, 2015
|
|
|
200,000
|
|
|
|
0.375
|
|
|
|
2.18
|
|
|
$
|
324,829
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Granted (1)
|
|
|
1,150,000
|
|
|
|
0.835
|
|
|
|
1.38
|
|
|
$
|
1,700,000
|
|
Forfeited/Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance- December 31, 2016
|
|
|
1,350,000
|
|
|
|
0.835
|
|
|
|
1.38
|
|
|
$
|
1,700,000
|
|
|
(1)
|
The
Company has issued options that have vested to purchase stock through our Incentive Plan.
Shares have not been reserved with our transfer agent, therefore, they are considered
“tainted”. The Company has determined that they should be accounted for at
fair value, as a derivative liability, see Note 8 for further details.
|
(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, 2014
|
9,728,984
|
|
|
0.375
|
2.2
|
Exercised
|
—
|
|
|
—
|
—
|
Cancelled/Forfeited
|
—
|
|
|
—
|
—
|
Balance, December 31, 2015
|
9,728,984
|
|
$
|
0.375
|
2.2
|
Issued
|
3,826,667
|
|
$
|
3.28
|
2.0
|
Exercised
|
—
|
|
|
—
|
—
|
Cancelled/Forfeited
|
—
|
|
|
—
|
—
|
Balance, December 31, 2016 (1)
|
13,555,651
|
|
$
|
1.20
|
2.5
|
|
(1)
|
The
Company identified conversion features embedded within warrants attached to stock purchases
in 2016. The Company has determined that the features associated with the embedded conversion
option, in the form a ratchet provision, should be accounted for at fair value, as a
derivative liability, as the Company cannot determine if a sufficient number of shares
would be available to settle all potential future conversion transactions. See Footnote
8 for further details.
|
During 2016, the Company issued warrants to four (4) different
groups totaling 3,826,667. These warrants had lives ranging from one to five years at strike prices between $3.0 and $3.50 per
share.
(E) 2015 Stock Incentive Plan
On April 27, 2015, the Board approved the Company’s
2015 Stock Incentive Plan (the “Incentive Plan”). Under the Incentive Plan, the Board has the sole authority to implement,
interpret, and/or administer the Incentive Plan unless the Board delegates all or any portion of its authority to implement, interpret,
and/or administer the Incentive Plan to a committee of the Board, or (ii) the authority to grant and administer awards under the
Incentive Plan to an officer of the Company. The Incentive Plan relates to the issuance of up to 5,000,000 shares of the Company’s
common stock, subject to adjustment, and shall be effective for ten (10) years, unless earlier terminated. Certain options to
be granted to employees under the Incentive Plan are intended to qualify as Incentive Stock Options (“ISOs”) pursuant
to Section 422 of the Internal Revenue Code of 1986, as amended, while other options granted under the Incentive Plan will be
nonqualified options not intended to qualify as Incentive Stock Options ISOs (“Nonqualified Options”), either or both
as provided in the agreements evidencing the options described.
The Incentive Plan further provides that awards granted
under the Incentive Plan cannot be exercised until a majority of the Company’s shareholders have approved the Incentive
Plan. The Incentive Plan which became effective July 31, 2016.
Note 14 Commitments
In January 2014, the Company executed a 39 month lease
for a corporate headquarters. The Company paid a security deposit of $27,020. The lease expires April, 2017
In October, 2014, the Company executed a 53 month lease
for a new corporate headquarters with a base rent of $97,266 escalating annually through 2019. The Company paid a security deposit
of $1,914.
In September, 2015 the Company amended the current lease
for a smaller space at the same terms.
In October, 2014, the Company entered into a sublease
agreement to sublease its previous office space through November 2016. In connection with the sublease, the Company collected
$34,981 as a security deposit.
The minimum rent obligations are approximately as follows:
|
|
Minimum
|
|
Sublease
|
|
Net
|
Year
|
|
Obligation
|
|
Rentals
|
|
Obligation
|
2017
|
|
44,463
|
|
-
|
|
44,463
|
2018
|
|
22,989
|
|
-
|
|
22,989
|
2019
|
|
7,872
|
|
-
|
|
7,872
|
Total
|
$
|
75,324
|
$
|
-
|
$
|
75,324
|
|
(B)
|
Employment Agreement – Chief Executive Officer
|
In November
2014, the Company entered into an employment agreement with its new Chief Executive Officer. In addition to salary, the agreement
provided for the issuance of 750,000 restricted shares of the Company’s common stock to him, which vested and were issued
as follows: 250,000 shares after the first 6 months of employment and 500,000 additional shares at December 31, 2015. Under terms
of the agreement the executive would receive additional compensation in the form of stock options to purchase shares of Company
stock equal to one half of one percent (0.5%) of quarterly net income. The strike price of the options will be established at
the time of the grant. The options will vest in twelve months and expire after sixty months. In addition to the stock options
compensation, the executive will receive cash compensation equal to one half of one percent (0.5%) of annual sales up to $20 million
and one quarter of one percent (0.25%) for annual sales $20 million and 3% of annual net income. These 750,000 shares were issued
in 2016 and valued at $0.625 per share.
On September 1, 2016, the Company entered into a new employment
agreement with Mr. Campi. The agreement provides for a base salary of $150,000; 120,000 shares of The Company’s common stock
in a “Sign on Bonus” which will vest December 31, 2017; 0.25% of annual gross sales and 3% of annual adjusted gross
income in cash compensation and 0.50% of quarterly net income in options, the strike price to be determined at the time of grant.
Such options will expire 5 years after issuance.
For the twelve months ended December 31, 2016 and 2015,
Mr. Campi earned approximately $31,600 and $14,400 respectively, under this agreement. No stock or options have been issued.
The Company
has a 3-year consulting agreement with a director which expires in November 2016, and carries an annual payment of $150,000 cash,
stock or 5 year options equal to one half of one percent (0.5%) of the Company’s annual net sales. For the twelve months
ended December 31, 2016 and 2015, Mr. Kohen earned approximately $35,400 and $14,400, respectively, under this agreement. No stock
or options have been issued.
On September
1, 2016, the Company modified the above agreement. The compensation was changed to $250,000 per annum, an annual grant of the
Company’s common stock of 340,000 shares which vest in its entirety January 1, 2019; Stock options equal to 0.50% of the
Company’s gross revenue with 5-year vesting. In addition, the Chairman was granted a “Sign on Bonus” of 120,000
shares of the Company’s common stock which will vest January 1, 2020 and a supplemental bonus of options which is tied to
the stock performance of the Company.
|
(D)
|
Employee Agreement - President
|
On August 17,
2016, the Company entered into an Employment Agreement with Mark Wells, its new President. Mr Wells receives a salary of $250,000;
1,025,000 shares in the Company’s common stock which will vest in its entirety January 1, 2019; 0.25% of the Company’s
net revenue and a “Sign on Bonus” of 120,000 shares of the Company’s common stock which vests January 1, 2017.
For the twelve months ended December 31, 2016, Mr. Wells earned $3,800 under his employment agreement and $10,000 in commissions
pursuant to the terms of a Consulting Agreement, dated June 1, 2015, between the Company and Mr. Wells, whereby Mr. Wells provided
independent sales consultant services.
|
(D)
|
Employment Agreement – Chief Operating Officer
|
Effective July 1, 2016, the Company entered into an Executive
Employment Agreement with Patricia Barron, its Chief Operations Officer. Ms. Barron receives a base salary of $120,000 per year
and incentive compensation equal to 0.25% of the Company’s net revenue paid in cash. For the twelve months ended December
31, 2016, Ms. Barron earned approximately $17,700 under this agreement.
Note 15 Subsequent Events
On March 24,
2017, the holder of our one-year Common Stock Purchase Warrant, issued on April 4, 2016, to purchase up to 1,666,667 shares of
our Common Stock at an exercise price of $3.00 per share, exercised such warrant in full upon tender of $5,000,000 in cash to
the Company.
From January
1, 2017 through March 31, 2017, in response to the August 2016 Election, (i) holders of two (2) outstanding Notes totaling a principal
balance of $100,000 elected to redeem their Notes, and the Company repaid the principal balance of such Notes in full, and (ii)
a holder of one (1) outstanding Note totaling a principal balance of $50,000 elected to convert the full principal balance of
its outstanding Note into Preferred Stock, and the Company thereafter issued 200,000 shares of Series A Preferred Stock to such
holder.