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SQL Technologies
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
LNGG Linn Energy 6,140
EEP Enbridge Energy Partners 3,569
CLSK Cleanspark 43
CBBT Cerebain Biotech 0
STSA Satsuma Pharmaceuticals 0
AEI20 AEI Net Lease Income & Growth Fund XX 0
FSLY Fastly 0
GSX GSX Techedu 0
RIGHT Right of Reply 0
CPKA Chase Packaging 0
SQFL 2018-09-30
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Note 1 Organization and Nature of Operations
Note 2 Summary of Significant Accounting Policies
Note 3 Furniture and Equipment
Note 4 Intangible Assets
Note 5 Ge Trademark License Agreement
Note 6 Deferred Lease Credits
Note 7 Notes Payable
Note 8 Convertible Debt
Note 9 Derivative Liabilities
Note 10 Ge Royalty Obligations
Note 11 Stockholders Deficit
Note 12 Commitments
Note 13 Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 5. Other Information
Item 6. Exhibits
EX-31.1 f2ssql10q102918ex31_1.htm
EX-31.2 f2ssql10q102918ex31_2.htm
EX-32.1 f2ssql10q102918ex32_1.htm
EX-32.2 f2ssql10q102918ex32_2.htm

SQL Technologies Earnings 2018-09-30

SQFL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 f2ssql10q102918.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 Washington, D.C. 20549

 

FORM 10-Q

 

[x]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

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 265, 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 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 whether the registrant has submitted electronically and posted on its corporate Web site, 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 registrant 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerate filer  [ ] Accelerated Filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Emerging growth company [X]    

  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As November 14, 2018, the issuer had 55,094,525 shares of common stock, no par value per share (“Common Stock”), issued and outstanding and 13,456,936 shares of Series A Convertible Preferred Stock, no par value per share (“Series A Preferred Stock”), issued and outstanding. 

 
 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION  
Item 1. Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24 
Item 3. Quantitative & Qualitative Disclosures about Market Risks 31 
Item 4. Controls and Procedures 31 
PART II OTHER INFORMATION  
Item 1. Legal Proceedings 32 
Item 1A. Risk Factors 32 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32 
Item 3. Defaults upon Senior Securities 32 
Item 5. Other Information 32 
Item 6. Exhibits 33 

 

Unless we have indicated otherwise, or the context otherwise requires, references in this Quarter Report on Form 10-Q to the “Company”, “we”, “us”, and “our” or similar terms are to “SQL Technologies Corp.”

 

 
 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

SQL TECHNOLOGIES CORP. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   (Unaudited)
September 30,
2018
  (Audited)
December 31, 2017
Assets          
           
Current assets:          
Cash and cash equivalents  $3,149,362   $4,877,720 
Accounts receivable   747,574    1,049,965 
Inventory   2,390,869    2,352,573 
Prepaid expenses   —      61,714 
Total current assets   6,287,805    8,341,972 
           
   Furniture and equipment, net   141,756    194,872 
Patent, net   222,223    204,412 
GE trademark license, net   298,265    1,640,466 
Other assets   40,934    40,934 
Total other assets   703,178    2,080,684 
           
Total assets  $6,990,983   $10,422,656 
           
Liabilities and Stockholders (Deficit)          
           
Current liabilities:          
Accounts payable & accrued expenses  $1,067,176   $1,364,446 
Notes payable, current portion   5,645,245    70,222 
Notes payable, related party   200,000    200,000 
GE royalty obligation   1,577,789    10,760,566 
Derivative liabilities   17,361,178    19,175,754 
Other current liabilities   32,561    42,332 
Total current liabilities   25,883,949    31,613,320 
           
Long term liabilities:          
GE royalty obligation   4,000,000      
Notes payable   —      3,456,732 
Total long-term liabilities   4,000,000    3,456,732 
           
Total liabilities   29,883,949    35,070,052 

  

 

1

 
 

  

Commitments and contingent liabilities:        
Redeemable preferred stock - subject to redemption: $0 par value; 20,000,000 shares authorized; 13,456,936 shares issued and outstanding at September 30, 2018 and December 31, 2017   45,753,569   45,753,569 
                 
Stockholders’ deficit:                
Common stock: $0 par value, 500,000,000 shares authorized; 53,714,900 and 53,174,900 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively.     19,201,387       17,581,387  
Common stock to be issued     300,000           
                 
Additional paid-in capital     89,084,385       80,103,806  
Accumulated deficit     (177,196,865)       (168,050,716 )
Total Stockholders’ deficit     (68,611,093)       (70,365,523 )
Noncontrolling interest     (35,442)       (35,442 )
Total Deficit     (68,646,535)       (70,400,965 )
Total liabilities, redeemable preferred stock, and stockholders’ deficit   $ 6,990,983     $ 10,422,656  

 

 

      The accompanying notes are an integral part of these condensed consolidated financial statements.    

 

2

 
 

 

SQL Technologies Corp. and Subsidiary 

Condensed Consolidated Statements of Operations

For the Three and Nine-Months Ended September 30, 2018 and 2017

(Unaudited)

 

   Three Months  Nine months
   September 30, 2018  September 30, 2017  September 30, 2018  September 30, 2017
             
Revenue  $1,011,811   $1,415,247   $6,412,712   $6,537,343 
Cost of Sales   (928,823)   (1,193,371)   (5,233,490)   (5,178,099)
Gross Profit   82,988    221,876    1,179,222    1,359,244 
Selling, general and administrative expenses   2,284,813    1,169,623    6,675,494    3,734,785 
Depreciation and amortization   469,699    632,770    1,408,992    1,866,323 
Total operating expenses   2,754,512    1,802,393    8,084,486    5,601,108 
Loss from Operations   (2,671,524)   (1,580,517)   (6,905,264)   (4,241,864)
Other Income / (Expense)                    
Interest expense   (114,638)   (74,294)   (296,361)   (216,592)
Derivative expenses   (1,159,551)   (663,033)   (2,968,805)   (2,922,061)
Change in fair value of embedded derivative liabilities   354,704    180,782    1,104,480    (12,834,488)
Loss on debt extinguishment - net   —      —      —      (1,260,000)
Gain on exchange   —      4,853    4,578    4,853 
Other income   4,295    4,541    12,877    13,371 
  Total other expense - net   (915,190)   (547,251)   (2,143,231)   (17,214,917)
                     
Net Income (loss) including noncontrolling interest   (3,586,714)   (2,127,768)   (9,048,495)   (21,456,781)
Less: net loss attributable to noncontrolling interest   —      —      —      —   
Net income (loss) attributed to SQL Technologies Corp.   (3,586,714)   (2,127,768)   (9,048,495)   (21,456,781)
                     
Net Income (Loss) per share - basic and diluted  $(0.068)  $(0.04)  $(0.171)  $(0.44)
                     
Weighted average number of common shares outstanding during the year-                    
basic and diluted   53,601,164    49,042,833    53,407,648    48,635,397 

  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.          

 

3

 
 

      

SQL Technologies Corp. and Subsidiary

Condensed Consolidated Statements of Cash Flows

Nine-months Ended September 30, 2018 and 2017

(Unaudited)

 

   Nine-Months  Nine-Months
   9/30/2018  9/30/2017
Cash flows from operating activities:          
Net income (loss) attributable to SQL Technologies  $(9,043,495)   (21,456,781)
Adjustments to reconcile net loss to net cash used in operating activities:   —        
Depreciation expense   53,116    34,943 
Provision for bad debts   —      18,995 
Amortization of patents   13,675    7,326 
Amortization of GE trademark license   1,342,201    1,824,081 
Change in fair value of derivative liabilities   (1,104,480)   12,834,488 
Derivative expense   2,968,805    2,922,061 
Loss on debt extinguishment   —      1,260,000 
Stock compensation - related parties   1,020,000      
Stock options issued for services - related parties   541,113      
Stock issued for services   900,000      
GE royalty reduction   4,760,567      
Change in operating assets and liabilities:          
Accounts receivable   302,391    (282,862)
Prepaid expenses   61,714    41,229)
Inventory   (38,296)   (423,566)
Royalty payable   (9,182,777)   (451,428)
Other   —      191,737 
Deferred rent   (9,771)   —   
Accounts payable & accrued expenses   (297,271)   253,377 
Net cash used in operating activities   (7,717,508)   (3,226,400)
Cash flows from investing activities:          
Purchase of property & equipment   —      (143,328)
Payment of patent costs   (31,486)   (48,765)
Net cash used in investing activities   (31,486)   (192,093)
Cash flows from financing activities:          
Repayments of convertible notes   —      (200,000)
Payments of contingent consideration        100,000 
Proceeds from note payable   2,188,513    2,443,996 
Preferred Dividends paid   (97,655)   (119,276)
Repayments of note payable   (70,222)   (1,938,048)
Proceeds from the exercise of options   —      78,000 
Proceeds from the exercise of warrants   —      5,000,000 
Proceeds from issuance of stock   —      287 ,000  
Increase of long term GE royalty obligation   4,000,000    —   
Net cash provided by financing activities   6,020,636    5,651,672 
Increase (Decrease) cash and cash equivalents   (1,728,358)   2,233,179 
Cash and cash equivalents at beginning of period   4,877,720    4,125,888 
Cash and cash equivalents at end of period  $3,149,362   $6,359,067 

Supplementary disclosure of non-cash financing activities:      
Reclassification of derivative liability to additional paid-in-capital  $—     $7,061,434 
Gain on debt extinguishment          
           
Supplementary disclosure of cash flow information          
Cash paid during the period for:          
Interest  $296,361   $214,266 

 

             The accompanying notes are an integral part of these condensed consolidated financial statements.    

 

4

 
 

   

   

 SQL TECHNOLOGIES CORP. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 ORGANIZATION AND NATURE OF OPERATIONS

 

SQL Technologies Corp. (f/k/a Safety Quick Lighting & Fans Corp.), a Florida corporation (the “Company”), was originally organized in May 2004 as a limited liability company under the name of Safety Quick Light, LLC. The Company was converted to corporation on November 6, 2012. Effective August 12, 2016, the Company changed its name from “Safety Quick Lighting & Fans Corp.” to “SQL Technologies Corp.” The Company holds a number of worldwide patents and has received a variety of final electrical code approvals, including UL Listing and CSA approval (for the United States and Canadian Markets), the CE Marking (for the European market) and, in December 2016, was approved by the National Fire Protection Association for inclusion in the NFPA 70: National Electrical Code (NEC). The Company maintains offices in Georgia, Florida and in Foshan, Peoples Republic of China.

 

The Company is engaged in the business of developing proprietary technology that enables a quick and safe installation of electrical fixtures, such as ceiling fans and light fixtures, using a power plug installed in ceiling and wall electrical junction boxes. The Company’s base technology consists of a weight bearing, fixable socket and a revolving plug for conducting electric power and supporting an electrical appliance attached to a wall or ceiling. The socket is comprised of an electric power supply that is connected to the electrical junction box. The plug, which is incorporated in an electrical appliance, attaches to the socket via a male post and is capable of feeding electric power to the appliance. The plug includes a second structural element allowing it to revolve and a releasable latching that provides a retention force between the socket and the plug to prevent unintentional disengagement. The socket and plug can be detached by releasing the latch, thereby disengaging the electric power from the plug. The socket is designed to replace the support bar incorporated in electric junction boxes, and the plug can be installed in light fixtures, ceiling fans and wall sconce fixtures. The use of the Company’s technology enables the installation and replacement of ceiling fans and lights and wall sconces in a fraction of the time of similar, conventional appliances.

 

The Company currently markets consumer friendly, energy saving “plugin” ceiling fans and light fixtures under the General Electric Company (“GE” or “General Electric”) brand as well as “conventional” ceiling lights and fans carrying the GE brand. The Company also owns 98.8% of SQL Lighting& Fans LLC (the “Subsidiary”). The Subsidiary was formed in Florida on April 27, 2011 and is in the business of manufacturing the patented device that the Company owns. The Subsidiary had no activity during the periods presented.

 

The Company’s fiscal year end is December 31.

 

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The following is a summary of the Company’s significant accounting policies:

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) under the accrual basis of accounting.

  

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of SQL Technologies Corp. (f/k/a Safety Quick Lighting & Fans Corp.) and the Subsidiary, SQL Lighting & Fans LLC. All intercompany accounts and transactions have been eliminated in consolidation.

 

Non-controlling Interest

 

In May 2012, in connection with the sale of the Company’s membership units in the Subsidiary, the Company’s ownership percentage in the Subsidiary decreased from 98.8% to 94.35%. The Company then reacquired these membership units in September 2013, increasing the ownership percentage from 94.35% back to 98.8%. During year ended 2017 and 2016, there was no activity in the Subsidiary.

 

5

 
 

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

 

Such estimates and assumptions impact both assets and liabilities, including but not limited to: net realizable value of accounts receivable and inventory, estimated useful lives and potential impairment of property and equipment, the valuation of intangible assets, estimate of fair value of share based payments and derivative liabilities, estimates of fair value of warrants issued and recorded as debt discount, estimates of tax liabilities and estimates of the probability and potential magnitude of contingent liabilities.

 

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future nonconforming events. Accordingly, actual results could differ significantly from estimates.

 

Reclassifications

 

For comparability, reclassifications of certain prior-year balances were made in order to confirm with current-year presentations.

 

Risks and Uncertainties

 

The Company’s operations are subject to risk and uncertainties including financial, operational, regulatory and other risks including the potential risk of business failure.

 

The Company has experienced, and in the future, expects to continue to experience, variability in its sales and earnings. The factors expected to contribute to this variability include, among others, (i) the uncertainty associated with the commercialization and ultimate success of the product, (ii) competition inherent at large national retail chains where product is expected to be sold (iii) general economic conditions and (iv) the related volatility of prices pertaining to the cost of sales.

 

Cash and Cash Equivalents

 

Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions, and all highly liquid investments with an original maturity of three months or less. The Company had $3,149,362 and $4,877,720 in cash and cash equivalents as of September 30, 2018, and December 31, 2017, respectively. The Company has deposits in financial institutions which exceeds the amount insured by the FDIC. The amount of uninsured deposits was $2,649,362 at September 30, 2018.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts.

 

The Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future bad debts, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible.

 

 

6

 
 

The Company’s net balance of accounts receivable at September 30, 2018 and December 31, 2017:

 

   (Unaudited)
September 30,
2018
  (Audited)
December 31, 2017
       
 Accounts Receivable  $747,574   $1,049,965 
 Allowance for Doubtful Accounts   —      —   
 Net Accounts Receivable  $747,574   $1,049,965 

 

All amounts are deemed collectible at September 30, 2018 and December 31, 2017 and accordingly, the Company has not incurred any bad debt expense at September 30, 2018 and December 31, 2017.

 

Inventory

 

Inventories are stated at the lower of cost, determined on the first-in, first-out (FIFO) method. Cost principally consists of the purchase price (adjusted for lower of cost or market), customs, duties, and freight. The Company periodically reviews historical sales activity to determine potentially obsolete items and evaluates the impact of any anticipated changes in future demand.

 

   (Unaudited)
September 30,
2018
  (Audited)
December 31, 2017
       
Inventory finished goods  $1,471,761   $1,887,034 
Inventory, component parts   919,109    465,539 
 Total inventory  $2,390,869   $2,352,573 

 

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 September 30, 2018, and December 31, 2017, the Company has determined that no allowance is required.

 

Valuation of Long-lived Assets and Identifiable Intangible Assets

 

The Company reviews for impairment of long-lived assets and certain identifiable intangible assets whenever events or changes in circumstances indicate that the carrying amount of any asset may not be recoverable. In the event of impairment, the asset is written down to its fair market value. The Company determined an impairment adjustment of $600,000 was necessary for the year ended 2017.

 

Property and Equipment

 

Property and equipment is stated at cost, less accumulated depreciation, and is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

 

Depreciation of property and equipment is provided utilizing the straight-line method over the estimated useful lives, ranging from 5 to 7 years of the respective assets. Expenditures for maintenance and repairs are charged to expense as incurred.

 

Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the statements of operations.

 

Intangible Asset Patent

 

The Company developed various patents for an installation device used in light fixtures and ceiling fans. Costs incurred for submitting the applications to the United States Patent and Trademark Office for these patents have been capitalized. Patent costs are being amortized using the straight-line method over the related 15-year lives. The Company begins amortizing patent costs once a filing receipt is received stating the patent serial number and filing date from the Patent Office.

 

The Company incurs certain legal and related costs in connection with patent applications. The Company capitalizes such costs to be amortized over the expected life of the patent to the extent that an economic benefit is anticipated from the resulting patent or alternative future use is available to the Company. The Company also capitalizes legal costs incurred in the defense of the Company’s patents when it is believed that the future economic benefit of the patent will be maintained or increased, and a successful defense is probable. Capitalized patent defense costs are amortized over the remaining expected life of the related patent. The Company’s assessment of future economic benefit or a successful defense of its patents involves considerable management judgment, and an unfavorable outcome of litigation could result in a material impairment charge up to the carrying value of these assets.

 

 

7

 
 

GE Trademark License Agreement

 

The Company entered into a Trademark License Agreement with General Electric on June 15, 2011, as amended on April 17, 2013, August 13, 2014 and September 25, 2018 (collectively, the “License Agreement”), allowing the Company to utilize the “GE trademark” on products which meet the stringent manufacturing and quality requirements of General Electric. As described further in Note 10, the Company is required to pay a minimum trademark licensing fee to General Electric. As of December 31, 2017, the Initial Royalty Obligation was $12,000,000, to be paid in full by November 30, 2018. However, by amendment of the License Agreement on September 25, 2018, the balance of the Initial Royalty Obligation was waived. In consideration, the Company agreed to pay $2,000,000 each year in 2018, 2019 and 2020 (the Minimum Payments”) for a total of $6,000,000. The Minimum Payments will be offset against quarterly royalty payments based on a percent of sales. Under SFAS 142 “Accounting for Certain Intangible Assets” the Company has recorded the value of the License Agreement and will amortize it over the life of the License Agreement, which is 60 months. The Company determined an impairment adjustment of $600,000 was necessary for the year ended 2017.

 

Fair Value of Financial Instruments

 

The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.

 

The following are the hierarchical levels of inputs to measure fair value:

 

  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. 

 

The Company changed its method to estimate the valuation of valuation for fair market values of derivatives in 2017 to a lattice-binomial option-pricing model (“lattice-binomial model”) from the Black-Scholes option-pricing model (“Black-Scholes model”) which was previously used under SFAS 123 and are reflected on our condensed consolidated statement of operations as other (income) expense at each reporting period. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. However, such new and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation of derivatives often incorporate significant estimates and assumptions, which may impact the level of precision in the financial statements. Furthermore, depending on the terms of a derivative or embedded derivative, the valuation of derivatives may be removed from the financial statements upon conversion of the underlying instrument into some other security. The change in valuation methodology for accounting estimates had no material impact on the Company’s previous calculations.

 

 

8

 
 

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.

 

The Company has reserved for issuance 26,751,860 shares of Common stock associated with conversion features on Series A Preferred Stock, warrants and options. These shares have been reserved for issuance by the Company’s stock transfer agent, and accordingly, no derivative liability has been calculated on these shares.

 

Beneficial Conversion Feature

 

For conventional convertible debt where the rate of conversion is below market value, the Company records a “beneficial conversion feature” (“BCF”) and related debt discount.

 

When the Company records a BCF, the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument (offset to additional paid in capital) and amortized to interest expense over the life of the debt.

 

Debt Issue Costs and Debt Discount

 

The Company may record debt issue costs and/or debt discounts in connection with raising funds through the issuance of debt. These costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.

 

Original Issue Discount

 

For certain convertible debt issued, the Company may provide the debt holder with an original issue discount. The original issue discount would be recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the life of the debt.

 

Extinguishments of Liabilities

 

The Company accounts for extinguishments of liabilities in accordance with ASC 86010 (formerly SFAS 140) “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”. When the conditions are met for extinguishment accounting, the liabilities are derecognized and the gain or loss on the sale is recognized.

 

Stock Based Compensation – Employees

 

The Company accounts for its stock-based compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.

 

The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.

 

If the Company is a newly formed corporation or shares of the Company are thinly traded, the use of share prices established in the Company’s most recent private placement memorandum (based on sales to third parties), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

 

The fair value of share options and similar instruments is estimated on the date of grant using a lattice-binomial option pricing valuation model. The ranges of assumptions for inputs are as follows:

 

  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.
 

9

 
 

 

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 – Nonemployees

 

Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services

The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of Subtopic 505-50 of the FASB Accounting Standards Codification (“Subtopic 505-50”).

 

Pursuant to ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur. If the Company is a newly formed corporation or shares of the Company are thinly traded the use of share prices established in the Company’s most recent private placement memorandum, or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

 

The fair value of share options and similar instruments is estimated on the date of grant using a Black-Scholes option pricing valuation model. The ranges of assumptions for inputs are as follows:

 

  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.

 

 

10

 
 

Pursuant to ASC paragraph 505-50-257, if fully vested, no forfeitable equity instruments are issued at the date the grantor and grantee enter into an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments), then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement is entered into). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized as contra equity under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances. Pursuant to ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return for fully vested, non-forfeitable equity instruments that are issued at the date the grantor and grantee enter into an agreement for goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra equity by the grantor of the equity instruments.

 

The transferability (or lack thereof) of the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited to transactions in which equity instruments are transferred to other than employees in exchange for goods or services. Section 505-50-30 provides guidance on the determination of the measurement date for transactions that are within the scope of this Subtopic.

 

Pursuant to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a share option and similar instrument that the counterparty has the right to exercise expires unexercised.

 

Pursuant to ASC paragraph 505-50-30-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should be recorded.

  

Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services

The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of Sub-topic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).

 

Pursuant to ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur. If the Company is a newly formed corporation or shares of the Company are thinly traded the use of share prices established in the Company’s most recent private placement memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

 

The fair value of share options and similar instruments is estimated on the date of grant using a lattice-binomial option-pricing valuation model. The ranges of assumptions for inputs are as follows:

 

  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.
 

11

 
 
  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 505-50-25-7, if fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee enter into an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments), then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement is entered into). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized as contra-equity under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances. Pursuant to ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return for fully vested, non-forfeitable equity instruments that are issued at the date the grantor and grantee enter into an agreement for goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra-equity by the grantor of the equity instruments.

 

The transferability (or lack thereof) of the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited to transactions in which equity instruments are transferred to other than employees in exchange for goods or services. Section 505-50-30 provides guidance on the determination of the measurement date for transactions that are within the scope of this Subtopic.

 

Revenue Recognition

 

The Company derives revenues from the sale of GE branded fans and lighting fixtures to large retailers through retail and online sales.

 

Sales are recognized at the time title transfers to the customer, generally upon shipment and when all the following have occurred: (1) persuasive evidence of an arrangement exists, (2) asset is transferred to the customer without further obligation, (3) the sales price to the customer is fixed or determinable, and (4) collectability is reasonably assured.

 

Trade allowances and a provision for estimated returns and other allowances are recorded at the time sales are made, considering historical and anticipated trends.

 

On January 1, 2017, we adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) to all contracts using the modified retrospective method, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. The adoption has had an immaterial impact to our comparative net income and as such comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We expect the impact of the adoption of the new standard to be immaterial to our net income on an ongoing basis.

 

A majority of our sales revenue continues to be recognized when products are shipped from our manufacturing facilities and from our third-party logistics facility.

 

Cost of Sales

 

Cost of sales represents costs directly related to produce, acquire and source inventory for sale, and provisions for inventory shrinkage and obsolescence. These costs include costs of purchased products, inbound freight, custom duties.

  

Shipping and Handling Cost

 

Costs incurred by the Company to deliver finished goods are expensed and recorded in selling, general and administrative expenses.

 

Selling, general and administrative expenses include employee and related costs, stock compensation, marketing, professional fees, distribution, warehouse costs, and other related selling costs. Stock compensation expense consists of non-cash charges resulting from the issuance of stock units and stock options. Selling expenses include costs incurred in the selling of merchandise. General and administrative expenses include costs incurred in the administration or general operations of the business.

 

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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 stocks, 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 nine-months ended September 30, 2018 and 2017, the Company reflected net loss and a dilutive net loss, and the effect of considering any common stock equivalents would have been antidilutive for the period. Therefore, separate computation of diluted earnings (loss) per share is not presented for the periods presented.

 

The Company has the following Common Stock equivalents at September 30, 2018 and December 31, 2017:

 

   

(Unaudited)

September 30, 2018

 

(Audited)

December 31, 2017

Stock Warrants (Exercise price - $0.375 - $3.50/share)   7,703,174     8,419,924  
Stock Options (Exercise price $0.375 - $5.00/share)   7,075,000     4,875,000  
      Total   14,778,174     13,294,924  

       

Related Parties

 

The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.

 

Pursuant to Section 850-10-20 the related parties include (a) Affiliates of the Company; (b) Entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; (c) Trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; (d) Principal owners of the Company; (e) Management of the Company; (f) Other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g) Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

 

The consolidated financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: (a). the nature of the relationship(s) involved; (b). a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c). the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and (d). amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

  

Contingencies

 

The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

 

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Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, consolidated financial position, and consolidated results of operations or consolidated cash flows.

 

Subsequent Events

 

The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements are issued.

 

Pursuant to ASU 201009 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.

 

Recently Issued Accounting Pronouncements

 

On January 1, 2017 We adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) to all contracts using the modified retrospective method, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows. We expect the impact of the adoption of the new standard to be immaterial to our net income on an ongoing basis. 

 

In August 2017, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 expands component and fair value hedging, specifies the presentation of the effects of hedging instruments, and eliminates the separate measurement and presentation of hedge ineffectiveness. We are currently evaluating the impact of adopting this guidance. We do not expect adoption of this guidance to have a material impact on our financial position, results of operations or cash flows.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows. The Company will adopt ASU 2016-18 in its first quarter of 2019. We do not expect adoption of this guidance to have a material impact on our financial position, results of operations or cash flows.

 

In March 2016, the FASB issued ASU 2016-09, Stock Compensation, which is intended to simplify the accounting for share-based payment award transactions. The new standard will modify several aspects of the accounting and reporting for employee share-based payments and related tax accounting impacts, including the presentation in the statements of operations and cash flows of certain tax benefits or deficiencies and employee tax withholdings, as well as the accounting for award forfeitures over the vesting period. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within that year, and will be adopted by the Company in the first quarter of fiscal 2017. The Company anticipates the new standard will result in an increase in the number of shares used in the calculation of diluted earnings per share and will add volatility to the Company’s effective tax rate and income tax expense. The magnitude of such impacts will depend in part on whether significant employee stock option exercises occur.

  

In March 2016, the FASB issued an accounting standard update which simplifies the accounting for share-based payment transactions, inclusive of income tax accounting and disclosure considerations. This guidance is effective for fiscal and interim periods beginning after December 15, 2016 and is required to be applied retrospectively to all impacted share-based payment arrangements. We adopted this guidance on January 1, 2017. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

 

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-01, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. We are currently evaluating the impact of adopting this guidance.

 

In February 2016, the FASB issued an accounting standard update which modifies the accounting for leasing arrangements, particularly those arrangements classified as operating leases. This update will require entities to recognize the assets and liabilities arising from operating leases on the balance sheet. This guidance is effective for fiscal and interim periods beginning after December 15, 2018 and is required to be applied retrospectively to all leasing arrangements. We are currently assessing the effects this guidance may have on our financial statements. Based on the lease portfolio as of September 30, 2018, we do not expect the Company to have a material impact on its consolidated financial statements.

 

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In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”). The standard clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Under ASU 2017-01, to be considered a business, the assets in the transaction need to include an input and a substantive process that together significantly contribute to the ability to create outputs. Prior to the adoption of the new guidance, an acquisition or disposition would be considered a business if there were inputs, as well as processes that when applied to those inputs had the ability to create outputs. Early adoption is permitted for certain transactions. Adoption of ASU 2017-01 may have a material impact on our consolidated financial statements if we enter into future business combinations.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not anticipate the adoption of ASU 2017-04 will have a material impact on our consolidated financial statements.

  

NOTE 3 FURNITURE AND EQUIPMENT

 

Furniture, fixtures, and equipment consisted of the following:

 

   (Unaudited)
September 30,
  (Audited)
December 31,
   2018  2017
Machinery and equipment  $31,456   $31,456 
Computer equipment   6,846    6,846 
Furniture and fixtures   36,059    36,059 
Tooling and production   207,016    207,016 
Leasehold improvements   30,553    30,553 
Total   311,930    311,930 
Less: accumulated depreciation   (170,174)   (117,058)
Total, net  $141,756   $194,872 

 

Depreciation expense amounted to $17,705 and $53,116 for the three and nine-months ended September 30, 2018, respectively; and $19,539 and $34,943 for the three-months and nine-months ended September 30, 2017, respectively. 

 

NOTE 4 INTANGIBLE ASSETS

 

Intangible assets (patents) consisted of the following:

 

   (Unaudited)
September 30,
2018
  (Audited)
December 31, 2017
       
Patents  $275,868   $244,382 
Less: Impairment Charges   —      —   
Less: accumulated amortization   (53,645)   (39,970)
Total, net  $222,223   $204,412 

 

Amortization expense associated with patents amounted to $4,594 and $13,675 for the three and nine-months ended September 30, 2018, respectively; and $2,221 and $7,326 for the three and nine-months ended September 30, 2017, respectively.

 

Assuming no impairment, the following table sets forth the estimated amortization expense for future periods based on recorded amounts as at September 30, 2018:  

  

Year Ending December 31    
  2018     $ 4,594  
  2019       18,375  
  2020       18,375  
  2021       18,375  
  2022       18,375  
  2023 and Thereafter       144,129  
  Total      $ 222,223  

  

Actual amortization expense in future periods could differ from these estimates as a result of future acquisitions, divestitures, impairments and other factors.

 

 

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NOTE 5 GE TRADEMARK LICENSE AGREEMENT

 

The License Agreement with General Electric is amortized through its expiration in November 2018, as follows:

 

   (Unaudited)
September 30,
2018
  (Audited)
December 31, 2017
GE Trademark License  $12,000,000   $12,000,000 
Less: Impairment charges       (600,000)
Less: accumulated amortization   (11,701,735)   (9,759,534)
Total, net  $298,265   $1,640,466 

 

Amortization expense associated with the License Agreement amounted to $447,400 and $1,342,201 for the three and nine-months ended September 30, 2018, respectively; and $611,037 and $1,824,081 for the three and nine-months ended 2017, respectively. The Company determined an impairment adjustment of $600,000 was necessary for the year ended 2017.

 

Assuming no impairment, the following table sets forth the estimated amortization expense for future periods based on recorded amounts as at September 30, 2018:

 

Year Ending December 31
  2018     $ 298,265  
  Thereafter          
  Total      $ 298,265  

 

NOTE 6 DEFERRED LEASE CREDITS

 

Cash or rent abatements received upon entering certain office leases are recognized on a straight-line basis as a reduction to rent expense over the lease term. The unamortized portion is included in Deferred Lease Credits, which are included in other current liabilities. As of September 30, 2018, and December 31, 2017 the deferred credits were $32,561 and $42,332, respectively. Deferred Rent amortization was $3,069 and $6,139 for the three and nine-months ended September 30, 2018, respectively; and $3,875 and $(16,673) for the three and nine-months ended September 30, 2017, respectively.

 

NOTE 7 NOTES PAYABLE

 

At September 30, 2018 and December 31, 2017, the Company had a note payable to a bank in the amount of $0.00 and $70,222, respectively. The note bore interest at prime plus 1.5% and matured on August 28, 2018. The note was secured by the assets of the Company and personal guarantees by a shareholder and an officer of the Company and was fully paid at the maturity date

 

On April 13, 2016, the Company entered into a Line of Credit Promissory Note with a third party (the “Line of Credit”), as amended and extended, in the principal sum of up to ten million U.S. Dollars (US $10,000,000) to support purchase orders, inventory and general working capital needs. The Company may draw and/or repay this Line of Credit from time to time until the maturity hereof. The Line of Credit provides for monthly payments of interest at nine percent (9%) per annum on outstanding principal and matures on January 10, 2019, at which time the full principal amount and accrued but unpaid interest become due.

 

The Line of Credit is secured by the assets of the Company. As of September 30, 2018, and December 31, 2017, the outstanding balance on this note was $5,645,245 and $3,456,732, respectively.

 

The Company received a $500,000 loan from a related party in January 2016. The note is on demand and carries interest of 12%. As of September 30, 2018, the outstanding balance is $200,000.

 

Principal payments due under the terms of the notes described above are as follows:

 

Principal Due in Next 12 months    
  2018     $ 200,000  
  2019       5,645,245  
        $ 5,845,245  

   

 

16

 
 

NOTE 8 CONVERTIBLE DEBT

 

The Company has recorded derivative liabilities associated with convertible debt instruments, as more fully discussed at Note 9.

 

    Third Party   Related Party   Totals
Balance December 31, 2015   $ 3,989,950     $ 50,000     $ 4,039,950  
Add: Amortization of Debt Discount     474,283       0       474,283  
Less Repayments/Conversions     (4,314,233 )     —         —    
Balance December 31, 2016     150,000       50,000       200,000  
Add: Amortization of Debt Discount     —         —         —    
Less Repayments/Conversions     (150,000 )     (50,000 )     (200,000 )
Balance December 31, 2017   $ —       $ —       $ —    
                         

On November 26, 2013, May 8, 2014 and June 25, 2014 the Company completed closings in connection with its offering (the “Notes Offering”) of its 12% and 15% Secured Convertible Promissory Notes in the aggregate principal amount of $4,270,100 (the “Notes”), with certain accredited investors, as defined under Regulation D, Rule 501 of the Securities Act of 1933, as amended. Pursuant to the Notes Offering, each Investor also received five (5) year common stock warrants to purchase the Company’s Common Stock at $0.375 per share (each a “Warrant” and collectively, the “Warrants”). The Notes and Warrants were treated as derivative liabilities.

 

In May 2016, the Company invited the holders of all Notes, where such holders had not already made an election to redeem or convert their Notes, to forbear or extend their forbearance period to make an election to convert or redeem their Notes (the “August 2016 Election”). This also provided a third option to all noteholders (the “Preferred Option”), whereby such holders could convert their respective Note(s) into shares of Series A Convertible Preferred Stock (“Preferred Stock”). Pursuant to the August 2016 Election, the Company issued 13,456,936 shares of Preferred Stock, representing $3,364,234 in outstanding Note principal balance.

 

All Notes have either been re-paid in cash, separate debt obligation or by conversion, and all Notes have been terminated.

 

(A)       Terms of Debt

 

The Note debt carried interest between 12% and 15%, and became due in November 2015, May 2016 and September 2016, as extended to July 31, 2016 pursuant to certain forbearance agreements. All Notes issued in connection with the Notes Offering were convertible at $0.25, but are now terminated, and all Warrants issued in connection with the Notes Offering are convertible at $0.375 per share, subject to the existence of a “ratchet feature”, which allows for a lower offering price if the Company offers shares to the public at a lower price.

 

(B)        Offer to Convert Debt to Preferred Shares

 

For those holders electing the Preferred Option, each holder has received shares of the Preferred Stock on a 1 to 1 ratio to the number of shares of Common Stock which are then convertible under such holder’s respective Note. With respect to interest on junior securities, dividends, distributions or liquidation preference, shares of Preferred Stock will rank senior to shares of Common Stock or other junior securities. Along with other terms customary for a class of convertible preferred stock, the Preferred Stock will be convertible into shares of Common Stock at the same conversion price as the Notes (i.e., USD $0.25 per share), and will pay interest quarterly at a rate of six percent (6%). The Preferred Stock will be convertible upon the election of the holder thereof. Shares of the Preferred Stock may be repurchased by the Company upon 30 days’ prior written notice, in whole or in part, for USD $3.50 per share, provided that during such notice period the holder will continue to have the option and right to convert its shares of Preferred Stock into shares of Common Stock. Holders will also have a put option, during such notice period, allowing them to sell their shares of Preferred Stock back to the Company at USD $0.25 per share, the Note conversion price.

 

Each holder electing the Preferred Option was required to enter into an amendment to its Note, providing that the Note will be convertible into the Preferred Stock rather than Common Stock, and to thereafter elect to convert their Note, as amended, into Preferred Stock. In addition, each holder entered into a lockup agreement, whereby the holder agreed not to offer, sell, contract to sell, pledge, give, donate, transfer or otherwise dispose of (i) the shares of Common Stock it then holds, (ii) the shares of Preferred Stock obtained upon conversion of its Note, and (iii) the shares of Common Stock underlying the Preferred Stock, for a period of twelve (12) months following the date of such agreement. The Note amendments, conversion to Preferred Stock and lockup agreement have been entered into on August 15, 2016. The Note amendments were approved by a majority of the holders of the then outstanding Notes.

 

 

17

 
 

NOTE 9 DERIVATIVE LIABILITIES

 

The fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions as:

 

   (Unaudited)
September 30,
2018
  (Audited)
December 31, 2017
Balance Beginning of period  $19,175,754   $24,083,314 
Reclassification of derivative liabilities to additional paid in capital related to warrants exercised that ceased being a derivative liability   (1,883,844)   (13,229,681)
Fair value at the commitment date for options granted   2,968,805    2,036,621 
Fair value mark to market adjustment - stock options   (108,464)   12,376,571 
Fair value mark to market adjustment – warrants   (996,014)     
Reclassification of derivative liability to Additional Paid in Capital due to share reservation        (6,091,070)
Balance at end of period  $17,361,180   $19,175,754 

 

The Company recorded a change in the value of embedded derivative liabilities income/ (expense) of $1,104,480 and ($12,834,488) for the nine-months ended September 30, 2018 and 2017, respectively. 

 

The Company recorded derivative expense of ($2,968,805) and ($2,922,061) for the nine-months ended September 30, 2018 and 2017, respectively.

 

    Commitment Date     Recommitment Date  
Expected dividends     0%       0%  
Expected volatility     150%       150%  
Expected term     0.90 – 9.56 years       0.16 – 8.56 years  
Risk Free Interest Rate     0.76%-2.40%       2.23%-3.09%  

 

NOTE 10 GE ROYALTY OBLIGATIONS

 

On June 15, 2011, the Company entered into the License Agreement with General Electric, pursuant to which the Company has the right to market certain ceiling light and fan fixtures displaying the GE brand. The Company and GE subsequently amended the License Agreement on April 17, 2013, August 13, 2014 and on September 25, 2018. 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 to the License Agreement; however, none were applicable as of September 30, 2018 and December 31, 2017.

 

On August 13, 2014, the Company entered into a second amendment to the License Agreement pertaining to its royalty obligations and having a term ending on November 20, 2018. Under the terms of the amendment, the Company agreed to pay to General Electric a minimum trademark license fee of $12,000,000 by November 30, 2018 (the “Initial Royalty Obligation”) for the rights assigned in the original contract. The amendment provided that, if the Company did not pay to GE royalties equal to the Initial Royalty Obligation over the term of the License Agreement, the Company would owe the difference to GE in December 2018.

 

The Company is expanding its relationship with GE to collaborate on mutual capabilities, and in September 2018, the Company entered into a third amendment to the License Agreement, expanding its product range, including smart, and adding additional global territory rights. The License Agreement was extended for an additional five years and expires on November 30, 2023. The approximate remaining $10,000,000 Initial Royalty Obligation that was due on November 30, 2018 was waived by the amendment. In consideration, the Company agreed to pay $2,000,000 each year in 2018, 2019 and 2020 (the “Minimum Payments”) for a total of $6,000,000. The Minimum Payments will be offset against the royalty payments made to GE during the respective year, as set forth below.

 

Royalty payments are due quarterly, based upon the prior quarters’ sales. Royalty payments will be paid from sales of GE branded product subject to the following repayment schedule:

 

Net Sales in Contract Year Percentage of Contract Year Net Sales owed to GE
$0 to $50,000,000 7%
$50,000,001 to $100,000,000 6%
$100,000,000+ 5%

 

The Company made payments of $55,625 and $422,211 for the three and nine-months ended September 30, 2018, respectively; and payments of $218,933 and $356,017 for the three and nine-months ended September 30, 2017, respectively.

 

As of September 30, 2018, the outstanding balance of the aggregate Minimum Payment was $5,577,789. As of December 31, 2017, the outstanding balance of the Initial Royalty Obligation was $10,760,566.

 

18

 
 

NOTE 11 STOCKHOLDERS DEFICIT

 

(A)       Common Stock

 

For the nine-months ended September 30, 2018 and year ended December 31, 2017, the Company issued the following Common Stock:

 

Transaction Type         Quantity
(shares)
    Valuation
($)
    Range of Value
Per Share
 
                                 
2017 Equity Transactions                                
Common Stock Offering     (1)       69,667     $ 209,000       3.00  
                                 
Common Stock Issued per Exercise of Warrants     (2)       1,666,667       5,000,000       3.00  
                                 
Common Stock Issued per Exercise of Options     (3)       30,000       78,000       2.60  
                                 
Common Stock Issued for the cashless exercise of Warrants     (4)       4,132,068       0       0.0  
                                 
Total 2017 Equity Transactions             5,898,402     $ 5,287,000     $ 2.60-3.00  
                                 
Common Stock Issued per Employee Agreement     (5)       240,000       720,000       3.00  
                                 
Common Stock issued Per Agreement     (6)       300,000       900,000       3.00  
                                 
Total 2018 Equity Transactions             540,000     $ 1,620,000     $ 3.00  

 

The following is a more detailed description of the Company’s stock issuance from the table above:

 

(1)       Shares Issued for Common Stock

 

During the nine-months ended September 30, 2017, the Company received gross proceeds of $209,000 from the sale of 69,667 shares of its Common Stock at $3.00 per share to three new Company employees. In connection therewith, the Company issued five-year options to purchase up to 315,000 shares of Common Stock at an exercise price of $3.00 per share.

 

(2)       Shares Issued Pursuant to Warrants Exercised

 

In March 2017, the Company issued 1,666,667 shares of Common Stock upon exercise in full of a warrant having an exercise price of $3.00 per share, and the Company received gross proceeds of $5,000,000.

 

(3)       Shares Issued Pursuant to Options Exercised

 

In April 2017, the Company issued 30,000 shares of Common Stock upon exercise in full of an option having an exercise price of $2.60 per share, and the Company received gross proceeds of $78,000.

 

(4)       Common Stock Issued for the cashless Exercise of Warrants

 

In November 2017, the Company issued 4,132,068 shares of Common Stock upon the cashless exercise of Warrants.

 

(5)       Common Stock Issued pursuant to Employment Agreements

 

In March 2018, the Company issued 240,000 shares of Common Stock, with a total fair market value of $720,000, to each of Mr. Campi and Mr. Wells, which vested pursuant to their respective employment agreements.

 

 

19

 
 

(6)       Common Stock Issued in Connection with Agreements

 

In June 2018, the Company issued 150,000 shares of Common Stock, with a total fair market value of $450,000, to a financial institution in exchange of extending the revolving Line of Credit.

 

In September 2018, the Company issued another 150,000 shares of Common Stock, with a total fair market value of $450,000, to a financial institution in exchange of extending the revolving line of credit.

 

(B)       Common Stock and Options to be Issued

 

For the nine-months ended September 30, 2018, the Company had not yet issued 100,000 shares of Common Stock in connection with a stock award agreement issued pursuant to the 2018 Plan. The issuance was related to stock compensation to an employee of the Company.

 

Also, on or about May 14, 2018, the Company granted non-qualified stock options to purchase up to 600,000 shares of Common Stock under the 2018 Plan at $5.00 per share, to a consultant performing capital fundraising activities for the Company. Pursuant to such grant, options to purchase up to 100,000 of such shares of Common Stock vested on or prior to the date of the grant, with the remaining shares to vest upon the closing of an equity transaction by said consultant in amounts determined based on the size of such equity transaction. The Company has not yet executed a stock option agreement

 

(C)       Preferred Stock

 

The following is a summary of the Company’s Preferred Stock activity:

 

Transaction Type   Quantity     Valuation     Range of
Value per
Share
 
                   
2016 Preferred Stock Transactions
                   
Preferred Stock Issued per August 2016 Election     13,056,936     $ 44,393,569     $ 3.40  
                         
Total 2016 Preferred Stock Transactions     13,056,936     $ 44,393,569     $ 3.40  
                         
2017 Preferred Stock Transactions                        
                         
Preferred Stock Issued per August 2016 Election     400,000     $ 1,360,000     $ 3.40  
                         
Total 2017 Preferred Stock Transactions     400,000     $ 1,360,000       3.40  
                         
Total 2018 Preferred Stock Transactions     0     $ 0        

 

In accordance with the August 2016 Elections (see Note 8), the Company has issued 13,456,932 shares of 6% Preferred Stock in exchange for Notes having a principal balance of $3,364,234. The Preferred Stock will be convertible upon the election of the holder thereof. Shares of the Preferred Stock may be repurchased by the Company upon 30 days’ prior written notice, in whole or in part, for USD $3.50 per share, provided that during such notice period the holder will continue to have the option and right to convert its shares of Preferred Stock into shares of Common Stock. Holders also have a put option, allowing them to sell their shares of Preferred Stock back to the Company at USD $0.25 per share, the Note conversion price, and therefore the stock is classified as Mezzanine equity rather than permanent equity. The stock was valued based upon the value of shares of Common Stock publicly traded nearest the conversion date. During the year ended December 31, 2017 the Company paid dividends in the amount of $149,737 to the Preferred Stock shareholders.

 

Redeemable preferred stock subject to redemption: $0 par value; 20,000,000 shares authorized; 13,456,932 at December 31, 2017 and September 30, 2018.

 

 

20

 
 

(D)       Stock Options

 

The following is a summary of the Company’s stock option activity:

 

            Weighted
Average
    Weighted
Average
Remaining
Contractual Life
    Aggregate
Intrinsic
 
      Options     Exercise Price     (In Years)     Value  
Balance, December 31, 2016       1,350,000       $ 0.767        7.81      3,015,000   
Exercised       (30,000)       2.600             (78,000)  
Granted and Issued       3,555,000       1.307       7.21       6,230,250  
Forfeited/Cancelled                          
Balance, December 31, 2017       4,875,000      $ 1.150       7.15     $ 9,167,250  
Exercised/Expired       (200,000)       (.375)             75,000  
Granted       2,400,000       3.563       6.77        
Forfeited/Cancelled                          
Balance, September 30, 2018       7,075,000     $ 1.99       6.88     $ 9,242,250  

 

The Company has issued, or the Company’s Board of Directors has authorized grants of, options, some of which have vested, to purchase shares of Common Stock through its 2015 Plan and/or 2018 Plan. The Company has issued options to purchase, in the aggregate, up to 7,075,000 shares of options to purchase shares of Common Stock, in conjunction with its 2015 Plan, 2018 Plan, agreements or otherwise. The Company has reserved 6,061,667 shares with the transfer agent for the future issuance for shares of Common Stock associated with options issued.

 

Also on or about May 14, 2018, the Company granted non-qualified stock options to purchase up to 600,000 shares of Common Stock under the 2018 Plan at $5.00 per share (with 100,000 vested and the remaining amounts vesting in accordance with performance standards), but has not yet executed a stock option agreement; therefore, such grant has not been deemed issued and has not yet been included in the table above.

 

During the nine-months ended September 30, 2018, the Company recognized $541,113 of compensation expense related to the vesting of options. The expense computation is based on 185,001 shares of options at its fair value. The fair value of stock option is estimated using the Binomial valuation method in the range of $2.9131 and $2.9362.

 

(E)       Warrants Issued

 

The following is a summary of the Company’s warrant activity:

  

      Number of
Warrants
    Weighted
Average Exercise
Price
    Weighted Average Remaining Contractual Life (in Years)  
Balance, December 31, 2016       13,555,651     $ 0.72       1.5  
Issued       898,040       3.31       4.63  
Exercised       (6,033,767)       (3.00)        
Cancelled/Forfeited                    
Balance, December 31, 2017       8,419,924     $ 1.64       2.42  
                           
Issued                    
Exercised/Expired       (716,750)       (0.375)        
Cancelled/Forfeited                    
Balance, September 30, 2018       7,703,174     $ 1.186       0.77  

 

 

21

 
 

(F)       2015 Stock Plan

 

On April 27, 2015, the Board approved the Company’s 2015 Stock Incentive Plan (the “2015 Plan”), and effective July 31, 2016, a majority of the Company’s shareholders approved the 2015 Plan. Under the 2015 Plan, the Board has the sole authority to implement, interpret, and/or administer the 2015 Plan unless the Board delegates all or any portion of its authority to implement, interpret, and/or administer the 2015 Plan to a committee of the Board, or (ii) the authority to grant and administer awards under the 2015 Plan to an officer of the Company. The 2015 Plan relates to the issuance of up to 5,000,000 shares of Common Stock, subject to adjustment, and shall be effective for ten (10) years, unless earlier terminated. Certain options to be granted to employees under the 2015 Plan are intended to qualify as Incentive Stock Options (“ISOs”) pursuant to Section 422 of the Internal Revenue Code of 1986, as amended, while other options granted under the 2015 Plan will be nonqualified options not intended to qualify as Incentive Stock Options ISOs (“Nonqualified Options”), either or both as provided in the agreements evidencing the options described. The 2015 Plan further provides that awards granted under the 2015 Plan cannot be exercised until a majority of the Company’s shareholders have approved the 2015 Plan, which. The 2015 Plan became effective July 31, 2016. As of September 30, 2018, up to 15,000 shares of Common Stock are available for issuance (not granted) under the 2015 Plan.

 

(G)       2018 Stock Plan

 

On April 26, 2018, the Board approved the Company’s 2018 Stock Incentive Plan (the “2018 Plan”). Under the 2015 Plan, the Board has the sole authority to implement, interpret, and/or administer the 2018 Plan unless the Board delegates all or any portion of its authority to implement, interpret, and/or administer the 2018 Plan to a committee of the Board, or (ii) the authority to grant and administer awards under the 2018 Plan to an officer of the Company. The 2018 Plan relates to the issuance of up to 5,000,000 shares of Common Stock, subject to adjustment, and shall be effective for ten (10) years, unless earlier terminated. Certain options to be granted to employees under the 2015 Plan are intended to qualify as ISOs, while other options granted under the 2015 Plan will be Nonqualified Option, either or both as provided in the agreements evidencing the options described. The 2018 Plan further provides that awards granted under the 2018 Plan cannot be exercised until a majority of the Company’s shareholders have approved the 2018 Plan, which has not yet occurred. As of September 30, 2018, up to 3,300,000 shares of Common Stock are available for issuance (not granted) under the 2018 Plan.

 

NOTE 12 COMMITMENTS

 

(A)       Operating Lease

 

In June 2017, the Company entered into an operating lease for its Georgia location which expires on September 30, 2020. We recognize rent expense under such arrangements on a straight-line basis.

 

On September 27, 2018 the Company entered into two separate residential leases near the Florida office for two of its employees. The term for each lease is 12 months and, each lease carries a rent of $2,000 per month. The collective rent payment is $4,000 per month and will reduce travel costs for the Company.

 

Minimum future rent obligations are approximately as follows:

 

      Minimum  
Year     Obligation  
2018     $    19,326  
2019       78,467  
2020       60,320  
      $ 158,113  

 

(B)       Employment Agreement – Chief Executive Officer

 

On September 1, 2016, the Company entered into an employment agreement with its Chief Executive Officer (the “Campi Agreement”). The Campi Agreement provides for a base salary of $150,000; 120,000 shares of Common Stock in a “Sign on Bonus” which will vest December 31, 2017; 0.25% of annual net sales, paid in cash on a quarterly basis, and 3% of annual adjusted gross income in cash compensation and 0.50% of quarterly net income in options, the strike price to be determined at the time of grant. Such options will expire 5 years after issuance. Pursuant to the Campi Agreement, if terminated without cause during the initial term, the Company shall pay to Mr. Campi (a) an amount calculated by multiplying the monthly salary, at the time of such termination, times the number of months remaining in the initial term, and (b) all unpaid incentive compensation then in effect on a pro rata basis. In addition, the sign-on shares of Common Stock shall immediately vest. For any other termination during the initial term, Mr. Campi shall receive an amount calculated by multiplying fifty percent of the monthly salary, in effect at the time of such termination, times the number of months remaining in the initial, and shall not be entitled to incentive compensation payments then in effect, prorated or otherwise.

 

22

 
 

 

Under the Campi Agreement, Mr. Campi earned approximately $42,294 and $124,593 for the three and nine-months ended September 30, 2018, respectively; and $44,664 and $91,378 for three and nine-months ended September 30, 2017, respectively.

 

(C)       Chairman Agreement

 

Effective September 1, 2016, the Company entered into a Chairman Agreement with Mr. Kohen (the “Chairman’s Agreement”), to serve as the Company’s Executive Chairman and Chairman of the Board. The Chairman’s Agreement provides that Mr. Kohen will serve for an initial term of three years, which may be renewed by the mutual agreement of Mr. Kohen and the Company. Subject to other customary terms and conditions of such agreements, the Chairman’s Agreement provides that Mr. Kohen will receive (a) a base salary of $250,000 per year, which may be adjusted each year at the discretion of the Board; (b) stock compensation equal to 340,000 shares of Common Stock per year, which shall vest on January 1 of the following year (the “Chairman Compensation Shares”); (c) a sign-on bonus of 120,000 shares of Common Stock, which shall vest in its entirety on January 1, 2020; (d) supplemental bonus compensation of stock options to purchase up to 4,000,000 shares of Common Stock at an exercise price ranging between $3.00 and $5.00 per share, determined based on the achievement of specified market capitalizations of the Company; and (e) incentive compensation equal to one half of one percent (0.50%) of the Company’s gross revenue paid in cash, stock or options on an annual basis. Pursuant to the Chairman’s Agreement, if terminated without cause during the initial term, the Company shall pay to Mr. Kohen (i) an amount calculated by multiplying the monthly salary, at the time of such termination, times the number of months remaining in the initial term, and (ii) all unpaid incentive compensation then in effect. In addition, the sign-on shares of Common Stock shall immediately vest, and the Chairman Compensation Shares shall vest on a pro rata basis based on the number of days served under the Chairman’s Agreement and the number of days from the beginning of the initial term through August 31, 2019. For any other termination during the initial term, Mr. Kohen shall receive payment, at the then current rate, through the date termination is effective.

  

Under the Chairman’s Agreement, Mr. Kohen earned approximately $97,515 and $247,265 for the three and nine-months ended September 30, 2018, respectively; and $95,654 and $245,053 for three and nine-months ended September 30, 2017, respectively.

 

(D)       Employee Agreement – President

 

Effective August 17, 2016, the Company entered into an Executive Employment Agreement with Mr. Wells (the “Wells Agreement”), to serve as the Company’s President. The Wells Agreement provides that Mr. Wells will serve for an initial term of three years, which may be renewed by the mutual agreement of Mr. Wells and the Company. Subject to other customary terms and conditions of such agreements, the Wells Agreement provides that Mr. Wells will receive (a) a base salary of $250,000 per year, which may be adjusted each year at the discretion of the Board; (b) 1,025,000 shares of Common Stock, which shall vest on January 1, 2019 (the “Wells Compensation Shares”); (c) a sign-on bonus of 120,000 shares of Common Stock, which shall vest in its entirety to Mr. Wells on January 1, 2018; and (d) incentive compensation equal to one quarter of one percent (0.25%) of the Company’s net revenue, paid in cash on an quarterly basis. Pursuant to the Wells Agreement, if terminated without cause during the initial term, the Company shall pay to Mr. Wells (i) an amount calculated by multiplying the monthly salary, at the time of such termination, times the number of months remaining in the Initial Term, and (ii) all unpaid incentive compensation then in effect. In addition, the sign-on bonus shares of Common Stock shall immediately vest, and the Wells Compensation Shares shall vest on a pro rata basis based on the number of days served under the Wells Agreement and the number of days in the vesting period. For any other termination during the initial term, Mr. Wells shall receive payment of salary, at the then current rate, and all due but unpaid incentive compensation through the date termination is effective.

 

Under the Wells Agreement, Mr. Wells earned approximately $67,294 and $199,593 for the three and nine-months ended September 30, 2018, respectively; and $71,333 and $144,970 for three and nine-months ended September 30, 2017, respectively.

 

(E)       Employment Agreement – Chief Operating Officer

 

Patricia Barron entered into a three-year Executive Employment Agreement, effective as of September 1, 2016 (the “Barron Agreement”). Under the terms of the Barron Agreement, Ms. Barron will receive (a) an annual salary of $120,000, and (b) incentive compensation equal to one-quarter of one percent (0.25%) of net revenue, paid in cash on a quarterly basis. In addition, The Board granted Ms. Barron (i) options to purchase up to 200,000 shares of Common Stock at $0.60 per share, which vested on November 15, 2015; (ii) options to purchase up to 150,000 shares of Common Stock at $1.20, which vested on November 15, 2016; and (iii) options to purchase up to 150,000 shares of Common Stock at $1.80, which will vest on November 15, 2017.

 

Under the Barron Agreement, Ms. Barron earned approximately $39,169 and $116,468 for the three and nine-months ended September 30, 2018, respectively; and $36,670 and $77,340 for three and nine-months ended September 30, 2017, respectively.

 

NOTE 13 SUBSEQUENT EVENTS

 

On October 18, 2018, the Company issued 333,374 shares of Common Stock to three holders of its Common Stock Purchase Warrants dated September 3, 2013, following the Company’s receipt of notice of exercise thereof on or prior to September 2, 2018. Said Common Stock Purchase Warrants were exercised at a price per share equal to $0.375, resulting in aggregate gross proceeds of $125,015.25.

On October 18, 2018, the Company issued 46,250 shares of Common Stock upon receipt of a notice to exercise a Common Stock Purchase Warrant, dated June 25, 2014, on a cashless basis, based on a price of $5.00 per share as previously offered to holders of Common Stock Purchase Warrants issued on the same date and under the same terms.

On October 30, 2018, the Company issued 1,000,000 shares of Common Stock to a holder of its Common Stock Purchase Warrant dated May 10, 2016, following the Company’s receipt of notice of exercise thereof on October 23, 2018. Said Common Stock Purchase Warrant was exercised at a price per share equal to $3.00, resulting in aggregate gross proceeds to the Company of $3,000,000.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Unless the context otherwise requires, all references to “SQL Technologies Corp,” the “Company,” “we,” “us” or “our” include SQL Technologies Corp. and its subsidiaries. This management’s discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on April 2, 2018 and related notes contained in Part I, Item 1 of this Quarterly Report.

 

Forward-Looking Statements

 

The information set forth in this Quarterly Report contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, including, among others (i) expected changes in SQL Technologies Corp.’s revenues and profitability, (ii) prospective business opportunities and (iii) our strategy for financing its business. Forward-looking statements are statements other than historical information or statements of current condition. Some forward-looking statements may be identified by use of terms such as “believes”, “anticipates”, “intends” or “expects”. These forward-looking statements relate to our plans, objectives and expectations for future operations. Although we believe that our expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of our knowledge of our business and operations, in light of the risks and uncertainties inherent in all future projections, the inclusion of forward-looking statements in this Quarterly Report should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. Our revenues and results of operations could differ materially from those projected in the forward-looking statements as a result of numerous factors, including, but not limited to, the following: the risk of significant natural disaster, the inability of the Company to insure against certain risks, inflationary and deflationary conditions and cycles, currency exchange rates, and changing government regulations domestically and internationally affecting our products and businesses.

 

We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements. You should read the following discussion and analysis in conjunction with the Financial Statements and Notes attached hereto, and the other financial data appearing elsewhere in this Quarterly Report.

 

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 of electrical fixtures, such as ceiling and wall lights and ceiling fans, by the use of a weight bearing power plug affixed 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.

 

In December 2016, the SQL Technology was included in the 2017 National Electrical Code (NEC).

 

The Company is currently in the process of transitioning its products portfolio to advanced “smart” technologies, along with a new sales methods and marketing strategy, which will include unique, innovative advanced technologies.

 

 

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Results of Operations - For the Three-Months Ended September 30, 2018 Compared to the Three-Months Ended September 30, 2017

 

 

   For the Three-Months Ended-
(Unaudited)
      
   September 30, 2018  September 30, 2017  $ Change  % Change
             
Revenue  $1,011,811   $1,415,247   $(403,436)   (28.5%)
Cost of Sales   (928,823)   (1,193,371)   (264,548)   (22.2%)
Gross Profit   82,988    221,876    (138,888)   (62.6%)
Selling, general and administrative expenses   2,284,813    1,169,623    1,115,190    95.3%
Depreciation and amortization   469,699    632,770    (163,071)   (25.7%)
Total operating expenses   2,754,512    1,802,393    952,119    52.8%
Loss from Operations   (2,671,524)   (1,580,517)   1,091,007    69.0%
Other Income / (Expense)                    
Interest expense   (114,638)   (74,294)   (40,344)   54.3%
Derivative expenses   (1,159,551)   (663,033)   (496,518)   74.9%
Change in fair value of embedded derivative liabilities   354,704    180,682    174,022    96.3%
Loss on debt extinguishment - net                    
Gain on exchange        4,853    (4,853)   (100%)
Other income   4,295    4,541    (246)   (5.4%)
 Total other expense - net   (915,190)   (547,251)   367,939)   67.2%
                     
Net Income (loss) including noncontrolling interest   (3,586,714)   (2,127,768)   1,458,946    68.6%
Less: net loss attributable to noncontrolling interest   —      —      —      —   
Net income (loss) attributed to SQL Technologies Corp.   (3,586,714)   (2,127,768)   1,458,946    68.6%
                     
Net Income (Loss) per share - basic and diluted  $(0.068)  $(0.04)  $0.028   68.8%

 

Revenue

Net revenue was $1,011,811 for the three-months ended September 30, 2018 compared to revenue of $1,415,247 for the three-months ended September 30, 2017. The Company is in the process of transitioning its product mix to incorporate its proprietary smart technology.

 

Cost of Sales

We had a cost of sales of $928,823 for the three-months ended September 30, 2018, as compared to $1,193,371 for the same period in 2017.  The decrease is associated with the decrease in revenue resulting from the transitioning of its product mix to incorporate its proprietary smart technology.

 

Gross Profit

We had gross profit of $82,988 for the three-months ended September 30, 2018 as compared to gross profit of $221,876 for the same period in 2017. The reduction in gross profit as a percent of revenue for the current year third quarter is primarily due to the transitioning of the Company’s product mix to its smart technology.

 

Selling, General and Administrative Expenses

Selling, general and administrative expense (SG&A) increased $952,119 to $2,754,512 during the three-months ended September 30, 2018 from $1,802,393 for the three-months ended September 30, 2017.

 

The increase was primarily due to non-cash stock compensation charges of $629,638.

 

 

25

 
 

 

Loss from Operations 

 

Loss from operations increased $1,091,007 to $2,671,524 during the three-month period ended September 30, 2018, from $1,580,517 for the same period in 2017. The increased loss was primarily due to the non-cash charges in SG&A, as described above, and a decrease of gross profit of $138,888.

 

Other Income (Expense)

 

Total other expenses, mostly non-cash amortization charges, increased $367,939 to $915,190 for the three-month period ended September 30, 2018. The increase is primarily due to non-cash derivative charges totaling $1,159,551 during the third quarter of 2018 compared to $663,033 during the same period in 2017.

 

Net Loss and Net Loss per Share 

 

The Company incurred a net loss for the three-month period ended September 30, 2018 of $3,586,714, or $0.068 per share, as compared to net loss of $2,127,768 or $0.040 per share the three-month period ended September 30, 2017.

 

Results of Operations - For the Nine-months ended September 30, 2018 Compared to the Nine-months Ended September 30, 2017

 

   For the Nine-Months Ended-
(Unaudited)
      
   September 30, 2018  September 30, 2017  $ Change  % Change
             
Revenue  $6,412,712   $6,537,343   $(124,631)   (1.9)%
Cost of Sales   (5,233,490)   (5,178,099)   55,391    1.1%
Gross Profit   1,179,222    1,359,244    (180,022)   (13.2%)
Selling, general and administrative expenses   6,675,494    3,734,785    2,940,709    78.7%
Depreciation and amortization   1,408,992    1,866,323    (457,331)   (24.5%)
Total operating expenses   8,084,486    5,601,108    2,483,378    44.3%
Loss from Operations   (6,905,264)   (4,241,864)   (2,663,400)   62.8%
Other Income / (Expense)                    
Interest expense   (296,361)   (216,592)   79,769    36.9%
Derivative expenses   (2,968,805)   (2,922,061)   46,744    1.6%
Change in fair value of embedded derivative liabilities   1,104,480    (12,834,488)   (13,938,968)   (108.6%)
Loss on debt extinguishment - net   0    (1,260,000)   (1,260,000)   (100.0%)
Gain on exchange   4,578    4,853    (275)   (5.7%)
Other income   12,877    13,371    (494)   (3.7%)
  Total other expense - net   (2,143,231)   17,214,917)   15,071,686    (87.6%)
                     
Net Income (loss) including noncontrolling interest   (9,048,495)   (21,456,781)   (12,408,286)    (57.8)%
Less: net loss attributable to noncontrolling interest   —      —      —        
Net income (loss) attributed to SQL Technologies Corp.   (9,048,495)   (21,456,781)   (12,408,286)    (57.8)%
                     
Net Income (Loss) per share - basic and diluted  $(0.171)  $(0.44)  $(0.269)   (61.1)%

 

Revenue

 

The Company reported net revenue of $6,412,712 for the nine-months ended September 30, 2018. This compares to net revenue of $6,537,343 for the nine-months ended September 30, 2017. The Company is in the process of transitioning its product mix to incorporate its proprietary smart technology.

 

 

26

 
 

Cost of Sales

Cost of sales was $1,078,367 for the nine-months ended September 30, 2018, as compared to $1,359,244 for the same period in 2017. 

 

Gross Profit

Gross profit was $1,179,222 for the nine-months ended September 30, 2018 as compared to gross profit of $1,359,244 for the same period in 2017.

 

Selling, General and Administrative Expenses

Selling, general and administrative expense (SG&A) increased $2,483,378 to $8,084,486 during the nine-months ended September 30, 2018, from $5,601,108 for the nine-months ended September 30, 2017.

 

The increase was primarily due to non-cash stock compensation charges of $2,461,113.

 

Loss from Operations 

 

Loss from operations increased $2,663,400 to $6,905,264 during the nine-month period ended September 30, 2018, from $4,241,864 for the same period in 2017. The increased loss was primarily due to the non-cash charges in SG&A.

 

Other Income (Expense)

 

Total other expenses, mostly non-cash charges, decreased $15,071,686 to $2,143,231 for the nine-month period ended September 30, 2018. This decrease is primary attributed to a $13,938,968 positive impact related to the Change in Fair Value of Embedded Derivatives to a positive $1,104,480 from a charge of $12,834,488 for the nine-month period ended September 30, 2018 and 2017, respectively.

 

Additionally, the Company’s interest expense increased by $79,769 to $296,361 for the nine-month period ended September 30, 2018, from $216,595 for the nine-month period ended September 30, 2017. The increase is due to the increased average balance on the line of credit and the increased interest rate.

 

Net Loss and Net Loss per Share 

 

The Company incurred a net loss for the nine-month period ended September 30, 2018 of $9,048,495, or $0.171 per share, as compared to net loss of $21,456,781or $0.44 per share the nine-month period ended September 30, 2017.

 

Liquidity and Capital Resources

 

As of September 30, 2018, the Company had $3,149,362 in cash and cash equivalents. As the Company continues to develop its revenue base, it has raised additional funds through the sale of its Common Stock and arranged a $10,000,000 Line of Credit to support the Company’s working capital needs. As of September 30, 2018, the Company had $4,354,755 available under the Line of Credit, which expires January 10, 2019. The Company may need to raise additional capital or arrange alternative financing to replace the expiring facility and fund its working capital needs. It currently has no such financing commitment in place.

 

For the nine-month period ended September 30, 2018, the Company used $3,298,295 of net cash for operations, after adjusting for a non-cash adjustment of $4,422,209 for the GE License Agreement (unadjusted usage was $7,717,508). This compares with $3,226,400 used for the same period in 2017.

 

For the nine-month period ended September 30, 2018, the Company used $31,486 for investing activities as compared with $192,093 used for the same period in 2017. The investments in 2018 were for patents costs. In 2017 the investments consisted of $48,765 for patents and $148,328 for the purchase of equipment.

 

 

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Cash flows provided from financing activities amounted to $6,020,636 in cash and cash equivalents for the for the nine-month period ended September 30, 2018, which includes a $4,000,000 reduction in royalty payments as a result of the amended GE License Agreement. This compares with $5,651,672 during the same period in 2017, which includes $5,000,000 cash proceeds from the exercise of warrants.

 

As a result of the above operating, investing and financing activities, the Company’s cash and cash equivalents for the nine-month ended September 30, 2018 decreased $1,728,358 compared to an increase in cash and cash equivalents of $2,233,179 during the same period in 2017. The Company had $3,149,362 in cash and cash equivalents at September 30, 2018, as compared to $6,359,067 at September 30, 2017. 

 

The Company had a working capital deficit of $19,596,144 as of September 30, 2018, as compared to $23,271,348 as of December 31, 2017, which includes $17,361,178 and $19,175,754 in derivative liabilities, respectively.

 

A majority of the Company’s sales do not require the Company to take delivery of inventory. Production of such inventory comprised of 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 time the products become the property of the customer.

 

U.S. Federal Income Tax Reform Could Adversely Affect Us

On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” (TCJA) that significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA, among other things, includes changes to U.S. federal tax rates to 21 percent from 35 percent, imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. We are currently evaluating the impact of the TCJA; we do not expect tax reform to have a material impact on our financial position, results of operations or cash flows.

 

Non-GAAP Financial Measures

 

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, management uses adjusted net income (loss) to evaluate operating and financial performance and believes the measure is useful to investors because it eliminates the impact of certain noncash and/or other items that management does not consider to be indicative of the Company’s performance from period to period. Management also believes this non-GAAP measure is useful to investors to evaluate and compare the Company’s operating and financial performance across periods, as well as facilitating comparisons to others in the Company’s industry.

 

We use the non-GAAP financial measure of Adjusted EBITDA, which is defined as net income (loss), plus interest income; interest expense; depreciation and amortization; unrealized derivative gains and losses, non-recurring income and expenses, and stock-based compensation expense. We believe that Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in Adjusted EBITDA.

 

These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with generally accepted accounting principles in the United States of America. These non-GAAP financial measures exclude significant expenses and income that are required by accounting principles generally accepted in the United States of America (“GAAP”) to be recorded in the company’s financial statements and are subject to inherent limitations. Investors should review the reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures that are included below.

  

 

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The following table presents a reconciliation of Adjusted EBITDA to net loss, the most comparable GAAP financial measure, for each of the periods presented:

 

   Nine-months Ended September 30,
   2018  2017
Adjusted EBITDA reconciliation to Net Income (Loss):          
Net (loss) income  $(9,048,495)  $(21,456,781)
Other Income / (Expense)          
      Stock compensation – related parties   (1,020,000)     
      Stock options issued – related parties   (541,113)     
  Depreciation and amortization (1)   (1,408,992)   (1,885,345)
  Interest expense   (296,361)   (216,592)
  Derivative expenses   (2,968,805)   (2,922,061)
  Change in fair value of embedded derivative liabilities   1,104,480    (12,834,488)
  Loss on debt extinguishment – net (2)        (1,260,000)
  Stock issued for services   (900,000)     
 Gain on exchange   4,578    4,853 
 Other income   12,877    13,371 
  Total adjustment   (6,013,336)   (19,100,262)
           
Adjusted EBITDA   (3,035,159)   (2,356,519)
           
Net Income (Loss) per share - basic and diluted  $(0.057)   (0.048)

 

The following table presents a reconciliation of Adjusted Accumulated deficit reconciliation for each of the periods presented:

 

                   
   Nine-months Ended  Year Ended December 31,
Account  9/30/2018  2017  2016  2015  2014  2013
                   
Adjusted Accumulated deficit reconciliation to Net Income (Loss):                              
Accumulated deficit  $(177,196,865)  $(168,050,716)  $(141,182,294)  $(42,703,470)  $(15,813,260)  $(8,519,517)
                               
Other Income / (Expense)                              
Depreciation and amortization (1)   (11,315,958)   (9,906,965)   (7,409,557)   (4,926,954)   (2,457,705)   (2,689)
Loss on impairment   (600,000)   (600,000)                    
Interest expense   (2,562,278)   (2,265,917)   (1,971,183)   (990,317)   (516,839)   (27,669)
Derivative expenses   (14,371,873)   (11,403,068)   (11,403,068)   (1,724,678)   (1,724,678)   (1,156,193)
Change in fair value of embedded
derivative liabilities
   (76,111,388)   (77,215,868)   (62,802,676)   (19,168,194)   248,102    34,181 
Loss on debt extinguishment, net (2)   (42,402,067)   (42,402,067)   (41,142,067)   (12,731)   (12,731)   (12,731)
Warrant expense   (1,869,358)   (1,869,358)                    
Option expense   (2,544,706)   (2,003,593)                    
Amortization of Debt Discount   (4,164,687)   (4,164,687)   (4,164,687)   (4,164,687)   (1,782,646)   (132,330)
Common stock issued for service   (2,249,750)   (1,229,750)   (1,229,750)   (375,000)   (201,312)   (125,000)
Founder shareholders   (562,500)   (562,500)   (562,500)   (562,500)   (562,500)   (562,500)
Gain on debt settlement   (66,458)   (66,458)   (66,458)   (66,458)   (66,458)   (66,458)
Stock issued for services   (900,000)                         
Gain on Debt Extinguishment   3,288,909    3,288,909    3,288,909    339,195    129,606    106,224 
Other income   58,054    40,598    15,915    2,640    1,814    0 
Total adjustment   (156,374,060)   (150,360,724)   (127,447,122)   (31,649,683)   (6,945,348)   (1,945,165)
                               
Total Adjusted Accumulated deficit  $(20,822,805)  $(17,689,992)  $(13,735,172)  $(11,053,787)  $(8,867,912)  $(6,574,352)

 

 

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  (1) Includes amortization of the GE License agreement of $1,342,201 for the nine-months ended September 30, 2018. And $9,755,534; $7,324,415; $4,865,901; $2,424,160; and $0 for the years ended 2017 through 2013, respectively.
  (2) Primarily represents conversion of Convertible Notes into the Company’s Preferred Stock and Common Stock resulting in a $41,310,119 non-cash loss due to the difference between the conversion rate and the market value at the time of conversion, and a gain of $3,288,909 reflecting the cost basis of the Convertible Notes that were converted into Common Stock during the fourth quarter of 2016.

 

Off Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements

 

Critical Accounting Policies and Estimates 

 

Critical Accounting Policies Included in the footnotes to the consolidated financial statements in this report is a summary of all significant accounting policies used in the preparation of our consolidated financial statements. Our consolidated financial statements are prepared in accordance with accounting methods and practices as required by accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. In particular, our critical accounting policies and areas in which we use judgment are revenue recognition, the estimated collectability of accounts receivable, the recoverability of obsolete or overstocked inventory, the impairment of assets that are our trademarks and goodwill, the recoverability of deferred tax assets and the measurement of retirement related benefits. We base our estimates on historical experience, as appropriate, and on various other assumptions that we believe to be reasonable under the circumstances. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the following critical accounting policies involve a greater degree of judgment and complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.

 

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

 

See Notes to the Consolidated Financial Statements in “Note 2 - Summary of Significant Accounting Policies, Recently Issued Accounting Pronouncements”.

  

 

 

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ITEM 3. 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 4. 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.

 

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.

 

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 PART II OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

We are not currently a party to any pending legal proceedings.

 

 

Item 1A. Risk Factors

 

As a “smaller reporting company”, we are not required to provide the information required by this Item.

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On September 28, 2018, the Company issued 150,000 shares of Common Stock to a financial institution in connection with an extension of the Line of Credit.

 

On October 18, 2018, the Company issued 333,374 shares of Common Stock to three holders of its Common Stock Purchase Warrants dated September 3, 2013, following the Company’s receipt of notice of exercise thereof on or prior to September 2, 2018. Said Common Stock Purchase Warrants were exercised at a price per share equal to $0.375, resulting in aggregate gross proceeds of $125,015.25.

 

On October 18, 2018, the Company issued 46,250 shares of Common Stock upon receipt of a notice to exercise a Common Stock Purchase Warrant, dated June 25, 2014, on a cashless basis, based on a price of $5.00 per share as previously offered to holders of Common Stock Purchase Warrants issued on the same date and under the same terms.

 

On October 30, 2018, the Company issued 1,000,000 shares of Common Stock to a holder of its Common Stock Purchase Warrant dated May 10, 2016, following the Company’s receipt of notice of exercise thereof on October 23, 2018. Said Common Stock Purchase Warrant was exercised at a price per share equal to $3.00, resulting in aggregate gross proceeds to the Company of $3,000,000.

 

The transactions described above were exempt from registration under the Securities Act of 1933, as amended, as transactions not involving a public offering. All proceeds received in connection with the foregoing exercises of Common Stock Purchase Warrants will be used for general working capital purposes. No commissions or fees were paid in connection with said exercises.

 

Item 3. Defaults upon Senior Securities

 

None.

 

 

Item 5. Other Information 

 

On June 15, 2011, the Company and General Electric entered into a Trademark License Agreement, as previously amended on April 17, 2013 and August 13, 2014 (the “License Agreement”), pursuant to which the Company has the right to market certain ceiling light and fan fixtures displaying the GE brand. In September 2018, the Company entered into a third amendment to the License Agreement, expanding its product range, including smart technologies, and adding additional global territory rights. The License Agreement was extended for an additional five years and expires on November 30, 2023. The approximate remaining $10,000,000 Initial Royalty Obligation that was due on November 30, 2018 was waived by the amendment. In consideration, the Company agreed to pay $2,000,000 each year in 2018, 2019 and 2020 (the “Minimum Payments”) for a total of $6,000,000. The Minimum Payments will be offset against the royalty payments made to GE during the respective year, and paid quarterly.

 

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Item 6. Exhibits

 

No. Description of Exhibit    Note
3.1 Articles of Incorporation of the Company, as amended.   (3)
3.2 Certificate Of Designation of Rights, Preferences and Privileges of Series A Convertible Preferred Stock.   (4)
3.3 The Company’s Bylaws   (2)
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 Financial and 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 Certification 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 Financial and 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 Quarterly Report on Form 10-Q for the three-months ended September 30, 2018 are formatted in XBRL (eXtensible Business Reporting Language):  (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Stockholders’ Equity (Deficit), (iv) the Statements of Cash Flows,  and (iv) the Notes to the Financial Statements.   (1)

 

  (1) Filed herewith.
  (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 quarterly report on Form 10-Q filed with the SEC on November 14, 2016.
  (4) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 15, 2016

 

 

 

 

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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)  
    August 14, 2018  

 

 

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