UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2017
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transitionperiod from ________ to ________
Commission File Number: 000-55152
ZNERGY, INC.
(Exact Name of Registrant As Specified In Its Charter)
Nevada | 46-1845946 | |
(State or other jurisdiction of incorporation or organization) | IRS I.D. |
808 A South Huntington Street Syracuse, Indiana 46567 | ||
(Address of principal executive offices) (800) 931 5662 (Registrant’s telephone number, including area code) |
Securities registered under 12(b) of the Exchange Act:
None
Securities registered under 12(g) of the Exchange Act:
Common Stock, par value $0.0001
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any,submitted every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☒
Indicated by check mark whether the registrant:(1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ☒☐ No ☐
Indicate by check mark if disclosure of delinquent filings pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant 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 accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of May 25,June 30, 2018 was $12,874,695.$19,020,329. For purposes of the foregoing calculation only, directors and executive officers and holders of 10% or more of the issuer’s common capital stock have been deemed affiliates.
On May 25, 2018,August 31, 2020, there were 232,624,960287,074,960 shares of the registrant’s common stock outstanding.
PART I | ||
Item 1. | 4 | |
Item 1A. | 7 | |
Item 1B. | 7 | |
Item 2. | 8 | |
Item 3. | 8 | |
Item 4. | 8 | |
PART II | ||
Item 5. | 9 | |
Item 6. | 10 | |
Item 7. | 11 | |
Item 7A. | 16 | |
Item 8. | 16 | |
Item 9. | 16 | |
Item 9A. | 17 | |
Item 9B. | 18 | |
PART III | ||
Item 10. | 19 | |
Item 11. | 22 | |
Item 12. | 23 | |
Item 13. | 24 | |
Item 14. | 25 | |
PART IV | ||
Item 15. | 26 | |
49 | ||
PART I
Special Note Regarding Forward-Looking Statements
Information included or incorporated by reference in this Annual Report on Form 10-K contains forward-looking statements. All forward- looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. Forward-looking statements may contain the words “believes,” “projects,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions, and are subject to numerous known and unknown risks and uncertainties. Additionally, statements relating to implementation of business strategy, future financial performance, acquisition strategies, capital raising transactions, performance of contractual obligations, and similar statements may contain forward-looking statements. In evaluating such statements, prospective investors and shareholders should carefully review various risks and uncertainties identified in this Report, including the matters set forth under the captions “Risk Factors” and in the Company’s other SEC filings. These risks and uncertainties could cause the Company’s actual results to differ materially from those indicated in the forward-looking statements. The Company disclaims any obligation to update or publicly announce revisions to any forward-looking statements to reflect future events or developments.
Although forward - looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward - looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading “Risk Factors Related to Our Business” below, as well as those discussed elsewhere in this Annual Report on Form 10-K. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 1 0 -K.10-K. We file reports with the Securities and Exchange Commission (“SEC”). You can read and copy any materials we file with the SEC at the SEC’s Public Reference Room, 1 00100 F. Street, NE, Washington, D.C. 2 0 549.20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1 - 800-SEC-0330.1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov)(www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.
Wedisclaimanyobligationtoreviseorupdateanyforward-lookingstatementsinordertoreflectanyeventorcircumstancethatmayariseafter the date of this Annual Report on Form 10-K. Readers are urged to carefully review and consider the various disclosures made throughout the entiretyofthisAnnualReport,whichattempttoadviseinterestedpartiesoftherisksandfactorsthatmayaffectourbusiness,financialcondition, results of operations andprospects.
General Counsel to the Company. Mr. Fillmore was also appointed Chair of the Company’s Compensation Committee. Mr. Fillmore was granted 3,000,000 shares of the Company’s restricted stock. At the same time, Mr. Filmore’s law firm, AEGIS Professional Services (new AEGIS Law) was granted 2,000,000 options to purchase the Company’s common stock at $0.10 per shares, vesting immediately, in exchange for AEGIS’ agreement to reduce its hourly billing rate to the Company by 25%. AEGIS distributed said options of 666,000 to each of Mr. Fillmore, Scott Levine and Nicholas Schopp.
The Company is a provider of energy-efficient lighting products, lighting controls and energy management solutions. The Company offers a full turn-key lighting solution which includes economic assessments, energy efficient analysis, installation and rebate support for the Company’s customers. The Company’s business primarily involves retrofitting existing lighting solutions from traditional high intensity fluorescent lighting to energy efficient LED (Light Emitting Diode) technology.
Managing energy consumption and the associateassociated costs is increasingly important to building owners. Technological advancements in LED, together with significant private and public incentives for sustainability initiatives have made lighting infrastructure changes an effective way for building owners to cut energy costs. LED lighting provides energy efficiency, long life, low running temperatures and increasing technology such as dimmable lights.
The Company does not have long termlong-term contracts with its customers, and the Company’s revenue comes from the sales of lighting systems involving the replacement of existing lighting fixtures with new energy efficient LED fixtures. In addition, the Company generates revenue from available utility incentives and rebate programs.
The Company provides its turn-key service though a detailed evaluation of the customer’s needs and performing an audit of the customer’s current energy consumptions and costs, together with an analysis of the benefits of retrofitting their lights. Typically, the customer experiences an average payback on their investment between 12 and 24 months.
The Company intends to grow organically by selling energy efficiency (EE) and commercial security (CS) products to industrial and commercial businesses as well as municipal and state governments, universities and colleges, K-12 schools, and hospitals (the “MUSH” market). Strained government budgets have convinced state and local governments across the United States to embrace a new form of performance-based investments in energy efficiency offered by Energy Services Companies, or ESCOs. An ESCO provides energy-efficiency-related and other value-added services and for which performance contracting is a core part of its energy-efficiency services business. In a performance contract, the ESCO guarantees energy or financial savings for the project, which means ESCOs only make money if the project performs as promised. A study prepared by Allied Market Research indicated that the market is expected to grow at a Compound Annual Growth Rate of 13.76% during the forecast period 2014-2020 and reach $44.4 billion by 2020.
In addition, the Company will look for accretive acquisitions in the diverse and fragmented EE marketplace
Recent Developments
Personnel andServices
In 2017,2018, the Company begancontinued to supplement its organization structure by adding new members of the board of directors, new sales and administrative employees, and third-party services to assist the company.
Private Offerings of Common Stock and Warrants
During the period ended June 30, 2017 the Company completed a private offering of common stock and warrants to accredited and unaccredited investors for gross proceeds of $1,119,372 which securities were offered under Regulation D, Rule 506(b) of the Securities and Exchange Act of 1933. The Company accepted subscriptions, in the aggregate, for 14,924,960 shares of common stock and one-year warrants to purchase 14,924,960 shares of common stock of which 10,600,000 shares of its common stock and 10,600,000 warrants were issued for $795,000 in cash and 4,324,960 shares of its common stock and 4,324,960 warrants were issued for $324,372 in the conversion of debt. Investors received one-year fully vested warrant to purchase up to 100% of the number of shares purchased in the offering. The warrants have an exercise price of $0.15 per share. The purchase price for each share of common stock together with the warrants was $0.075. For the debt converted, the difference between the amount of debt converted and the fair value of the common stock and warrants issued of $519,086 has been charged to interest expense.
Debt
On November 6, 2017, the Company executed an unsecured promissory note in the amount of $25,000 payable to Christopher J Floyd. This note was payable on December 15, 2017 with accrued interest at 8% per annum. The note was paid in fully on November 22, 2017.
On February 15, 2018, the Company executed a promissory note in the amount of $25,000 payable to Rick Mikles, the Company’s Chairman and secured by the Company’s inventory. The note was due and payable on June 1, 2018 together with interest at 4% per annum. Pursuant to the terms of the note, if the note and accrued interest is not paid by the due date, interest at 12% per annum shall be accrued on the outstanding balance until paid in full. The balance at December 31, 2018 was $27,125 which includes unpaid interest. As of the date of this Report, the principal balance remainsnote and accrued interest remain unpaid.
On March 2, 2018, the Company executed an unsecured promissory note in the amount of $200,000 payable to Rick Mikles, the Company’s Chairman. The note was due on June 1, 2018 together with interest of $2,500. Pursuant to the terms of the note, there was a 15-day grace period, granted, which ended on March 27,June 16, 2018 at which time a 15% penalty onof the unpaid balance became due and payable alongtogether with the unpaid principal and any accrued interest. The balance at December 31, 2018 was $232,875 which includes unpaid interest and penalties. As of the date of this Report, the note, accrued interest, and penalties remain unpaid.
On March 22, 2018, the Company executed an unsecured promissory note in the amount of $20,000 payable to Mr. Wayne Miller, a shareholder of the Company. The note has interest at accruing at 10% per annum. The balance at December 31, 2018 was $10,250 which includes unpaid interest.
On March 22, 2018, the Company executed an unsecured promissory note in the amount of $50,000 payable to Paul Ladd, a shareholder. The note was due and payable on May 21, 2018 together with interest of $1,000. Pursuant to the terms of the note, there was a 15-day grace period, which ended on June 4, 2018 at which time a 15% penalty of the unpaid balance became due and payable together with the unpaid principal and accrued interest. The balance at December 31, 2018 was $58,650 which includes the unpaid principal, interest, and penalties. As of the date of this Report, the note, accrued interest, and penalties remain unpaid. Under the note agreement, the Company issued warrants to purchase 50,000 shares at an exercise price of $0.15 per share. The warrants expired on the first anniversary date of the initial exercise date of the warrants.
On October 4, 2018, the Company also borrowed $275,000 in a short-term payable to Wayne Miller. The balance as of December 31, 2018 is $281,875 which includes the unpaid principal and interest. This loan was due on April 3, 2019 and remains unpaid at the date of this report.
On October 23, 2018, the Company also borrowed $75,000 in a non-interest bearing short-term payable to Cary Baskin, and was secured by shares owned by the Company’s CEO. The balance as of December 31, 2018 is $75,000. This loan was due on December 31, 2018 and remains unpaid as of the date of this report.
Subsequent Events
Subsequent to December 31, 2018 through the filing date, the Company has issued 50,450,000 shares of common stock. In December 2019, the Company issued 2,500,000 shares in exchange for $250,000 to an unrelated accredited investor. For the shares that were granted, 11,200,000 shares were issued to the Chairman of the Board in exchange for the cancellation of 19,000,000 stock options and 2,000,000 warrants outstanding. In addition, 4,000,000 shares were issued in exchange for business development efforts. On July 9, 2019, the Company issued 20,000,000 shares to its Chief Executive Officer. The remainder of shares were issued to various parties for services to the Company.
In April 2020, the Company received an unsecured loan (the "SBA Loan") under the Small Business Administration ("SBA") Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act CARES Act through Chase Bank (“Lender”). The SBA Loan has a two-year term expiring on April 2022. The SBA Loan has a principal amount of $237,457 with an interest rate of 1.0%. The Company expects that the full principal amount of the loan will be forgiven. Interest accrues during the period between funding date and the date the loan is forgiven.
The Company has borrowed $1,624,127 from related parties since December 31, 2018. These loans from related parties were made on various dates in March 2019, April 2019 and October 2019 to August 2020, and have various payment terms up to six (6) months. All of these loans are unsecured.
The Company has borrowed $527,962 from various third-party lenders, none of which are financial institutions. These loans were made on various dates in August 2019 and October 2019 to December 2019, have various terms payment terms up to ten (10) months and all are secured by, inventory, receivables or the equity in the corporate headquarters building.
The Company is unsure of the outcome of the COVID-19 novel Coranavirus pandemic on its business. The duration of the pandemic, its effect on business in general and its effect on the Company specifically are unknown to management. For example, the Company’s largest client, one of the world’s largest clothing retail stores, was forced to close its doors at the onset of the pandemic and only recently re-opened some of its stores, thereby allowing the Company to continue to retrofit the stores with its LED lighting system. A continuation of the pandemic, a second surge of the pandemic, or a failure to find and commercialize a vaccine for COVID-19 could materially impact the Company’s revenues and its operations.
Financing Strategy
The Company only recently has begun to generate revenue from the sale of its services and from rebate income.services. The Company has invested in additional sales staff and has incurred costs developing its customer auditing process. These expenses are partially funded by cash flow from its revenues, but the Company is currently operating below break-even due to its operating investments. As a result, the Company had to rely on additional debt and advances, primarily from its shareholders.shareholders as well as the sale of additional shares of common stock. The Company anticipates that it will continue to fund its operations through the revenue it derives from services and rebates but will also need to finance its needs through additional debt, advances and through the sale of its shares of common stock, which will result in dilution to the current owners of the Company’s shares. There can be no assurance, however, that the Company will be successful and raising additional debt and advances or to sell additional securities, or that such offerings, if successful will provide the Company with sufficient capital to implement its business plan.
Competition
The energy efficiency segment for small and medium sized commercial businesses is fragmented and highly competitive. The Company competes with various types and sizes of companies ranging from local and national service providers.
The efficient lighting market, which is part of the energy efficiency market, is also highly competitive, with some of the largest suppliers of lighting components also serving many of the same markets and competing for the same customers. Competition is based on numerous factors, including features and benefits, brand name recognition, product quality, product and lighting system design, energy efficiency, customer relationships, service capabilities, and price. The Company’s largest competitors in the North American lighting market include the lighting divisions of Acuity Brands, Koninklijke Philips N.V., Eaton Corporation, Hubbell Incorporated, Schneider Electric, Cree, Inc., and General Electric Company. The Company estimates that the largest publicly tradedpublicly-traded manufacturers, which participate in varying degrees in the North American lighting market, have over half of the total market share. In addition to these large competitors, the Company also competes with hundreds of manufacturers of varying size.
Employees
As of the date of this Annual Report, the Company has 14 employees, including the services of the Company’s interim Chief Financial Officer. The Company has recently commenced operations and generated revenue.44 employees. As such, the Company relies substantially onfrom time to time uses third party contractors and the services of Mr. Baker who serves as the Company’s Chief Executive Officer and Mr. Mikles who serves as the Company’s Chairman of the Board and the Chief Marketing Officer.
Employment Agreements
On January 1, 2019, Mr. Baker entered into an employment agreement with Dave BakerEmployment Agreement to become the Company’s Chief Operating Officer. Mr. Baker’s agreement, dated September 28, 2016, had a term of three years, an annual base salary of $100,000 which salary to be reviewed by the Compensation Committee of the Board of Directors, a signing bonus of $10,000 and a bonus in January 2017 equal to 6% of the total revenue generated by Mr. Baker in the fourth quarter of 2016 which bonus was paid on January 20th, 2017 in the amount of $10,928 (6% of $182,127). In addition, Mr. Baker was granted 500,000 shares of common stock of the Company, vested immediately, and was granted 5,000,000 options to purchase common stock of the Company at $0.10 per share. These Options have a three-year expiration and vest one option for every two dollars of revenue recognized by the Company. On December 1, 2016, Mr. Baker was promoted from Senior Vice President to Chief Operating Officer and granted a further 4,500,000 shares of the Company’s common stock, which vested immediately.
On February 12, 2018, the Company entered into an employment agreement with Rick Mikles, the Company’s Chairman, to become Chief Marketing Officer. The agreement has a three-year term, an annual base salary of $26,000 and a quarterly payment based on 3% of the quarterly revenue recognized by the Company. Mr. Mikles was granted 5,000,000 shares of the Company’s common stock, which vested immediately and was granted 5,000,000 options to purchase common stock of the Company at $0.10 per share. These options have a three-year expiration and vest one options for every two dollars of revenue recognized by the Company.
Board Committees
The Board formed its Compensation Committee in January 2017 comprising Mr. Fillmore and Mr. Mikles serving as Chairman and member of the Committee, respectively. On September 19, 2017, the Company appointed Jennifer Peek to the board of directors. Ms. Peek serves as Chair of the Audit Committee of the Board of Directors.
Directors
The maximum number of directors the Company is authorized to have is nine. However, in no event may the Company have fewer than one director. Currently, the Company has sevensix board members; four independent directors - Art Fillmore (director and General Counsel), Kevin Harrington (director), Jennifer Peek (director), Nicole StrothmanJerry Horowitz (director); and threetwo employee directors - Rick Mikles (director and Chief Marketing Officer), and Dave Baker (director and Chief Executive Officer) and William McMahon (director and interim Chief Financial Officer).
Director Compensation
None.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Not required for Smaller Reporting Companies.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
Company Offices
On July 22, 2017, the Company entered into a purchase agreement for a property located at 808A South Huntington Street, Syracuse, Indiana. The purchase price was $255,000 of which $30,000 was paid on July 22, 2017 with the balance of $225,000 due 180 days after closing. There was no interest accruing on the debt. The square footage of the building is approximately 2,348 and has 27 storage units which generate approximately $19,000 per year in rental income. The Company closed on the property on September 1, 2017.
On March 9, 2018, the Company settled the outstanding mortgage through a sale of the building to the Company’s chairman, Rick Mikles who purchased the building for the balance of the mortgage of $225,000, as the Company was unable to make the scheduled payment of $225,000. On March 16th,16th, a quitclaim was recorded to Rick Mikles as the new owner of the building. Mr. Mikles and theThe Company are negotiating the terms ofis currently paying on a leasemonth-to-month basis for thethis office space.
On September 26, 2016, Registrant filed in the United States District Court for the Middle District of Florida a Complaint against defendants The Mazzal Trust, Nissim S. Trabelsi and Shawn Telsi (collectively the “Defendants”), seeking the disgorgement of profits obtained by Defendants and certain of their shareholder affiliates defined under Rule 16a-1(a)(1) under the Exchange Act defined below (collectively, the “Group”) through “short swing profits” in violation of Section 16(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Specifically, Registrant alleged that the Group acted under the guidance and control of the Defendants, whose individual defendants had filed forms 3 and 4 with the Securities and Exchange Commission (the “SEC”, declaring themselves to be “insiders” for the purpose of Section 16(b). The Group owned 100% of the shares of Registrant at the time that members of the group were engaged in the sale and purchase of such shares. The sales and purchases referenced all occurred with six months of other sales and purchases, subjecting Defendants to disgorge to Registrant all profits made by the Group in such sales and purchases. As detailed in paragraphs 16-22 of the Complaint, the total profits received by the Group is $1,695,689. Accordingly, Registrant has demanded the return of all such profits to Registrant plus the statutory payment of attorneys’ fees.
On August 24, 2017, the Plaintiff received a Clerk’s Entry of Default against Nissim Trabelsi. The Plaintiff filed a Motion for Default Judgment for damages against Trabelsi on September 13, 2017, which to date has not been addressed by the Court. On March 5, 2018, Nissim Trabelsi filed a notice of bankruptcy. The Plaintiff is still pursuing its options in the Case and the Court has yet to address the service issues with the Mazzal Trust.
On January 26, 2017, the Company received an email from its transfer agent, VStock Transfer, LLC, (“VStock”) informing the Company that it had been served with a Summons and Complaint (B2 Opportunity Fund (“B2”) v. Trabelsi et al. - Index No.:17-CV-10043, the “Claim”) and further stating that the Company was obligated to indemnify VStock for fees and expenses incurred in defending the Claim. The Company responded on February 24, 2017 stating that (1) we reviewed the Transfer Agent and Registrar Agreement between Mazzal and VStock dated May 20, 2014 and that in Article VI(c) of that agreement it states that indemnification will not be offered if the acts of VStock constitute bad faith or gross negligence, (2) we reviewed the lawsuit filed by B2 against VStock and others and find that VStock’s actions constitute gross negligence and perhaps bad faith, and we therefore deny indemnification of VStock relating to the Claim, and (3) should VStock take any action to seek indemnification by Znergy in any manner, Znergy will either join B2 in its lawsuit or will file an action on its own. The Company terminated its agreement with VStock. Management cannot at this time estimate what, if any, financialThe issue in its entirety was settled with no impact this matter will haveto the Company on the Company.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’SREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
There is only a very limited established public trading market for our securities and a regular trading market may not develop, or if developed, may not be sustained. A stockholder in all likelihood, therefore, will not be able to resell his or her securities should he or he desire to do so when eligible for public resale. Furthermore, it is unlikely that a lending institution will accept our securities as pledged collateral for loans unless a regular trading market develops. We have no plans, proposals, arrangements, or understandings with any person with regard to the development of a trading market in any of our securities.
During the period ended June 30, 2017 the Company completed a private offering of common stock and warrants to accredited and unaccredited investors for gross proceeds of $1,119,372 which securities were offered under Regulation D, Rule 506(b) of the Securities and Exchange Act of 1933. The Company accepted subscriptions, in the aggregate, for 14,924,960 shares of common stock and one-year warrants to purchase 14,924,960 shares of common stock of which 10,600,000 shares of its common stock and 10,600,000 warrants were issued for $795,000 in cash and 4,324,960 shares of its common stock and 4,324,960 warrants were issued for $324,372 in the conversion of debt. Investors received one-year fully vested warrant to purchase up to 100% of the number of shares purchased in the offering. The warrants have an exercise price of $0.15 per share. The purchase price for each share of common stock together with the warrants was $0.075.
As of May 25, 2018:
1. There were 3,031,597 options to purchase common stock of the Company and -0- warrants to purchase common stock of the Company. There were no other options, warrants or other instruments convertible into equity of the Company; and
2. There were 287,074,960 shares of the Company’s common stock held by approximately 210 shareholders of record.
As of the date of this Annual Report, the Company was not classified as a “shell company” under Rule 405 of the Securities Act, and to the knowledge of the management of the Company, the Company has never been a shell company. As such, all restricted securities presently held by the founder and other officers or directors of the Company may be resold in reliance on Rule 144, once all requirements set forth in that Rule have been met.
Penny Stock Considerations
The shares of the Company likely will be “penny stocks” as that term is generally defined in the Exchange Act and the rules and regulations promulgated thereunder to mean equity securities with a price of less than $5.00. The shares thus will be subject to rules that impose sales practice and disclosure requirements on broker-dealers who engage in certain transactions involving a penny stock.
Under the penny stock regulations, a broker-dealer selling a penny stock to anyone other than an established customer or accredited investor must make a special suitability determination regarding the purchaser and must receive the purchaser’s written consent to the transaction prior to the sale. Generally, an individual with a net worth in excess of $1,000,000 or annual income exceeding $200,000 individually or $300,000 together with his or her spouse is considered an accredited investor. In addition, under the penny stock regulations the broker-dealer is required to:
● | Deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt; |
● | |
Disclose commissions payable to the broker-dealer and our registered representatives and current bid and offer quotations for the securities; |
● | |
Send monthly statements disclosing recent price information pertaining to the penny stock held in a customer’s account, the account’s value and information regarding the limited market in penny stocks; and |
● | |
Make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction, prior to conducting any penny stock transaction in the customer’s account. |
Because of these regulations, broker-dealers may encounter difficulties in their attempt to sell shares of the Company’s Common Stock, which may affect the ability of the stockholders to sell their shares in the secondary market and have the effect of reducing the level of trading activity in the secondary market. These additional sales practice and disclosure requirements could impede the sale of the securities. In addition, the liquidity for our securities may be decreased, with a corresponding decrease in the price of our securities. Our shares in all probability will be subject to such penny stock rules and our stockholders will, in all likelihood, find it difficult to sell their securities.
Holders
As of the date of this Report, the Company had approximately 243210 holders of record of our Common Stock.
Dividends
The Company has not declared any cash dividends on our Common Stock since its inception and does not anticipate paying such dividends in the foreseeable future. Any decisions as to future payments of dividends will depend on the Company’s earnings and financial position and such other facts, as the Board of Directors deems relevant.
Recent Sales of Unregistered Securities
In June 2017, the Company completed a private offering of common stock to accredited and unaccredited investors which securities were offered under Regulation D, Rule 506(b) of the Securities and Exchange Act of 1933. The Company issued 13,100,00010,600,000 shares of its common stock and 10,600,000 warrants were issued for services provided$795,000 in cash and 4,324,960 shares of its common stock were issued for the amountconversion of $926,500 with $208,333 recorded as deferred compensation. These issuances qualified for exemption from registration under the Securities Act of 1933 by virtue of Section 4(2) of the Securities Act, in that the issuances did not involve a public offering.
During the year ended December 31, 2017, the Company issued 22,650,000 shares of its common stock for services provided in the amount of $2,264,446 in stock-based compensationcompensation.
During the year ended December 31, 2018, the Company issued 5,000,000 shares of its common stock for services provided in the amount of $500,000 in stock-based compensation.
During the year ended December 31, 2018, the Company also issued 1,000,000 shares of its common stock in exchange for $75,000 in cash. The Company also issued 1,000,000 warrants to the shareholder.
Subsequent to December 31, 2018 through the filing date, the Company has issued 50,450,000 shares of common stock. In December 2019, the Company issued 2,500,000 shares in exchange for $250,000 to an unrelated accredited investor. For the shares that were granted, 11,200,000 shares were issued to the Chairman of the Board in exchange for the cancellation of 19,000,000 stock options and $821,8252,000,000 warrants outstanding. In addition, 4,000,000 shares were issued in consulting expense.
Because the Company is a “Smaller Reporting Company,” this information is not required to be provided.
You should read the following discussion of our financial condition and results of operations together with the audited financial statements and thenotestotheauditedfinancialstatementsincludedinthisAnnualReportonForm10-K.Thisdiscussioncontainsforward-lookingstatements thatreflectourplans,estimatesandbeliefs.Ouractualresultsmaydiffermateriallyfromthoseanticipatedintheseforward-lookingstatements.
Our management does not expect to incur research and development costs. We do not have any off-balance sheet arrangements.
Results of Operations
The following table sets forth our results of operations for the periods indicated:
For the Years Ended | ||||||||||||
December 31, | December 31, | |||||||||||
2018 | 2017 | Change | ||||||||||
Revenue | $ | 1,452,153 | $ | 1,225,867 | $ | 226,286 | ||||||
Cost of revenue | 1,455,011 | 980,996 | 474,015 | |||||||||
Gross profit | (2,858 | ) | 244,871 | (247,729 | ) | |||||||
Selling, general and administrative expenses | 3,299,118 | 4,138,249 | (839,131 | ) | ||||||||
Loss on sale of assets | 88,628 | - | 88,628 | |||||||||
Total operating expenses | 3,387,746 | 4,138,249 | (750,503 | ) | ||||||||
Loss from operations | (3,390,604 | ) | (3,893,378 | ) | 502,774 | |||||||
Other income (expense) | ||||||||||||
Other income | 5,868 | - | 5,868 | |||||||||
Interest expense | (319,022 | ) | (594,192 | ) | 275,170 | |||||||
Total other income | (313,154 | ) | (594,192 | ) | 281,038 | |||||||
Provision for income taxes | - | - | - | |||||||||
Net loss | $ | (3,703,758 | ) | $ | (4,487,570 | ) | $ | 783,812 | ||||
Revenue
The Company had revenues of $1,452,153 and $1,225,867 for the years ended December 31, 2018, and December 31, 2017, respectively. Revenues consist primarily of LED retrofit and new fixture installations. There were minimal sales of individual lamps and fixtures. The increase in revenue in due mainly to the audited financial statements includedadditions of significant customers during 2018.
Cost of revenue
The Company had costs of revenue of $1,455,011 and $980,996 for the years ended December 31, 2018, and December 31, 2017, respectively. These costs are composed of the cost of lights and fixtures from our suppliers, plus the cost of installation and rental of lift equipment at the job site. The increase was mainly due to the Company made a change in this Annual Reportits lighting supplier, which increased costs but with a significant better quality and warranty.
Gross Profit
Gross profit decreased to ($2,868) for the year ended December 31, 2018 from $244,871 for the year ended December 31, 2017. The gross profit percentage for the year ended December 31, 2018 was (0.2%) compared to 20% for the year ended December 31, 2017. The decrease in gross profit was mainly due to the Company’s change in its lighting supplier, which increased costs but with a significant better quality, which we expect to generate more future demand. However, we were unable to pass through the increased cost to our existing contracts that were in process.
Selling, general and administrative expenses
The Company had selling, general and administrative expenses of $3,299,118 and $4,138,249 for the years ended December 31, 2018, and December 31, 2017, respectively. Selling, general and administrative expenses in 2018 and 2017 are comprised primarily of payroll and related expenses of $743,060 and $158,305, professional and legal expenses of $132,370 and $282,733, consulting expenses of $119,190 and $-0- , sales and marketing expenses of $465,736 and $478,882, other administrative expenses such as insurance and utilities of $363,188 and $132,058, and stock-based compensation arising from the issuance of stock awards and options of $1,530,660 and $3,086,271, respectively. Selling, general and administrative expenses in 2018 compared to 2017 decreased primarily due to the reduction in stock-based compensation arising from the issuance of stock awards and stock options, offset by the increase in payroll and related expenses due to an increase in sales staff and management.
Loss on sale of assets
Loss on sale and write-off of assets of $88,628, arose partly ($26,542) from the sale of a building owned by the Company to the Company’s Chairman and the balance of disposing certain assets no longer in use.
Other income (expense)
The Company had interest expense of $319,022 and $594,192 for the years ended December 31, 2018 and December 31, 2017, respectively. The decrease in interest expense was primarily due to interest expense of $519,086 recognized during 2017 arising from the conversion of debt to equity. Other income of $5,868 during 2018 was related to the rental of storage units in a building owned by the Company.
Provision for income taxes
Income taxes were nil for the years 2018 and 2017 as the Company had negative taxable earnings.
Liquidity and Capital Resources
Cash Flows
The table below sets forth a summary of the Company’s cash flows for the years ended December 31, 2018 and 2017:
For the Years Ended | ||||||||
December 31, | December 31, | |||||||
2018 | 2017 | |||||||
Net cash used in operating activities | $ | (1,386,226 | ) | $ | (933,498 | ) | ||
Net cash used in investing activities | (12,450 | ) | (99,774 | ) | ||||
Net cash provided by financing activities | 1,282,788 | 1,109,246 | ||||||
Increase (decrease) in cash | $ | (115,888 | ) | $ | 75,974 | |||
Operating Activities
Net cash used in operating activities during the year ended December 31, 2018 was $1,386,226 compared to $933,498 for the same period last year. The primary operating activity during the year ended December 31, 2019 were from $3,703,758 of net losses, which was partially offset by (1) $1,530,660 of stock-based compensation arising from the issuance of stock awards and stock options, (2) non-cash interest expense of $319,775 and (3) a $342,061 change in operating assets and liabilities.
Investing Activities
Net cash used by investing activities during the year ended December 31, 2018 was $12,450 compared to $99,774 for the same period last year. The net cash used in investing activities during the year ended December 31, 2018 was the purchase of fixed assets, which was partially offset by proceeds $50,218 from sale of fixed assets.
Financing Activities
Net cash provided by financing activities during the year ended December 31, 2018 was $1,282,788 compared to $1,109,246 for the same period last year. The net cash provided by financing activities during the year ended December 31, 2018 was primarily due to (1) $1,033,000 of proceeds from loans from related parties and (2) $230,411 of proceeds from third parties.
Going Concern
This Form 10-K. This discussion contains forward-looking statements10-K has been prepared assuming that reflect our plans, estimatesthe Company will continue as a going concern, which contemplates the realization of assets and beliefs. Our actual resultsthe liquidation of liabilities in the normal course of business. As of December 31, 2018, the Company had a working capital deficit of $1,927,119, insufficient cash resources to meet its planned business objectives, and accumulated losses of $16,142,976. The Company intends to fund operations through equity and debt financing arrangements, which may differ materially from those anticipatedbe insufficient to fund its capital expenditures, working capital and other cash requirements through July 2021. As a result, the Company is seeking additional funding through debt and equity financing arrangements, or other funding opportunities.
The Company is dependent upon, among other things, obtaining the additional financing to continue operations and to execute its business plan. In response to these problems, management intends to raise additional funds through public or private placement offerings. No assurances can be made that management will be successful in pursuing any of these forward- looking statements.
As discussed below,above, our revenue for the year ended December 31, 20172018 was $1,225,867$1,452,153 as compared to $196,828$1,225,867 for the year ended December 31, 2016.2017. We are still early in our development stage and in 20172018 we invested in building our organization of sales and administrative personnel. Because of these investments along with the additional costs of our efforts to develop new customers, provide audits at no cost to potential customers and build for the future, we have operated at a loss for the year.
As discussed in Note 3 to the financial statements, the Company has suffered recurring losses investment requirementsfrom operations and has an accumulated deficit that raise substantial doubt about its ability to continue as a going concern for growth, and having a working capital deficiency.the next twelve months from the issuance of this annual report on Form 10-K. Management's plans in regard to these matters are also described in Note 3. Accordingly, to implement our business plan, we must raise cash from sources other than operations. In 20172018 and through the date of this report, in 2018, the Company has raised cash by incurring debt. In addition, we will need to seek fundsdebt and through private offerings of our securities or through other means.
We do not anticipate needing to significantly increase our administrative and sales staff to achieve our growth. But we need to increase our revenue from the $1,225,867 achieved in 2017 to approximately $4,000,000We were on path to reach cash breakeven fromthis target until the pandemic affected our customers’ operations. This growth willmay necessitate additional investment in inventory and accounts receivable. We believe we may need to raise a minimum of $1,000,000additional capital to allow us to implement our business plan and fund our growth. Additionally, we are targeting customers and industry verticals which are less vulnerable to the Covid-19 pandemic than retail is. We may need to raise this additional capital by issuing capital stock in exchange for cash. However, we cannot guarantee that we will generate such growth. If we do not generate sufficient cash flow to support our operations over the next 12 to 18 months, we may need to raise more capital and increase the breadth of our customer base more than planned to continue as a going concern. There are no formal or informal agreements to attain such financing.financing other than the purchase order financing referenced above. We cannot give assurance that any financing can be obtained or, if obtained, that it will be on reasonable terms. Without realization of additional capital or our rollout of our plan to broaden our customer base, it would be unlikely for us to continue as a going concern.
Plan of Operation
The Company’s anticipated plan of operation is to continue to (1) identify and train sales personnel in regions of the country that have advantageous utility company rebate programs, (2) identify and train lighting installation personnel where we have established sales personnel, (3) seek out the best current and incipient solutions in the Energy Efficiency marketplace and become a reseller of those solutions, (4) develop our own solutions for the EE marketplace, and (5) seek to acquire other businesses in the market where such acquisitions makesmake strategic sense and are accretive to earnings.
The Company continues to expand its solutions portfolio for both indoor and outdoor applications in an effort to capitalize on the evolving and growing market for intelligent networked systems that collect and exchange data to increase efficiency as well as provide a host of other economic benefits resulting from data analytics to better enable smart buildings and smart cities. The transition to solid-state lighting provides the opportunity for lighting to be integrated with other building automation systems to create an optimal platform for enabling the “Internet of Things” (IoT), which will support the advancement of smart buildings, smart cities, and the smart grid.
The Company’s ability to grow its incipient operations is primarily dependent upon its ability to raise additional capital, most likely through the sale of additional shares of the Company’s common stock or other securities. There can be no guarantee that the Company will be able raise additional capital on terms that are acceptable to the Company, or at all.
The realization of revenues in the next twelve months from the filing of this Form 10-K is important in the execution of the plan of operations. However, if the Company cannot raise additional capital by issuing capital stock in exchange for cash, or through obtaining commercial or bank financing, in order to continue as a going concern, the Company may have to curtail or cease its operations. As of the date of this Report, there were no formal or informal agreements to attain such financing. The Company cannot assure any investor that, if needed, sufficient financing can be obtained or, if obtained, that it will be on reasonable terms. Without realization of additional capital, it would be unlikely for operations to continue.
Critical Accounting Policies
Management’s discussion and commentaryanalysis of our results of operations and liquidity and capital resources are based on their most critical accounting policies. In FRR 60, the Commission has defined the most criticalour audited financial information. We describe our significant accounting policies as the ones that are most important to the portrayalin Note 2 – Summary of a company’s financial condition and operating results and require management to make its most difficult and subjective judgments, often as a resultSignificant Accounting Policies, of the needNotes to make estimatesFinancial Statements included in this report. Our audited financial statements have been prepared in accordance with U.S. GAAP. Certain of matters that are inherently uncertain. Based on this definition, the Company’s most criticalour accounting policies include (a) use of estimates, (b) revenue recognition, (c) going concern, and (d) share based payments. The methods,require that management apply significant judgments in defining the appropriate assumptions integral to financial estimates. On an ongoing basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with U.S. GAAP. Judgments are based on historical experience, terms of existing contracts, industry trends and information available from outside sources, as appropriate. However, by their nature, judgments are subject to an inherent degree of uncertainty, and, therefore, actual results could differ from our estimates. Described below are the Company usesmost significant policies we apply in applying these most critical accounting policies have a significant impact on the results the Company reports in itspreparing our consolidated financial statements.
(a) | Use of Estimates |
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts or revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates, judgments and assumptions used in these consolidated financial statements include those related to revenues, accounts receivable and related allowances, contingencies, and the fair values of stock-based compensation. These estimates, judgments, and assumptions are reviewed periodically and the effects of material revisions in estimates are reflected in the financial statements prospectively from the date of the change in estimate.
(b) | Revenue Recognition |
Accounting Standards Update (“ASU”) No. 2014-09, Revenue Recognition
The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer. Revenue is measured based on the consideration the Company expects to receive in exchange for those products. In instances where final acceptance of the product is specified by the customer, revenue is deferred until all acceptance criteria have been met. Revenues are recognized under Topic 606 in a manner that reasonably reflects the delivery of the Company’s products and services to customers in return for expected consideration and includes the following elements:
● | executed contracts with the Company’s customers that it believes are legally enforceable; |
● | identification of performance obligations in the respective contract; |
● | determination of the transaction price for each performance obligation in the respective contract; |
● | allocation the transaction price to each performance obligation; and |
● | recognition of revenue only when the Company satisfies each performance obligation. |
Performance Obligations
The Company’s revenue streams can be categorized into the following performance obligations and recognition patterns:
● | Completion and delivery of installation contracts. The Company recognizes revenue at a point in time when control transfers to the customer, usually through a written customer acceptance form. |
● | Delivery of lighting products. The Company recognizes revenue at the point of shipment to the customer. |
Transaction prices for performance obligations are explicitly outlined in relevant agreements, therefore, the Company does not believe that significant judgments are required with respect to the determination of the transaction price.
When Znergy receives an order from a customer, either verbally or through a written purchase order for products such as individual lights or fixtures, but is not part of an installation contract, the Company recognizes the revenue when the goods are shipped, and title has passed to the customer. In these arrangements, the Company has determined that there is one performance obligation and that revenue should be recognized at the point in time that title passes to the customer.
Installation contract revenue is recognized when the contract is considered complete by the customer, through a written customer acceptance form. Each contract for installation of lighting and fixtures, consists of labor and materials, and is given a unique number in the system. Each contract is accounted for individually. The Company identifies the performance obligations, which include labor and materials and are accounted for as one contract. The transaction price is identified in advance with an agreed proposal between the Company and the customer and the price can be adjusted if, during the installation process, changes are made during the process. Under this method, contract costs are accumulated as deferred assets and billings and/or cash receipts are recorded to a deferred revenue liability account during the contract period, but no revenues, costs, or profits are recognized in operations until the completion of the contract. Costs include direct material, direct labor, subcontract labor, and allocable indirect costs. All unallocableunallocated indirect costs and corporate general and administrative costs are charged toin the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss when such loss is determined. The deferred asset (accumulated contract costs) in excess of the deferred liability (billings and/or cash received) is classified as a current asset under “Costs in excess of billings on uncompleted contracts.” The deferred liability (billings and/or cash received) in excess of the deferred asset (accumulated contract costs) is classified under current liabilities as “Billings in excess of costs on uncompleted contracts.” A contract is considered complete when accepted by the customer. Thecustomer that the Company quoteshas satisfied its customers the total costsperformance obligations. There were no contracts which were not complete as of product installation and materials minus the expected rebates, if any, from a given utility. For projects larger than $10,000, rebates must be pre-approved by the utility. Rebate revenue is recognized when the rebate is received by the Company.
(c) | Going Concern |
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. As at December 31, 2017,2018, the Company has a working capital deficit of $337,596,$1,927,119, insufficient cash resources to meet its planned business objectives and accumulated losses from operations of $12,439,218.$16,142,976. The Company intends to fund operations through debt and equity financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements through May 2019.
The Company is dependent upon, among other things, obtaining additional financing to continue operations and to execute its business plan. In response to these problems, management intends to raise additional funds through public or private placement offerings. No assurances can be made that management will be successful in pursuing any of these strategies.
These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.concern for the next twelve months from the issuance of this Annual Report on Form 10-K. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
(d) | Stock-Based Compensation |
Certain employees, officers, directors, and consultants of the Company participate in incentive plans that provide for granting stock options and performance-based awards. Time basedTime-based stock options generally vest in equal increments over a two -yeartwo-year period and expire on the third anniversary following the date of grant. Performance-based stock options vest once the applicable performance conditions are satisfied.
The Company recognizes stock-based compensation for equity awards granted to employees, officers, directors, and consultants as compensationSelling, general and benefitsadministrative expense in the consolidated statements of operations. The fair value of stock options is estimated using a Black-Scholes valuation model on the date of grant. Stock-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period. For performance-based stock options, compensation is recognized once the applicable performance condition is satisfied.
The fair value of restricted stock awards is equal to the closing price of the Company’s stock on the date of grant multiplied by the number of shares awarded. Stock-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period.
On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company,” we have the option to delay adoption of new or revised accounting standards until those standards would otherwise apply to private companies, until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period for complying with such new or revised accounting standards. We have elected to opt out of this extended transition period. As noted, this election is irrevocable.
Our significant accounting policies, as described in our financial statements in the Summary of Significant Accounting Policies, should be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Recently Issued Accounting Pronouncements
For more information on recently issued accounting standards, see Note 2 - Summary of Significant Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2014-09, Revenue From Contracts With Customers, or ASU 2014-09. Pursuant to this update, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this update are currently effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and are to be applied retrospectively, or on a modified retrospective basis. Early application is not permitted. In July 2015, the FASB approved a one-year deferral of the effective date for annual reporting periods beginning after December 15, 2017 with early adoption permitted for annual periods beginning after December 15, 2016. We have determined that adopting ASU 2014-09 does not have a material impact on our consolidated financial statements.
Off-Balance Sheet Arrangements
None.
Not required for smaller reporting companies.
The Company’s audited financial statements as of and for the years ended December 31, 20172018 and 2016,2017, are presented in a separate section of this report following Item 15.
On March 9, 2016,September 4, 2018, the Company’s Board of Directors approvedaccepted the Company’s dismissalresignation of WeinsteinFrazier & Co.Deeter, LLC (“Weinstein”F&D”) as independent auditors for the Company and its subsidiaries.
F&D’s report on the Company’s financial statements for the fiscal years endingyear ended December 31, 2014 and 2013,2017, and through the date of dismissal did not contain an adverse opinion or disclaimer of opinion, and werewas not qualified or modified as to uncertainty, audit scope or accounting principles. Weinstein’s reportsF&D’s report for the yearsyear ended December 31, 2014 and 2013, were2017 was modified to include an emphasis regarding uncertainty about the Company’s ability to continue as a going concern.
There have been no disagreements with WeinsteinF&D on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Weinstein,F&D, would have caused it to make reference to the subject matter of the disagreement in connection with its report. None of the events described in Item 304(a)(1)(v) of Regulation S-K has occurred with respect to Weinstein.
On March 9, 2016,November 15, 2018, the Board of Directors approved the Company’s engagement of Frazier & Deeter, LLCMarcum, LLP (“F&D”Marcum”) as independent auditors for the Company and its subsidiaries. The Company engaged F&DMarcum on March 9, 2016.
Neither the Company nor anyone on its behalf during its two most recent fiscal years or during any subsequent interim period prior to F&D’sMarcum’s appointment as the Company’s independent registered public accounting firm consulted F&DMarcum regarding (i) the application of accounting principles to a specific completed or contemplated transaction, (ii) the type of audit opinion that might be rendered on the Company’s financial statements, or (iii) any matter that was the subject of a disagreement or event identified in response to Item 304(a)(2) of Regulation S-K (there being none).
Management’s Report on Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, to allow for timely decisions regarding required disclosure.
As of December 31, 2017,2018, the end of our fiscal year covered by this report, we carried out an evaluation, under the supervision of our principal executive officer and our principal financial officer of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, we concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this annual report for the reasons discussed below. In light of the conclusion that our internal controls were ineffective as of December 31, 2017,2018, we have applied processes and procedure as necessary to ensure reliability of our financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act, as amended). In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of control procedures. The objectives of internal control include providing management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of consolidated financial statements in conformity with accounting principles generally accepted instandards of the United States.Public Accounting Oversight Board. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017.2018. In making this assessment, our management used the criteria set forth by the 2013 Committee of Sponsoring Organizations framework. Our management has concluded that, as of December 31, 2017,2018, we identified a material weakness in our internal control over financial reporting that was not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US generally accepted accounting principles. The Company has not had sufficient internal accounting personnel working at their corporate office which has led to a lack of segregation of duties.duties and timely closing processes, nor did we perform an effective assessment of our system of internal control. The accounting functions have been handled by a combination of third parties off-site.off-site and internal personnel which has hindered the Company’s ability to timely reconcile its accounts, maintain the proper controls under the underlying documentation and close its books and records. This was a result of the early stage in the Company's growth. The Company will be adding internal accounting personnel in 2018 in place of outside parties2020 which should allow the Company to addressstart to remediate its internal control issues.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Inherent limitations on effectiveness of controls
Internal control over financial reporting has inherent limitations which include but is not limited to the use of independent professionals for advice and guidance, interpretation of existing and/or changing rules and principles, segregation of management duties, scale of organization, and personnel factors. Internal control over financial reporting is a process which involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis, however these inherent limitations are known features of the financial reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There have been no significant changes in our internal controls over financial reporting that occurred during the year ended December 31, 2017,2018, that have materially or are reasonably likely to materially affect, our internal controls over financial reporting.
Code of Ethics
As of the date of this Report, we had not adopted a formal, written code of conduct (“Code of Ethics”) within the specific guidelines promulgated by the SEC, although we intend to adopt a Code of Ethics in 2018.
PART III
Set forth in the table below are the names, ages and positions of each person on our Board:
Name | Age | Position | ||
Rick Mikles | 62 | Chairman | ||
David Baker | 43 | Director and Chief Executive Officer | ||
Arthur Fillmore | 71 | Director and General Counsel | ||
Kevin Harrington | 63 | Director | ||
Jennifer Peek | 50 | |||
Director and Audit Committee Chair | ||||
Jerry Horowitz | 76 | Director | ||
Rick Mikles, Chairman
Mr. Mikles was the co-CEO of Ideal Image and co-founded the Company in 2001 with Joseph Acebal. He was initially responsible for managing the day-to-day operations of Ideal Image’s Tampa location until mid-2003 when the focus shifted to franchising the model. In this position, Mr. Mikles developed the Company’s marketing and branding message through radio and billboard advertisements. He named the company “Ideal Image” and designed the original Ideal Image center concept, including its “look and feel.” Mr. Mikles also developed Ideal Office, the Company’s proprietary core management tool, and launched the first version of the system in 2003. In addition, he has worked to develop the Ideal Image corporate brand and the I-Learn training system. In 2011, Mikles and co-founder Joseph Acebal became winners of the Ernst & Young entrepreneur of the year for the State of Florida. Steiner Leisure acquired Ideal Image in 2011 for $175 million dollars.
David Baker, Director and Chief Executive Officer
Mr. Baker has had a distinguished career in upper level management for several firms and as a founder of his own companies, exhibiting leadership and creativity in driving revenue growth and customer satisfaction. From 2007 to 2016, Mr. Baker was partner in Prevail Property Management, a top property services company, responsible for sales, marketing and operations, during which time sales growth ranged from 20% to over 100% per year. In 2004, Mr. Baker founded Extreme Green, a property services company, which he grew from startup to over 2,300 clients in three years before selling the business. From 1995 through 2003, Mr. Baker held several positions in sales and marketing and sales management with TruGreen Chemlawn, a Fortune 500 company, where he was ranked in the top three out of 3,500 sales members for nine years. He was key in developing and rolling out many successful sales campaigns and implementing operational procedures to successfully drive revenue and customer satisfaction. In addition, Mr. Baker was crucial in the recruiting and training of new team members.
Art Fillmore, Director and General Counsel
Mr. Fillmore has a distinguished career, practicing law for more than 40 years in the areas of mergers and acquisitions, capital formation, financial transactions and securities law. Mr. Fillmore has represented, on a national basis, many public and privately held companies in areas ranging from startup formation to going public to acquiring other companies or being acquired. He has been recognized as Super Lawyers of Missouri and was named One of 50 Missourians You Should Know by Ingram’s Magazine in 2014. He has also been named Best in Bar and one of 10 Legal Leaders of Kansas City. He has also served as Chairman and CEO of a microprocessor miniaturization company in San Diego, California.
Prior to entering Law School, where he was the Managing Editor and Lead Article Editor of the Missouri Law Review, he served in the United States Army, where he achieved the rank of Captain. He is a combat veteran of Vietnam, where he received numerous awards, including several Bronze Stars, and is a member of the United States Army Artillery School Hall of Fame. Mr. Fillmore is a passionate veterans’ advocate, chairing several foundations which assist homeless and disabled veterans.
Kevin Harrington, Director
Kevin Harrington has been a successful entrepreneur over the last 40 years. He is an Original Shark on the ABC hit, Emmy winning TV show, “Shark Tank.” He is also the Inventor of the Infomercial, As Seen On TV Pioneer, Co- Founder of the Electronic Retailers Association (ERA) and Co- Founder of the Entrepreneurs’ Organization (EO). Kevin has launched more than 20 businesses that have grown to over $100 million in sales each. He has been involved in more than a dozen public companies and has launched over 500 products generating more than $5 billion in sales worldwide with iconic brands and celebrities such as Jack Lalanne, Tony Little, George Foreman, and the new I-Grow hair restoration product on QVC. Kevin has extensive experience in business all over the world, opening distribution outlets in over 100 countries worldwide. His success led Mark Burnett to hand pick Kevin to become an Original Shark on Shark Tank where he filmed over 175 segments.
Kevin got his start as a young entrepreneur in the early 80’s when he invested $25,000 and launched Quantum International. This turned into a $500 million per year business on the New York Stock Exchange and drove the stock price from $1 to $20 per share. After selling his interest in Quantum International, he formed a joint Venture with the Home Shopping Network, called HSN Direct, which grew to hundreds of millions of dollars in sales. Entrepreneur Magazine has called him one of the top Entrepreneurs of our time.
Aside from speaking to audiences across five continents, Kevin’s influence has reached over 100 million people through his multi-media presence and industry dominance. A prominent business thought leader, he is often featured and quoted as a business leader in the Wall Street Journal, New York Times, USA Today, CNBC, Forbes, Inc., Entrepreneur, Fortune, The Today Show, Good Morning America, CBS Morning News, The View, Squawk Box, Fox Business, and more. He is a regular contributor to Forbes.com and Inc.com and has published acclaimed books like
Act Now! How I Turn Ideas Into Million Dollar Products as well as the best seller, Key Person of Influence. As co-founder of the EO (Entrepreneurs Organization), he has grown this organization to 45 countries and thousands of members, generating over $500Jerry Horowitz joined the family business, Morris Distributing in the early 1960s. Jerry soon moved from Binghamton, NY to Syracuse, NY and established a strategic thinker withsubsidiary called Morris Electronics. Jerry was very successful in sales of the many types and brands of electronics, such as stereos, speakers, radios, video games, etc. The business grew over 14the years to boast a revenue of over $100,000,000 in sales. The business was successfully sold in 1987 so Jerry could pursue other avenues.
In 1988, Jerry founded Profit Motivators, Inc., a sales and marketing organization made up of professionals who have earned a reputation for producing winning results. Jerry and his brother/Partner, Richard bring over 35 years of broad-basedmarketing experience and success. Jerry’s expertise in the retail/wholesale trade covers all markets in the United States. Since his contacts are key decision-makers from corporate and executive management experience. Sheheadquarters to the operational store level, he has built a backgroundsales distribution network that gives high exposure to the products they market. Jerry has established hundreds of long-term business relationships that are second to none. Profit Motivators Inc. is centrally located in corporate transactions, employment, mergers and acquisitions, healthcare, commercial real estate, litigation, franchising, and corporate governance. She currently is the General Counsel and Director of Franchise Operations of Ideal Image,Syracuse, NY. In 1994, a multi-state retail concept in North America. Prior to Ideal Image, she worked in-house for an international car rental and car sales company. Nicole received her B.A. from Florida State University and a J.D./M.B.A from Stetson University.
Jennifer Peek, Director
Ms. Peek has had a distinguished career in Finance, Audit and Mergers and Acquisitions. From 2010 until the present she has led her own firm Peek Valuation, which specializes in financial mergers and acquisitions, outsource CFO services, business valuations and due diligence. From 1996 through 2010, Ms. Peek was a member of finance team at Sprint, where her responsibilities started with development and drafting of 10Q and 10K filings and ranged to coordination and integration of over $3 billion of 8 affiliated acquisitions over 5 years. From 1991 through 1996, she was an audit team member as a CPA at Baird, Kurtz and Dobson, primarily working with clients in manufacturing, distribution and construction. Over the course of her 25-year career, Ms. Peek has utilized a wide range of financial expertise that covers finance, mergers and acquisitions and valuations. Ms. Peek earned a Bachelor of Science in Business Administration degree from University of Central Missouri and a Master of Business Administration from Rockhurst University.
EXECUTIVE OFFICERS
Set forth in the table below are the names, ages and positions of each executive officer of the company:
| Name | Age | Position | ||
| Dave Baker | Chief Executive Officer | |||
David Baker, Chief Executive Officer
Biographical information for Mr. Baker is set forth above under “Directors”.
The Board of Directors and Committees
The maximum number of directors the Company is authorized to have is nine. However, in no event may the Company have fewer than one director. Currently, the Company has sevensix board members.
Jennifer Peek is Chair of the audit committee and is currently the only member of the committee. Ms. Peek qualifies as a qualified financial expert as defined in the regulations of the SEC. The Audit Committee’s duties are to recommend to the Company’s Board of Directors the engagement of independent auditors to audit the consolidated financial statements and to review the accounting and auditing principles. The Audit Committee would review the scope, timing and fees for the annual audit and the results of audit examinations performed by the internal auditors, if any, and independent public accountants, including their recommendations to improve the system of accounting and internal control. The Audit Committee would at all times be composed exclusively of directors who are, in the opinion of the Board of Directors, free from any relationship that would interfere with the exercise of independent judgment as a committee member and who possess an understanding of financial statements and generally accepted accounting principles.
Compensation Committee
The Board formed its Compensation Committee in February 2017, comprising Mr. Fillmore and Mr. Mikles serving as Chairman and member of the Committee, respectively. The Compensation Committee reviews and approves the salary and benefits policies, including compensation of executive officers. The Compensation Committee also administers any stock option plans that they may adopt and recommend and approve grants of stock options under such plans.
Nominating and Corporate Governance Committee
As of the filing date of this Report, the Company did not have a standing Nominating and Corporate Governance Committee. The Company intends to establish a Nominating and Corporate Governance Committee of the Board of Directors to assist in the selection of director nominees, approve director nominations to be presented for stockholder approval at the annual meeting of stockholders and fill any vacancies on our Board of Directors, consider any nominations of director candidates validly made by stockholders, and review and consider developments in corporate governance practices.
Code of Ethics
As of the filing date of this Report, the Company had not adopted a formal, written code of conduct (“Code of Ethics”) within the specific guidelines promulgated by the SEC, although the Company intends to adopt a Code of Ethics during 2018.
Corporate Governance
As of the filing date of this Annual Report, the Company had sevensix directors and twoone executive officers.officer. The Company intends to approve an Internal Control Manual so that management has an organizational guide for the purpose of establishing policy toward Company-wide treatment of check writing and receiving, as well as the items relating to disclosure to shareholders and regulators.
Indemnification
Under our Articles of Incorporation and Bylaws, the Company may indemnify an officer or director who is made a party to any proceeding, including a lawsuit, because of his position, if he acted in good faith and in a manner he reasonably believed to be in our best interest. The Company may advance expenses incurred in defending a proceeding. To the extent that the officer or director is successful on the merits in a proceeding as to which he is to be indemnified, the Company must indemnify him against all expenses incurred, including attorney’s fees. With respect to a derivative action, indemnity may be made only for expenses actually and reasonably incurred in defending the proceeding, and if the officer or director is judged liable, only by a court order. The indemnification is intended to be to the fullest extent permitted by the laws of the State of Nevada.
Regarding indemnification for liabilities arising under the Securities Act which may be permitted to directors or officers under Nevada law, the Company is informed that, in the opinion of the Securities and Exchange Commission, indemnification is against public policy, as expressed in the Securities Act and is, therefore, unenforceable.
The following table summarizes the compensation earned by and paid to our non-employee director for the year ended December 31, 2017:
| Name | Position | Fees Earned or Paid in Cash | Option Awards | Stock Awards | All other Compensation | Total Compensation | ||||||||||||||||
| Richard Mikles | Chairman | $ | 250,577 | $ | 672,800 | $ | 923,377 | |||||||||||||||
| Arthur Fillmore | Director and General Counsel | $ | - | $ | - | $ | - | |||||||||||||||
| Kevin Harrington | Director | $ | 174,167 | $ | 100,000 | $ | 274,167 | |||||||||||||||
| Nicole Strothman | Director and Secretary | $ | 76,410 | $ | - | $ | 76,410 | |||||||||||||||
| Jennifer Peek | Audit Committee Chair | $ | 18,375 | $ | 76,350 | $ | 94,725 | |||||||||||||||
Name | Position | Fees Earned or Paid in Cash | Option Awards | Stock Awards | All Other Compensation | Total Compensation | ||||||||||||||||
Rick Mikles (1) | Chairman | $ | 26,000 | $ | 70,459 | $ | 465,000 | $ | - | $ | 561,459 | |||||||||||
Arthur Fillmore | Director and General Counsel | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||
Kevin Harrington | Director | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||
Nicole Strothman | Director and Secretary | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||
Jennifer Peek | Audit Committee Chair | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||
(1) | Mr. |
There are no other formal or informal arrangements or agreements to compensate directors for services provided as directors.
The following table gives forth the compensation for our two executivesexecutive as of December 31, 2017.
| Name | Position | Year | Salary | Bonus | Option Award | Stock Grants | Total Compensation | |||||||||||||||||
| Christopher J. Floyd | CEO, CFO | 2016 | 17,000.00 | 17,000.00 | ||||||||||||||||||||
| 2017 | 70,329.00 | 269,700.00 | 340,029.00 | |||||||||||||||||||||
| David J. Baker | COO, CEO | 2016 | 23,077.00 | 10,000.00 | 275,000.00 | 300,500.00 | 608,577.00 | |||||||||||||||||
| 2017 | 102,493.67 | 40,000.00 | 69,866.00 | 500,000.00 | 712,359.67 | |||||||||||||||||||
| Ryan Smith | COO | 2016 | - | |||||||||||||||||||||
| 2017 | 51,881.81 | 56,250.00 | 300,000.00 | 408,131.81 | ||||||||||||||||||||
Name | Position | Year | Salary | Bonus | Option Awards | Stock Growth | Total Compensation | |||||||||||||||||
David Baker | COO, CEO | |||||||||||||||||||||||
2017 | $ | 102,494 | $ | 40,000 | $ | 69,866 | $ | 500,000 | $ | 712,360 | ||||||||||||||
2018 | $ | 40,059 | $ | 78,000 | $ | - | $ | - | $ | 118,059 | ||||||||||||||
(1) |
On May 15, 2017, Mr. Baker was granted 5,000,000 shares of common stock of the Company in conjunction with his employment as Chief Executive Officer of the Company. |
(2) | Mr. Baker was granted 5,000,000 options to purchase common stock of the Company at $0.10 per share. These options have a three-year expiration and vest quarterly one options for every two dollars of revenue recognized by the Company and have an expiration of three years from the date of issue. |
(3) | Effective January 1, 2019, Mr. |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides the names and addresses of each person known to the Company to own more than 5% of the outstanding common stock as of April 14, 2018,August 31, 2020, and by the Officers and Directors, individually and as a group. Except as otherwise indicated, all shares are owned directly.
| Number of | Total | |||||||||||||||
| Name and Address | Shares | Outstanding | Beneficial | Percent of | ||||||||||||
| of Beneficial Owner | Owned | Options Owned | Ownership | Class | ||||||||||||
| Dave Baker | 20,000,000 | 10,000,000 | 30,000,000 | 13.10 | % | |||||||||||
| Chief Executive Officer | ||||||||||||||||
| Syracuse, IN | ||||||||||||||||
| B2 Opportunity Fund | 18,124,614 | - | 18,124,614 | 7.91 | % | |||||||||||
| Las Vegas, NV | ||||||||||||||||
| C&M Baskin Investments, Inc. | 17,448,335 | - | 17,448,335 | 7.62 | % | |||||||||||
| Livingston, TX | ||||||||||||||||
| David J. Miller | 11,766,495 | - | 11,766,495 | 5.14 | % | |||||||||||
| Fountain Hills, AZ | ||||||||||||||||
| Richard Mikles | 8,800,000 | 9,000,000 | 17,800,000 | 7.77 | % | |||||||||||
| Chairman and Director | ||||||||||||||||
| Homes Beach, FL | ||||||||||||||||
| Arthur Fillmore | 3,000,000 | 666,666 | 3,666,666 | 0.016 | % | |||||||||||
| General Counsel and Director | ||||||||||||||||
| Ryan Smith | 3,000,000 | 7,000,000 | 10,000,000 | 4.37 | % | |||||||||||
| Larwill, IN | ||||||||||||||||
| Kevin Harrington | 2,000,000 | 4,000,000 | 6,000,000 | 2.62 | % | |||||||||||
| St. Petersburg, FL | ||||||||||||||||
| Venture Legal Services PLLC | 333,333 | 2,000,000 | 2,333,333 | 1.02 | % | |||||||||||
| Tampa, FL | ||||||||||||||||
| Jennifer Peek | 1,500,000 | 1,500,000 | 3,000,000 | 1.31 | % | |||||||||||
| Kansas City, MO | ||||||||||||||||
| Officers & Directors | 18,633,333 | 24,166,666 | 42,799,999 | 18.69 | % | |||||||||||
| As a Group | ||||||||||||||||
Name and Address | Shares Owned | Number of Outstanding Options Owned | Total Beneficial Ownership | Percent of Class | ||||||||||||
David Baker | 37,578,676 | - | 37,578,676 | 13.09 | % | |||||||||||
Chief Executive Officer | ||||||||||||||||
Syracuse, IN | ||||||||||||||||
C&M Baskin Investments, Inc. | 17,448,335 | - | 17,448,335 | 6.08 | % | |||||||||||
Livingston, TX | ||||||||||||||||
David J. Miller | 15,066,495 | - | 15,066,495 | 5.25 | % | |||||||||||
Fountain Hills, AZ | ||||||||||||||||
Richard Mikles | 25,000,000 | - | 25,000,000 | 8.71 | % | |||||||||||
Chairman and Director | ||||||||||||||||
Homes Beach, FL | ||||||||||||||||
Arthur Fillmore | 13,000,000 | - | 13,000,000 | 4.53 | % | |||||||||||
General Counsel and Director | ||||||||||||||||
Jerry Horowitz | 4,000,000 | - | 4,000,000 | 1.39 | % | |||||||||||
Director | ||||||||||||||||
Kevin Harrington | 2,000,000 | - | 2,000,000 | 0.70 | % | |||||||||||
Director | ||||||||||||||||
St. Petersburg, FL | ||||||||||||||||
Jennifer Peek | 1,500,000 | 1,500,000 | 3,000,000 | 0.52 | % | |||||||||||
Director | ||||||||||||||||
Kansas City, MO | ||||||||||||||||
All officers and directors as a group | 115,593,506 | 1,500,000 | 117,093,506 | 40.27 | % | |||||||||||
*The percent of class is based on 229,024,960287,074,960 shares of common stock issued and outstanding as of April 17, 2018.
In November 2015, pursuant to the Master Agreement, Mr. Trabelsi and Mr. Telsi each agreed to sell 100% of the shares of the Company’s common stock owned by them to B2 or its designees. Mr. Trabelsi sold 45,800,000 shares of the Company’s common stock, and Mr. Telsi sold 9,500,000 shares of the Company’s common stock. The aggregate purchase price paid for the 55,300,000 shares was Three Hundred Fifteen Thousand Dollars ($315,000).
Rick Mikles
On November 15, 2017, the Company executed an unsecured promissory note in the amount of $50,000, payable to the Company’s chairman, Rick Mikles. The note was payable on December 1, 2017 with interest at 4% per annum. On December 1, 2017, the payment date was extended to June 1, 2018. The balance remains outstanding.
On February 15, 2018, the Company executed a promissory note in the amount of $25,000 payable to Rick Mikles, the Company’s Chairman and secured by the Company’s inventory. The note was due and payable on June 1, 2018 together with interest at 4% per annum. Pursuant to the terms of the note, if the note and accrued interest is not paid by the due date, interest at 12% per annum shall be accrued on the outstanding balance until paid in full. The balance at December31, 2018 was $27,125 which includes unpaid interest.
On March 2, 2018, the Company executed an unsecured promissory note in the amount of $200,000 payable to Rick Mikles, the Company’s Chairman. The note was due on June 1, 2018 together with interest of $2,500. Pursuant to the terms of the note, there was a 15-day grace period, which ended on June 16, 2018 at which time a 15% penalty of the unpaid balance became due and payable together with the unpaid principal and accrued interest. The balance at December 31, 2018 was $232,875, which includes unpaid interest and penalties.
During the year ended December 31, 2018, the Company received various loans from the Company’s chairman, Rick Mikles, with a balance of $200,000 as of December 31, 2018. There is no formal promissory note and payment is due on demand.
Wayne Miller
On November 27, 2017, the Company executed an unsecured promissory note in the amount of $200,000, payable to Mr. Wayne Miller, a shareholder of the Company. The note was due and payable with interest of $2,000 on December 31, 2017. The note was repaid in full, with interest on December 22, 2017. Under the note agreement, the Company issued warrants to purchase 1,000,000 shares at an exercise price of $0.15 per share. The warrants expire on the first anniversary date of the initial exercise date of the warrants.
On December 6, 2017, the Company executed an unsecured promissory note in the amount of $150,000 payable to Mr. Wayne Miller, a shareholder of the Company. The note was due and payable on March 12, 2018, with interest of $6,000. Under the note agreement, the Company issued warrants to purchase 1,000,000 shares at an exercise price of $0.15 per share. The warrants expire on the first anniversary date of the initial exercise date of the warrants. As of December 31, 2018, the principal balance remains unpaid. Pursuant to the terms of the note, there was a 15-day grace period granted, which ended on March 27, 2018, at which a 15% penalty on the unpaid balance became due and payable along with the unpaid principal and any accrued interest.
On January 8, 2018, the Company executed an unsecured promissory note in the amount of $150,000 payable to Mr. Wayne Miller, a shareholder of the Company. The note was due and payable on April 8, 2018, with interest of $6,000. Pursuant to the terms of the note, there was a 15-day grace period, which ended on April 23, 2018 at which time a 15% penalty of the unpaid balance became due and payable together with the unpaid principal December 31, 2018 was $179,700, which includes unpaid principal, interest, and penalties. Under the note agreement, the Company issued warrants to purchase 1,000,000 shares at an exercise price of $0.15 per share. The warrants expire on the first anniversary date of the initial exercise date of the warrants.
On March 22, 2018, the Company executed an unsecured promissory note in the amount of $20,000 payable to Mr. Wayne Miller, a shareholder of the Company. The note has interest at accruing at 10% per annum. The balance at December 31, 2018 was $10,250 which includes unpaid interest.
On October 4, 2018, the Company also borrowed $275,000 short-term payable to Wayne Miller. The balance as of December 31, 2018 is $281,875 which includes the unpaid principal and interest. This loan was due on April 3, 2019.
Paul Ladd
On March 22, 2018, the Company executed an unsecured promissory note in the amount of $50,000 payable to Paul Ladd, a shareholder. The note was due and payable on May 21, 2018 together with interest of $1,000. Pursuant to the terms of the note, there was a 15-day grace period, which ended on June 4, 2018 at which time a 15% penalty of the unpaid balance became due and payable together with the unpaid principal and accrued interest. The balance at December31, 2018 was $58,650 which includes the unpaid principal, interest, and penalties. Under the note agreement, the Company issued warrants to purchase 50,000 shares at an exercise price of $0.15 per share. The warrants expire on the first anniversary date of the initial exercise date of the warrants.
Cary Baskin
On October 23, 2018, the Company also borrowed $75,000 in a non-interest bearing short-term payable to Cary Baskin, and was secured by shares owned by the Company’s CEO. The balance as of December 31, 2018 is $75,000. This loan was due on December 31, 2018.
Other than these, to the Company’s knowledge, no Selling Stockholder has, or had, any material relationship with our officers or directors.
Total interest expense under the related party loans was $119,803 during the year ended December 31, 2018.
Director Independence
As of the date of this Report, we had three independent directors as defined by the rules of the SEC or any securities exchange or inter-dealer quotation system. Our stock has been accepted for trading on the OTC Markets, which does not impose standards relating to director independence or the makeup of committees with independent directors or provide definitions of independence.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
During the year ended December 31, 2017, the Company’s executive officers, directors and 10% stockholders were required under Section 16 of the Securities Exchange Act of 1934, as amended, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Copies of these reports must also be furnished to the Company.
To the best knowledge of the Company’s current management, based solely on their review of the copies of the reports received by the Company and written representations from certain reporting persons, we note that all of our directors, executive officers, and greater than 10 percent shareholders have filed all required reports during or with respect to the year ended December 31, 2017,2018, on a timely basis.
On March 9, 2016,September 4, 2018, the Company’s Board of Directors approvedaccepted the Company’s dismissalresignation of WeinsteinFrazier & Co.Deeter, LLC (“Weinstein”F&D”) as independent auditors for the Company and its subsidiaries. Weinstein wasOn November 15, 2018, the Company’s independent registered public accounting firm through March 9, 2016. Also, on March 9, 2016, the Company’s Board of Directors approved the Company’s engagement of Frazier and Deeter, LLCMarcum, LLP (“Frazier”Marcum”) as independent auditors for the Company and its subsidiaries.
F&D and Marcum Audit Fees
The aggregate fees billed or to be billed by FrazierF&D for professional services rendered for the audit of our annual financial statements, review of our quarterly financial statements or services that are normally provided in connection with statutory and regulatory filings were $27,500$81,000 for the year ended December 31, 2016 and estimated2017. The aggregate fees billed or to be between $47,000billed by Marcum for professional services rendered for the audit of our annual financial statements, review of our quarterly financial statements or services that are normally provided in connection with statutory and $55,000regulatory filings were $150,000 for the year ended December 31, 2017.
F&D and Marcum Tax Fees
There were no fees billed by Frazier for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements for the years ended December 31, 2016 or December 31, 2017, respectfully.
All Other Fees
There were no fees billed by FrazierF&D or Marcum for other products and services for the years ended December 31, 20172018 or 2016.
PART IV
15(a)(1). Financial Statements.
The following financial statements, and related notes and ReportReports of Independent Registered Public Accounting Firm are filed as part of this Annual Report.
CONTENTS: | |
27 | |
29 | |
30 | |
31 | |
32 | |
33 |
To the ShareholdersStockholders and Board of Directors of
Znergy, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheetssheet of Znergy, Inc. (the “Company”) as of December 31, 20172018, the related consolidated statements of operations, changes in stockholders’ (deficit) equity and 2016,cash flows for the year ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 3, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2018.
New York, NY
September 3, 2020
REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Znergy, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Znergy, Inc. (the Company) as of December 31, 2017, and the related consolidated statements of operations, changes in stockholders’stockholders' equity, (deficit) and cash flows for the yearsyear then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and 2016, and the results of their operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’sCompany's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’sCompany's internal control over financial reporting. Accordingly, we express no such opinion.
Our auditsaudit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
Emphasis of Matter
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has incurred recurring losses from operations, has negative working capital, a stockholders’ deficitequity and ongoing requirements for additional capital investment. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We have served as the Company’sCompany's auditor since 2016.
/s/ Frazier & Deeter, LLC
Tampa, FL
June 6, 2018
ZNERGY, INC.
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 116,481 | $ | 40,507 | ||||
| Accounts receivable, net | 112,818 | 79,612 | ||||||
| Prepaid expenses | 35,365 | 3,750 | ||||||
| Inventory | 444,606 | 192,105 | ||||||
| Total current assets | 709,270 | 315,974 | ||||||
| Building, equipment and furniture, net | 364,093 | 2,567 | ||||||
| Intangible assets, net | 1,845 | 1,845 | ||||||
| TOTAL ASSETS | $ | 1,075,208 | $ | 320,386 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | 431,267 | $ | 284,930 | ||||
| Accrued expenses | 179,628 | 139,336 | ||||||
| Customer deposits | 39,453 | 6,605 | ||||||
| Advances | - | 60,000 | ||||||
| Loan, building | 225,000 | - | ||||||
| Loans from related parties | 171,518 | 135,749 | ||||||
| Total current liabilities | 1,046,866 | 626,620 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
Preferred stock, $0.0001 par value, 100,000,000 authorized shares; no shares issued and outstanding | - | - | ||||||
Common stock, $0.0001 par value; 500,000,000 shares authorized; 230,724,960 and 193,150,000 shares issued and 227,624,960 and 193,150,000 shares outstanding at December 31, 2017 and December 31, 2016, respectively | 23,072 | 19,315 | ||||||
| Additional paid-in-capital | 12,444,488 | 7,626,099 | ||||||
| Accumulated deficit | (12,439,218 | ) | (7,951,648 | ) | ||||
| Total stockholders’ equity (deficit) | 28,342 | (306,234 | ) | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | 1,075,208 | $ | 320,386 | ||||
December 31, | December 31, | |||||||
2018 | 2017 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash | $ | 593 | $ | 116,481 | ||||
Accounts receivable, net of allowance | - | 112,818 | ||||||
Prepaid expenses | 61,457 | 35,365 | ||||||
Inventory | 299,428 | 444,606 | ||||||
Total current assets | 361,478 | 709,270 | ||||||
Building, furniture and equipment, net | 28,352 | 364,093 | ||||||
Intangible assets, net | - | 1,845 | ||||||
TOTAL ASSETS | $ | 389,830 | $ | 1,075,208 | ||||
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 403,307 | $ | 431,267 | ||||
Accrued expenses | 341,556 | 179,628 | ||||||
Customer deposits | 30,642 | 39,453 | ||||||
Advances from related parties | 222,788 | - | ||||||
Loan, building | - | 225,000 | ||||||
Loan from related parties | 1,290,304 | 171,518 | ||||||
Total current liabilities | 2,288,597 | 1,046,866 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 11) | ||||||||
STOCKHOLDERS' (DEFICIT) EQUITY | ||||||||
Preferred stock, $0.0001 par value, 100,000,000 authorized shares; no shares issued and outstanding | - | - | ||||||
Common stock, $0.0001 par value; 500,000,000 shares authorized; 236,724,960 and 230,724,960 shares issued and outstanding at December 31, 2018 and 2017, respectively | 23,672 | 23,072 | ||||||
Additional paid-in-capital | 14,220,537 | 12,444,488 | ||||||
Accumulated deficit | (16,142,976 | ) | (12,439,218 | ) | ||||
Total stockholders'(deficit) equity | (1,898,767 | ) | 28,342 | |||||
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | $ | 389,830 | $ | 1,075,208 | ||||
The accompanying notes are an integral part of these consolidated financial statements
ZNERGY, INC.
| For the Year Ended | ||||||||
| December 31, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Revenue | $ | 1,225,867 | $ | 196,828 | ||||
| Cost of revenue | 980,996 | 151,546 | ||||||
| Gross profit | 244,871 | 45,282 | ||||||
| Selling, general and administrative expenses | 4,138,249 | 1,033,595 | ||||||
| Loss from operations | (3,893,378 | ) | (988,313 | ) | ||||
| Other income (expense) | ||||||||
| Other income | - | 7,137 | ||||||
| Interest (expense) | (594,192 | ) | - | |||||
| Total other income (expense) | (594,192 | ) | 7,137 | |||||
| Provision for income taxes | - | - | ||||||
| Net loss | $ | (4,487,570 | ) | $ | (981,176 | ) | ||
| Net loss per common share - basic and diluted | $ | (0.02 | ) | $ | (0.00 | ) | ||
Weighted average number of shares outstanding during the year - basic and diluted | 214,644,216 | 197,543,151 | ||||||
For the Years Ended | ||||||||
December 31, | December 31, | |||||||
2018 | 2017 | |||||||
Revenue | $ | 1,452,153 | $ | 1,225,867 | ||||
Cost of revenue | 1,455,011 | 980,996 | ||||||
Gross profit | (2,858 | ) | 244,871 | |||||
Selling, general and administrative expenses | 3,299,118 | 4,138,249 | ||||||
Loss on sale and write off of assets | 88,628 | - | ||||||
Total operating expenses | 3,387,746 | 4,138,249 | ||||||
Loss from operations | (3,390,604 | ) | (3,893,378 | ) | ||||
Other income (expense) | ||||||||
Other income | 5,868 | - | ||||||
Interest expense | (319,022 | ) | (594,192 | ) | ||||
Total other expense | (313,154 | ) | (594,192 | ) | ||||
Provision for income taxes | - | - | ||||||
Net loss | $ | (3,703,758 | ) | $ | (4,487,570 | ) | ||
Net loss per common share - basic and diluted | $ | (0.02 | ) | $ | (0.02 | ) | ||
Weighted average number of shares outstanding - basic and diluted | 235,387,974 | 214,644,216 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
ZNERGY, INC.
FOR THE YEARS ENDED DECEMBER 31, 20172018 AND 2016
| Total | ||||||||||||||||||||
| Additional | Stockholders’ | |||||||||||||||||||
| Common Stock | Paid in | Accumulated | Equity | |||||||||||||||||
| Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||
| Balance at December 31, 2015 | 330,000,000 | $ | 33,000 | $ | 7,897,200 | $ | (6,970,472 | ) | $ | 959,728 | ||||||||||
| (149,950,000 | ) | (14,995 | ) | (1,004,897 | ) | - | (1,019,892 | ) | ||||||||||||
| Contributed services | - | - | 10,760 | - | 10,760 | |||||||||||||||
| Shares issued for services | 13,100,000 | 1,310 | 925,190 | - | 926,500 | |||||||||||||||
| Deferred compensation | - | - | (208,333 | ) | - | (208,333 | ) | |||||||||||||
| Stock options | - | - | 6,180 | - | 6,180 | |||||||||||||||
| Net loss | - | - | - | (981,176 | ) | (981,176 | ) | |||||||||||||
| Balance at December 31, 2016 | 193,150,000 | 19,315 | 7,626,099 | (7,951,648 | ) | (306,234 | ) | |||||||||||||
| Warrants issued with debt | - | - | 97,417 | - | 97,417 | |||||||||||||||
| Shares and options issued for services | 22,650,000 | 2,265 | 3,084,006 | - | 3,086,271 | |||||||||||||||
| 506b Offering | ||||||||||||||||||||
| Stock and warrants issued for cash | 10,600,000 | 1,059 | 793,941 | 795,000 | ||||||||||||||||
| Stock and warrants issued for debt conversion | 4,324,960 | 433 | 843,025 | 843,458 | ||||||||||||||||
| Net loss | - | - | - | (4,487,570 | ) | (4,487,570 | ) | |||||||||||||
| Balance at December 31, 2017 | 230,724,960 | $ | 23,072 | $ | 12,444,488 | $ | (12,439,218 | ) | $ | 28,342 | ||||||||||
Additional | Total | |||||||||||||||||||
Common Stock | Paid in | Accumulated | Stockholders' | |||||||||||||||||
Shares | Amount | Capital | Deficit | (Deficit) Equity | ||||||||||||||||
Balance at January 1, 2017 | 193,150,000 | $ | 19,315 | $ | 7,626,099 | $ | (7,951,648 | ) | $ | (306,234 | ) | |||||||||
Warrants issued with debt | - | - | 97,417 | - | 97,417 | |||||||||||||||
Shares and options issued for services | 22,650,000 | 2,265 | 3,084,006 | - | 3,086,271 | |||||||||||||||
Stock and warrants issued for cash | 10,600,000 | 1,059 | 793,941 | - | 795,000 | |||||||||||||||
Stock and warrants issued for debt | 4,324,960 | 433 | 843,025 | - | 843,458 | |||||||||||||||
Net loss | - | - | - | (4,487,570 | ) | (4,487,570 | ) | |||||||||||||
Balance at December 31, 2017 | 230,724,960 | 23,072 | 12,444,488 | (12,439,218 | ) | 28,342 | ||||||||||||||
Warrants issued with debt | - | - | 170,989 | - | 170,989 | |||||||||||||||
Options issued for services | - | - | 1,030,660 | - | 1,030,660 | |||||||||||||||
Shares issued for cash | 1,000,000 | 100 | 74,900 | - | 75,000 | |||||||||||||||
Shares issued for services | 5,000,000 | 500 | 499,500 | - | 500,000 | |||||||||||||||
Net loss | - | - | - | (3,703,758 | ) | (3,703,758 | ) | |||||||||||||
Balance at December 31, 2018 | 236,724,960 | $ | 23,672 | $ | 14,220,537 | $ | (16,142,976 | ) | $ | (1,898,767 | ) | |||||||||
The accompanying notes are an integral part of these consolidated financial statements
ZNERGY, INC.
| For the Year Ended | ||||||||
| December 31, | December 31, | |||||||
| 2017 | 2016 | |||||||
| CASH FLOWS USED IN OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (4,487,570 | ) | $ | (981,176 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 11,025 | 2,732 | ||||||
| Common stock and options issued for services | 3,086,271 | 724,347 | ||||||
| Common stock and warrants issued for interest | 588,273 | - | ||||||
| Contributed services | - | 10,760 | ||||||
| Accounts receivable | (80,983 | ) | (79,612 | ) | ||||
| Inventory | (252,501 | ) | (192,104 | ) | ||||
| Prepaid expenses | (31,615 | ) | (3,750 | ) | ||||
| Accounts payable & accrued expenses | 200,754 | 365,399 | ||||||
| Customer deposits | 32,848 | 6,605 | ||||||
| Net cash used in operating activities | (933,498 | ) | (146,799 | ) | ||||
| CASH FLOWS USED IN INVESTING ACTIVITIES: | ||||||||
| Purchase of fixed assets | (99,774 | ) | (2,800 | ) | ||||
| Net cash used in investing activities | (99,774 | ) | (2,800 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from common stock | 795,000 | - | ||||||
| Advances from third parties | (60,000 | ) | 60,000 | |||||
Proceeds from advances from related parties | 374,246 | 128,827 | ||||||
| Net cash provided by financing activities | 1,109,246 | 188,827 | ||||||
| INCREASE IN CASH | 75,974 | 39,228 | ||||||
| CASH, BEGINNING OF YEAR | 40,507 | 1,279 | ||||||
| CASH, END OF YEAR | $ | 116,481 | $ | 40,507 | ||||
Supplemental Disclosures | ||||||||
| Interest paid in cash for the period | $ | - | $ | - | ||||
| Income taxes paid in cash for the period | $ | - | $ | - | ||||
Non-cash investing and financing activities: | ||||||||
| Warrants issued with debt | $ | 97,417 | $ | - | ||||
| Purchase of building with note | $ | 225,000 | $ | - | ||||
| Repayment of debt with common stock and options | $ | 843,458 | $ | - | ||||
| Purchase of recreational vehicle in exchange for receivable payment | $ | 47,776 | ||||||
| Transfer of assets and liabilities to related party for return of common shares | $ | - | $ | 1,019,892 | ||||
For the Years Ended | ||||||||
December 31, | December 31, | |||||||
2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (3,703,758 | ) | $ | (4,487,570 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 34,563 | 11,025 | ||||||
Impairment expense | 1,845 | - | ||||||
Loss on sale of fixed assets | 26,542 | - | ||||||
Write-off of fixed assets | 62,086 | - | ||||||
Non-cash interest expense | 319,775 | - | ||||||
Common stock and options issued for services | 1,530,660 | 3,086,271 | ||||||
Common stock and warrants issued for interest | - | 588,273 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 112,818 | (80,983 | ) | |||||
Prepaid expenses | (26,092 | ) | (31,615 | ) | ||||
Inventory | 145,178 | (252,501 | ) | |||||
Accounts payable and accrued expenses | 118,968 | 200,754 | ||||||
Customer deposits | (8,811 | ) | 32,848 | |||||
Net cash used in operating activities | (1,386,226 | ) | (933,498 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of fixed assets | (62,668 | ) | (99,774 | ) | ||||
Proceeds from sale of fixed assets | 50,218 | - | ||||||
Net cash used in investing activities | (12,450 | ) | (99,774 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from common stock | 75,000 | 795,000 | ||||||
Repayment of advances from related parties | (7,623 | ) | (60,000 | ) | ||||
Proceeds of advances from related parties | 230,411 | 374,246 | ||||||
Repayment of loan from related parties | (48,000 | ) | - | |||||
Proceeds of loan from related parties | 1,033,000 | - | ||||||
Net cash provided by financing activities | 1,282,788 | 1,109,246 | ||||||
Increase (decrease) in cash | (115,888 | ) | 75,974 | |||||
Cash, beginning of the year | 116,481 | 40,507 | ||||||
Cash, end of the year | $ | 593 | $ | 116,481 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Interest paid in cash | $ | 15,000 | $ | - | ||||
Non-cash investing and financing activities: | ||||||||
Warrants issued with debt | $ | 170,989 | $ | 97,417 | ||||
Satisfaction of debt with building | $ | 225,768 | $ | - | ||||
| Purchase of building for debt | $ | - | $ | 225,000 | ||||
Repayment of debt with common stock and options | $ | - | $ | 843,458 | ||||
Purchase of recreational vehicle in exchange for receivable payment | $ | - | $ | 47,776 | ||||
The accompanying notes are an integral part of these consolidated financial statements
ZNERGY, INC.
NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION
Znergy, Inc., (formerly Mazzal Holding Corp., formerly Boston Investment and Development Corp.) is a Nevada corporation (the “Company” or “Znergy”), incorporated on January 23, 2013. The originalCompany is a provider of energy-efficient lighting products, lighting controls and energy management solutions. The Company offers a full turn-key lighting solution which includes economic assessments, energy efficient analysis, installation and rebate support for the Company’s customers. The Company’s business planprimarily involves retrofitting existing lighting solutions from traditional high intensity fluorescent lighting to energy efficient LED (Light Emitting Diode) technology.
The spread of a novel strain of coronavirus (COVID-19) around the world in the first half of 2020 has caused significant volatility in U.S. and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies and, as such, the Company was the construction and management of multi-family home developments and the subsequent sale thereof.
Basis of Presentation
The Company maintains its accounting records on an accrual basis in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Znergy (FL) and Znergy Holdings (FL). All intercompany transactions have been eliminated in consolidation.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts or revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates, judgments, and assumptions used in these consolidated financial statements include those related to revenues, accounts receivable and related allowances, contingencies, and the fair values of stock-based compensation. These estimates, judgments, and assumptions are reviewed periodically and the effects of material revisions in estimates are reflected in the financial statements prospectively from the date of the change in estimate.
Cash
The Company maintains its cash balances at credit-worthy financial institutions that are insured by the Federal Deposit Insurance Corporation.
Revenue Recognition
Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“Topic 606”), became effective for the Company on January 1, 2018. The Company’s revenue recognition disclosure reflects its updated accounting policies that are affected by this new standard. The Company accountsapplied the “modified retrospective” transition method for revenue usingopen contracts for the "completed contract method"implementation of Topic 606. The Company made no adjustments to its previously-reported total revenues, as those periods continue to be presented in accordance with ASC 605-35.its historical accounting practices under Topic 605, Revenue Recognition. The Company generally has two revenue sources: installation contracts and sales of lighting products. The installation contracts are short term in duration, typically within a week. The disaggregation of revenue for the year ended December 31, 2018 was $1,338,897 and $113,256 for installation contracts and sale of lighting products, respectively.
The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer. Revenue is measured based on the consideration the Company expects to receive in exchange for those products. In instances where final acceptance of the product is specified by the customer, revenue is deferred until all acceptance criteria have been met. Revenues are recognized under Topic 606 in a manner that reasonably reflects the delivery of the Company’s products and services to customers in return for expected consideration and includes the following elements:
● | executed contracts with the Company’s customers that it believes are legally enforceable; |
● | identification of performance obligations in the respective contract; |
● | determination of the transaction price for each performance obligation in the respective contract; |
● | allocation the transaction price to each performance obligation; and |
● | recognition of revenue only when the Company satisfies each performance obligation. |
Performance Obligations
The Company’s revenue streams can be categorized into the following performance obligations and recognition patterns:
● | Completion and delivery of installation contracts. The Company recognizes revenue at a point in time when control transfers to the customer, usually through a written customer acceptance form. |
● | Delivery of lighting products. The Company recognizes revenue at the point of shipment to the customer. |
Transaction prices for performance obligations are explicitly outlined in relevant agreements, therefore, the Company does not believe that significant judgments are required with respect to the determination of the transaction price.
When Znergy receives an order from a customer, either verbally or through a written purchase order for products such as individual lights or fixtures, but is not part of an installation contract, the Company recognizes the revenue when the goods are shipped, and title has passed to the customer. In these arrangements, the Company has determined that there is one performance obligation and that revenue should be recognized at the point in time that title passes to the customer.
Installation contract revenue is recognized when the contract is considered complete by the customer, through a written customer acceptance form. Each contract for installation of lighting and fixtures, consists of labor and materials, and is given a unique number in the system. Each contract is accounted for individually. The Company identifies the performance obligations, which include labor and materials and are accounted for as one contract. The transaction price is identified in advance with an agreed proposal between the Company and the customer and the price can be adjusted if, during the installation process, changes are made during the process. Under this method, contract costs are accumulated as deferred assets and billings and/or cash receipts are recorded to a deferred revenue liability account during the contract period, but no revenues, costs, or profits are recognized in operations until the completion of the contract. Costs include direct material, direct labor, subcontract labor, and allocable indirect costs. All unallocableunallocated indirect costs and corporate general and administrative costs are charged in the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss when such loss is determined. The deferred asset (accumulated contract costs) in excess of the deferred liability (billings and/or cash received) is classified as a current asset under "Costs in excess of billings on uncompleted contracts." The deferred liability (billings and/or cash received) in excess of the deferred asset (accumulated contract costs) is classified under current liabilities as "Billings in excess of costs on uncompleted contracts." A contract is considered complete when accepted by the customer.
Accounts receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a provision for bad debt expense and an adjustment to a valuation allowance based on their assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance account and a credit to accounts receivable.
Inventory
Inventory consists of a variety of LED lamps, all of which are valued at the lower of actual costs from our supplierscost or market.
Building, equipmentEquipment and furniture,Furniture, net
Real estate assets are stated at cost less accumulated depreciation and amortization.
Furniture, fixtures and equipment are recorded at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line basis over the estimated useful lives of the assets, ranging from 3-5 years.
Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments, which improve or
Building, equipment and furniture consisted of the following:
December 31 | December 31 | |||||||
2018 | 2017 | |||||||
Building | $ | - | $ | 255,000 | ||||
Equipment and Furniture | 59,609 | 120,350 | ||||||
| 59,609 | 375,350 | |||||||
Accumulated Depreciation | (31,257 | ) | (11,257 | ) | ||||
Net | $ | 28,352 | $ | 364,093 | ||||
During the years ended December 31, 2018 and 2017, depreciation expense was $34,563 and $11,025 respectively
For purposes of recognition and measurement of an impairment loss, a long-lived asset or assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The Company assesses the impairment of long-lived assets (including identifiable intangible assets) annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
When management determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more indicators of impairment, we testthe Company tests for any impairment based on a projected undiscounted cash flow method. Projected future operating results and cash flows of the asset or asset group are used to establish the fair value used in evaluating the carrying value of long-lived and intangible assets. The Company estimates the future cash flows of the long-lived assets using current and long-term financial forecasts. The carrying amount of a long-lived asset is not recoverable if its carrying amount exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If this were the case, an impairment loss would be recognized. The impairment loss recognized is the amount by which the carrying amount exceeds the fair value. AtDuring the year ended December 31, 2017 and 2016,2018, the Company believes that no impairmentimpaired intangible assets having a carrying value of its long-lived assets is required.
Accounts payablePayable and accrued expenses
Accounts payable and accrued expenses are carried at amortized cost and represent liabilities for goods and services provided to the Company prior to the end of the financial year that are unpaid and arise when the Company becomes obliged to make future payments in respect of the purchase of these goods and services.
Financial Instruments and Fair Value Measurements
FASB ASC 825, Financial Instruments, defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
● | Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. |
● | Level 2 inputs to the valuation methodology included quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
● | Level 3 inputs to the valuation methodology is one or more unobservable inputs which are significant to the fair value measurement. |
The carrying amounts of the Company’s financial instruments, which includes accounts receivable, inventory, accounts payable and accrued expenses, customer deposits and loans for related parties approximate their fair values at December 31, 2018 and 2017, due to their short-term nature. The Company’s cash is measured at fair value under the fair value hierarchy based on Level 1 quoted prices in active markets for identical assets or liabilities.
Loss per share
The Company computes net loss per share in accordance with ASC 260, “Earnings Per Share” ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding for the effects of all potential dilutive common shares, which comprise options granted to employees. At December 31, 20172018 and 2016,2017, any potentially dilutive shares (consisting of 39,985,974 options and 45,741,094 options)options, respectively) and (3,050,000 warrants and 15,924,960 warrants, respectively) were not considered in the calculation of the loss per share as their effect would be anti-dilutive.
Stock-Based Compensation
Certain employees, officers, directors, and consultants of the Company participate in incentive plans that provide for granting stock options and performance-based awards. Time basedTime-based stock options generally vest in equal increments over a two-year period and expire on the third anniversary following the date of grant. Performance-based stock options vest once the applicable performance conditions are satisfied.
The Company recognizes stock-based compensation for equity awards granted to employees, officers, directors, and consultants as Selling, general and administrative expense in the consolidated statements of operations. The fair value of stock options is estimated using a Black-Scholes valuation model on the date of grant. Stock-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period. For performance-based stock options, compensation is recognized once the applicable performance condition is satisfied.
The fair value of restricted stock awards is equal to the closing price of the Company’s stock on the date of grant multiplied by the number of shares awarded. Stock-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period.
Income taxes
In accordance with FASB ASC 740, “Income Taxes” (“ASC 740”), deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. The Company has recorded a valuation allowance against its deferred tax assets based on the history of losses incurred.
ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions. As of December 31, 2017,2018, the Company does not believe a liability exists for any unrecognized tax benefits exists.
The Company has not filed required income tax returns to date. While for federal income tax purposes the net operating losses would eliminate the federal income tax liability, we may be subject to penalties and minimum state income tax.
All tax periods from inception remain open to examination by taxing authorities due to the non-filing and the net operating losses.
The Tax Cuts and Jobs Act (the “Tax Act”) was signed into law on December 22, 2017. The Tax Act changed many aspects of U.S. corporate income taxation and included a reduction of the corporate income tax rate from 35% to 21%. The Company will continue to assess its provisions for income tax as future guidance is issued but does not currently anticipate significant revisions will be necessary. Any such revisions will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118, Net Income (Loss) Per Common Share.
Recently Issued Accounting Pronouncements
In May 2014,June 2016, the Financial Accounting Standards Board or FASB,(“FASB”) issued Accounting Standards UpdateASU No. 2014-09, Revenue From Contracts With Customers2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2014-09. Pursuantwhich significantly changes the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to this update,estimate credit losses on certain financial instruments, including trade receivables, and requires an entity shouldto recognize revenue to depict the transferan allowance based on its estimate of promised goods or services to customers in an amount that reflects the consideration to which the entity expects toexpected credit losses rather than incurred losses. This standard will be entitled in exchange for those goods or services. The amendments in this update are currently effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and are to be applied retrospectively, or on a modified retrospective basis. Early application is not permitted. In July 2015, the FASB approved a one-year deferral of the effective date for annual reporting periods beginning after December 15, 2017 with early adoption permitted for annual periods beginning after December 15, 2016.2019, and will generally require adoption on a modified retrospective basis. In February 2020, the FASB issued SU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for us for interim and annual periods in fiscal years beginning after December 15, 2022. We have determined that adopting ASU 2014-09 doesdo not expect the adoption of this guidance to have a materialsignificant impact on our consolidated financial statements.
In February 24, 2016, the FASB issued ASU No. 2016-02, Leases requiring lessees, which supersedes the current lease accounting requirements. This standard requires a lessee to recognize a right-of-use asset and a lease liabilityrecord on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months. In addition, this standard requires lessees to disclose certain key information about lease transactions. Upon implementation, an entity’s lease payment obligations will be recognized at their estimated present value along with a corresponding right-of-use asset. Lease expense recognition will be generally consistent with current practice. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements , which simplifies adoption of the new lease accounting requirements by allowing an additional transition method that will not require restatement of prior periods and providing a new practical expedient for lessors to avoid separating lease and non-lease components within a contract if certain requirements are met. The provisions of this guidance must be elected upon adoption of the new lease accounting requirements, which will be effective for interim and annual periods beginning after December 15, 2018.
We will adopt the standard as required on January 1, 2019 and use that date as our date of initial application of the guidance. Consequently, we will not update previously reported financial information and the disclosures under the new standard will not be provided for dates and periods prior to January 1, 2019. We will elect all of the practical expedients available under the transition guidance. The new standard also provides practical expedients for ongoing accounting. We will elect the short-term lease recognition exemption for all leases exceptthat qualify. This means we will not recognize right of use assets or lease liabilities for short-termthose leases. For lessees, leasesWe will also elect the practical expedient to not separate lease and non-lease components for all of our leases. We do not expect that this standard will have a material impact on our financial statements. While we continue to be classified as eitherassess all of the effects of adoption, we currently believe the most significant effects relate to the recognition of new right of use assets and lease liabilities on our balance sheet for our real estate and equipment operating or finance leases, and the significant new required disclosures regarding our leasing activities. We do not expect a significant change in our leasing activities between now and adoption.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Clarification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which eliminates the diversity in practice related to the classification of certain cash receipts and payments in the income statement. Lessor accounting is similarstatement of cash flows, by adding or clarifying guidance on eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the current model but updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. The effective dateinterest rate of the new standardborrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for public companies isnon-public business entities for fiscal yearsannual periods beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
In May 10, 2017, the FASB issued ASU No. 2017-09, Compensation –- Stock Compensation (Topic 718), which was issued to clarify: Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 provides clarity and reducereduces both (1)(i) diversity in practice and (2)(ii) cost and complexity when applying the guidance in Topic 718, Compensation – StockCompensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. An entity may change the terms or conditions of a share-based payment award for many different reasons. The amendments in this updateASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment awareaward require an entity to apply modification accounting in Topic 718. The amendments in the update areASU 2017-09 is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.2017, with early adoption permitted. The adoption of ASU 2017-09 did not have a material impact on the Company’s financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which changes the measurement date for share-based awards to the grant date, instead of the previous requirement to remeasure the awards through the performance completion date. ASU No. 2018-07 is effective for the Company for fiscal years beginning after December 31, 2018, including interim periods within that fiscal year. Early adoption is permitted,permitted. The Company does not believe adopting ASU No. 2018-07 will have a material impact on its consolidated financial statements.
In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements, (“ASU 2018-09”), which affects a wide variety of topics, including adoptionthe following. Amendments to Subtopic 220-10, Income Statement - Reporting Comprehensive Income - Overall relates to income taxes not payable in any interim period,cash. Amendments to Subtopic 470-50, Debt—Modifications and Extinguishments relates to debt extinguishment and requires that the net carrying amount of extinguished fair value elected debt equals its fair value at reacquisition and related gains or losses in other comprehensive income must be included in net income upon extinguishment of the debt. Amendments to Subtopic 480-10, Distinguishing Liabilities from Equity - Overall relates to combinations of freestanding financial instruments with non-controlling interests. Amendments to Subtopic 718-740, Compensation - Stock Compensation - Income Taxes relate to recognition timing clarification for (10)excess tax benefits or deficiencies for compensation expense. Amendments to Subtopic 805-740, Business Combinations - Income Taxes relate to allocating tax provisions to an acquired entity. Amendments to Subtopic 815-10, Derivatives and Hedging - Overall relate to accounting for offsetting derivatives. Amendments to Subtopic 820-10, Fair Value Measurement - Overall relate to the wording with respect to how transfer restrictions effect the fair value of an asset and adds explicit wording to allow entities to measure fair value on a net basis for those portfolios in which financial assets and financial liabilities and nonfinancial instruments are managed and valued together. Amendments to Subtopic 940-405, Financial Services - Brokers and Dealers - Liabilities relate to guidance about offsetting on the balance sheet. Amendments to Subtopic 962-325, Plan Accounting - Defined Contribution Pension Plans – Investments - Other relate to plan evaluation of whether a readily determinable fair value exists to determine whether those investments may qualify for the practical expedient to measure at net asset value in accordance with Topic 820. The transition and selection of an effective date is based on the facts and circumstances of each amendment, but many of the amendments have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. The Company does not expect this ASU to have a material impact on its financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which removed certain disclosure requirements regarding transfers between fair value hierarchy levels and modified disclosure requirements for Level 3 fair value measurements and the timing of liquidation of investments in certain entities that calculate net asset value. ASU 2018-13 is effective for all entities for reportingannual periods beginning after December 15, 2019. Certain amendments should be applied prospectively for which financial statements have not yet been issued and (2)only the most recent interim or annual period presented in the initial year of adoption; all other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. The Company does not expect the new guidance to have a material impact on its financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles--GoodwillandOther--Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , which aligns the requirements for capitalizing implementation costs in a cloud computing service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. This standard will be effective for interim and annual periods beginning after December 15, 2019. We do not expect the adoption of this guidance to have a significant impact on our financial position, results of operations, or cash flows.
In November 2018, the FASB issued ASU No. 2018-18, “Collaborative Arrangements (Topic 808) Clarifying the Interaction between Topic 808 and Topic 606” (“ASU 2018-18”), which makes targeted improvements to generally accepted accounting principles for collaborative arrangements. The new guidance clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the participant is a customer in the context of a unit of account. It aligns unit-of-account guidance in Topics 808 and 606 and precludes presenting a transaction together with revenue recognized under Topic 606 for a collaborative arrangement participant that is not directly related to sales to third parties and the participant is not a customer. ASU 2018-18 is effective for public entities for reporting periods for which financial statements havefiscal years beginning after December 15, 2019. Early adoption is permitted; however, an entity may not yet been made available for issuance. We are currently evaluatingadopt the effect thatamendments of ASU 2018-18 earlier than its adoption date of Topic 606. The amendments of ASU 2018-18 should be applied retrospectively to the updated standard will have on our consolidated financial statements and related disclosures.
In April 2019, the FASB issued ASU No. 2019-04 “Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”, which provides updates and clarifications to three previously-issued ASUs: 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”; 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”; and 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for complying with such new or revised accounting standards. We have elected to opt outHedging Activities”. The adoption of this extended transition period. As noted,standards update is not expected to have a material impact on the Company’s financial statements.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes”. This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The guidance is effective non-public entities for fiscal years beginning after December 15, 2020, with early adoption permitted. The adoption method is dependent on the specific amendment included in this electionupdate as certain amendments require retrospective adoption, modified retrospective adoption, an option of retrospective or modified retrospective, and prospective adoption. The adoption of this standards update is irrevocable.
The Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
NOTE 3 – GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. As of December 31, 2017,2018, the Company has a working capital deficit of $337,596,$1,927,119, insufficient cash resources to meet its planned business objectives and accumulated deficit of $12,439,218.$16,142,976. The Company intends to fund operations through debt and equity financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements through May 2019.
The Company is dependent upon, among other things, obtaining additional financing to continue operations and to execute its business plan. In response to these problems, management intends to raise additional funds through public or private placement offerings. No assurances can be made that management will be successful in pursuing any of these strategies.
These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.concern for the next twelve months from the date these consolidated financial statements were issued. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 4 – INTANGIBLE ASSETS
The Company was granted a federally registered trademark for “ZNERGY”. The cost of applying for and prosecuting this trademark was $1,845 which cost was accounted for as an intangible asset.
NOTE 5 – REAL ESTATE HELD FOR SALE AND DEVELOPMENT
On July 22, 2017, the Company entered into a purchase agreement for a property located at 808A South Huntington Street, Syracuse, Indiana. The purchase price was $255,000 of which $30,000 was paid on July 22, 2017 with the balance of $225,000 due 180 days after closing. There was no interest accruing on the debt. The square footage of the building is approximately 2,348 and has 27 storage units which generate approximately $19,000 per year in rental income. The Company closed on the property on September 1, 2017 (See Note 12).
On March 9, 2018, the Company settled the outstanding mortgage through a sale of the building to the Company's chairman, Rick Mikles who purchased the building for the balance of the mortgage of $225,000, as the Company was unable to make the scheduled $225,000 payment. On March 16, 2018, a quitclaim was recorded to Rick Mikles as the new owner of the building.
NOTE 6 – LOANS FROM RELATED PARTIES
| December 31, 2017 | December 31, 2016 | |||||||
| Loans with related parties: | ||||||||
| Znergy, Inc. officers and stockholders | $ | 171,518 | $ | 135,749 | ||||
December 31 | December 31 | |||||||
2018 | 2017 | |||||||
Rick Mikles | $ | 514,579 | $ | 47,248 | ||||
Wayne Miller | 642,075 | 124,270 | ||||||
Paul Ladd | 58,650 | - | ||||||
Cary Baskin | 75,000 | - | ||||||
| $ | 1,290,304 | $ | 171,518 | |||||
Rick Mikles
On November 15, 2017, the Company executed an unsecured promissory note in the amount of $50,000, payable to the Company’s chairman, Rick Mikles. The note was payable on December 1, 2017 with interest at 4% per annum. On December 1, 2017, the payment date was extended to June 1, 2018. The balance remains outstanding.
On February 15, 2018, the Company executed a promissory note in the amount of $25,000 payable to Rick Mikles, the Company’s Chairman. The note was due and payable on June 1, 2018 together with interest at 4% per annum. Pursuant to the terms of the note, if the note and accrued interest is not paid by the due date, interest at 12% per annum shall be accrued on the outstanding balance until paid in full. The balance at December 31, 2018 was $27,125 which includes unpaid interest.
On March 2, 2018, the Company executed an unsecured promissory note in the amount of $200,000 payable to Rick Mikles, the Company’s Chairman. The note was due on June 1, 2018 together with interest of $2,500. Pursuant to the terms of the note, there was a 15-day grace period, which ended on June 16, 2018 at which time a 15% penalty of the unpaid balance became due and payable together with the unpaid principal and accrued interest. The balance at December 31, 2018 was $232,875, which includes unpaid interest and penalties.
During the year ended December 31, 2018, the Company received various loans from the Company’s chairman, Rick Mikles, with a balance of $200,000 as of December 31, 2018. These loans were non-interest bearing and payment is due on demand.
Wayne Miller
On November 27, 2017, the Company executed an unsecured promissory note in the amount of $200,000, payable to Mr. Wayne Miller, a shareholder of the Company. The note was due and payable with interest of $2,000 on December 31, 2017. The note was repaid in full, with interest on December 22, 2017. Under the note agreement, the Company issued warrants to purchase 1,000,000 shares at an exercise price of $0.15 per share. The warrants expireexpired on the first anniversary date of the initial exercise date of the warrants.
On December 6, 2017, the Company executed an unsecured promissory note in the amount of $150,000 payable to Mr. Wayne Miller, a shareholder of the Company. The note was due and payable on March 12, 2018, with interest of $6,000. Under the note agreement, the Company issued warrants to purchase 1,000,000 shares at an exercise price of $0.15 per share. The warrants expire on the first anniversary date of the initial exercise date of the warrants. The Company evaluated the warrants in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging – Contracts in Entity’s Own Stock and determined that the warrants did not meet the definition of a liability and therefore did not account for them as a separate derivative liability. The fair value of the warrants was calculated using the Black-Sholes model amounting to $42,345, and was recorded as a debt discount and amortized over the term of the note. As of December 31, 2018, the date of this Report,debt discount was fully amortized and the principal balance of the note remains unpaid. Pursuant to the terms of the note, there was a 15-day grace period granted, which ended on March 27, 2018, at which a 15% penalty on the unpaid balance became due and payable along with the unpaid principal and any accrued interest.
On January 8, 2018, the Company executed an unsecured promissory note in the amount of $150,000 payable to Mr. Wayne Miller, a shareholder of the Company. The note was due and payable on April 8, 2018, with interest of $6,000. Pursuant to the terms of the note, there was a 15-day grace period, which ended on April 23, 2018 at which time a 15% penalty of the unpaid balance became due and payable together with the unpaid principal December 31, 2018 was $179,700, which includes unpaid principal, interest, and penalties. Under the note agreement, the Company issued warrants to purchase 1,000,000 shares at an exercise price of $0.15 per share. The warrants expire on the first anniversary date of the initial exercise date of the warrants. The Company evaluated the warrants in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging – Contracts in Entity’s Own Stock and determined that the warrants did not meet the definition of a liability and therefore did not account for them as a separate derivative liability. The fair value of the warrants was calculated using the Black-Sholes model amounting to $47,867, and was recorded as a debt discount and amortized over the term of the note. As of December 31, 2018, the debt discount was fully amortized and the principal balance of the note remains unpaid.
On March 22, 2018, the Company executed an unsecured promissory note in the amount of $20,000 payable to Mr. Wayne Miller, a shareholder of the Company. The note has interest at accruing at 10% per annum. The balance at December 31, 2018 was $10,250 which includes unpaid interest.
On October 4, 2018, the Company also borrowed $275,000 short-term payable to Wayne Miller. The balance as of December 31, 2018 is $281,875 which includes the unpaid principal and interest. This loan was due on April 3, 2019.
Paul Ladd
On March 22, 2018, the Company executed an unsecured promissory note in the amount of $50,000 payable to Paul Ladd, a shareholder. The note was due and payable on May 21, 2018 together with interest of $1,000. Pursuant to the terms of the note, there was a 15-day grace period, which ended on June 4, 2018 at which time a 15% penalty of the unpaid balance became due and payable together with the unpaid principal and accrued interest. The balance at December31, 2018 was $58,650 which includes the unpaid principal, interest, and penalties. Under the note agreement, the Company issued warrants to purchase 50,000 shares at an exercise price of $0.15 per share. The warrants expire on the first anniversary date of the initial exercise date of the warrants. The Company evaluated the warrants in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging – Contracts in Entity’s Own Stock and determined that the warrants did not meet the definition of a liability and therefore did not account for them as a separate derivative liability. The fair value of the warrants was calculated using the Black-Sholes model amounting to $2,875, and was recorded as a debt discount and amortized over the term of the note. As of December 31, 2018, the debt discount was fully amortized and the principal balance of the note remains unpaid.
Cary Baskin
On October 23, 2018, the Company also borrowed $75,000 in a non-interest bearing short-term payable to Cary Baskin, and was secured by shares owned by the Company’s CEO. The balance as of December 31, 2018 is $75,000. This loan was due on December 31, 2018.
Total interest expense under the related party loans was $119,803 and $75,106 during the years ended December 31, 2018 and 2017, AND 2016
NOTE 7 – STOCKHOLDERS’ EQUITY (DEFICIT)
December 31 | December 31 | |||||||
2018 | 2017 | |||||||
B2 Opportunity Fund | $ | 154,788 | $ | - | ||||
Other | 68,000 | - | ||||||
| $ | 222,788 | $ | - | |||||
On February 9, 2016,April 20, 2018, the Company agreedreceived $125,000 as a short-term advance from an investor, B2 Opportunity Fund, via a payment to sella vendor on the Company’s behalf. On June 5, 2018, the Company received an additional $29,975 in cash as an additional short-term advance. These advances were offset by $187 of repayments to the Mazzal Trustinvestor. Currently the real property which the Trust had previously sold to the Companyadvances are non-interest bearing and the Trust returned to the Company 149,950,000 of the 150,000,000 shares of the Company’s common stock owned by the Trust. These shares returned to the Company were canceled.
NOTE 8 – STOCKHOLDERS’ (DEFICIT) EQUITY
Common Stock
Year ended December 31, 2016 the Company appointed Arthur Fillmore to the board of directors as well as General Counsel to the Company. In conjunction with his appointment, the Company issued to Mr. Fillmore 3,000,000 shares of its common stock vested immediately, which shares were valued at $120,000 based on the trading price of the shares on the date of grant. Concomitantly, the Company entered into a consulting agreement with Mr. Fillmore’s employer, AEGIS Professional. This consulting agreement has a term of three years. Upon executing the agreement, the Company issued AEGIS Professional an option to purchase 2,000,000 shares of its common stock at $0.10 per share and a term of 3-years with immediate vesting.
On January 25, 2017 the Company appointed RichardRick Mikles as Chairman of the board of directors and issued to Mr. Mikles 3,000,000 shares of its common stock, valued at its trading price on the date of the grant of $300,000, which vested immediately, and 4,000,000 options to purchase shares of common stock of the Company at a price of $0.10 per share said options vesting equally over eight quarters and having an expiration of three years from the date of issue. Concomitantly,Concurrently, the Company entered into a consulting agreement with Mr. Mikles to provide marketing, strategic, and organizational services to the Company. Upon execution of this consulting agreement the Company issued 2,000,000 shares of common stock, valued at its trading price on the date of the grant of $200,000, which vested immediately, and 5,000,000 options to purchase shares of common stock of the Company at aan exercise price of $0.10 per share said options to vestthat vests quarterly in the amount of one option for every two dollars of revenue recognized by the Company.
On January 27, 2017 the Company appointed Kevin Harrington to its Board of Directors and issued 2,000,000 shares of its common stock, valued at its trading price on the date of the grant of $100,000, which vested immediately, and 4,000,000 options to purchase shares of common stock of the Company at aan exercise price of $0.10 per share said options vesting equally over eight quarters and having an expiration of three years from the date of issue.
On February 2, 2017 the Company entered into a consulting agreement with Venture Legal Services, PLC, to provide legal and strategic advisory services for the Company. In conjunction with the execution of this agreement, the Company granted Venture options to purchase up to 2,000,000 shares of its common stock at aan exercise price of $0.10 per share. The options have an expiration of three years from the date of issueissuance and vest quarterly one option for every two dollars of revenue recognized by the Company.
On May 15, 2017, the Company entered into an employment agreement with Mr. Baker, as the Company’s CEO. Mr. Baker was granted 5,000,000 shares of common stock of the Company, valued at its trading price on the date of the grant of $500,000, which vested immediately, and was granted 5,000,000 options to purchase common stock of the Company at an exercise price of $0.10 per share. These options have a three-year expiration and vest quarterly one option for every two dollars of revenue recognized by the Company.
On May 15, 2017, the Company entered into an employment agreement with Mr. Floyd, as the Company’s CFO. Mr. Floyd was granted 10,000,000 options to purchase common stock of the Company at an exercise price of $0.10 per share. These options have a three-year expiration and vest quarterly, at a rate of one option for every two dollars of revenue recognized by the Company. On November 15, 2017, the Company terminated the employment agreement, effective December 31, 2017 and entered into an amended agreement, pursuant to which Mr. Floyd would be paid a salary through the effective date of the termination and for four consecutive calendar months thereafter. In addition, Mr. Floyd forfeited his unvested options of 9,313,955 shares and the Company issued 3,000,000 shares of its common stock, valued at its trading price on the date of the grant of $269,700, which vested immediately.
On June 1, 2017, the Company entered into a service agreement with a provider of investor relations services. Under the agreement, the Company issued 1,000,000 shares of common stock to the provider, valued at its trading price on the date of the grant of $98,000, vesting 500,000 on June 1, 2017, 250,000 shares on October 1, 2017 and 250,000 shares on January 1, 2018.
On June 13, 2017, the Company entered into a service agreement with a provider of bookkeeping, accounting, payroll and human resources services. Under the agreement, the Company issued 250,000 shares of common stock to the provider, valued at its trading price at the date of the grant of $30,000, which vested immediately, and 1,000,000 options to purchase common stock of the Company at an exercise price of $0.10 per share. These options have a three-year expiration and vest evenly over two years. On August 30, 2017, the Company granted 600,000 performance-based options to purchase common stock of the Company at an exercise price of $0.10 per share. These options have a three-year expiration and vest quarterly, a rate of one option for every two dollars of revenue recognized by the Company from customers referred directly by the service provider.
On June 19, 2017, the Company entered into an agreement with Profit Motivators and the Company granted 600,000 performance-based options to purchase common stock of the Company at an exercise price of $0.10 per share. These options have a three-year expiration and vest quarterly, at a rate of one option for every two dollars of revenue recognized by the Company from customers referred directly by Profit Motivators.
On July 10, 2017 the Company entered into an employment agreement with Ryan Smith, to serve as Senior Vice President of the Company. The agreement has a term of three years, and Mr. Smith’s employment with the Company is on an at-will basis. The agreement specifies an annual base salary of $100,000 and a performance-based bonus within 45 days from the end of the Company’s fiscal year as determined by the Compensation Committee of the Board of Directors. In addition, Mr. Smith was granted 3,000,000 shares of common stock of the Company, valued at its trading price at the date of the grant of $300,000, which vested immediately, and was granted 7,000,000 options to purchase common stock of the Company at an exercise price of $0.10 per share. The Options have a three-year expiration and vest quarterly at a rate of one option for every two dollars of revenue recognized by the Company.
On July 13, 2017, the Company entered into a service agreement with a provider of tax services. Under the agreement, the Company issued 100,000 shares of common stock to the provider, valued at its trading price on the date of the grant of $10,800, which vested immediately, and 400,000 options to purchase common stock of the Company at an exercise price of $0.10 per share. These options have a three-year expiration and vest evenly over two years. On August 30, 2017, The Company granted 600,000 performance-based options to purchase common stock of the Company at an exercise price of $0.10 per share. These options have a three-year expiration and vest quarterly at a rate of one option for every two dollars of revenue recognized by the Company from customers referred directly by the provider of tax services.
On July 13, 2017, the Company amended and extended a consulting agreement, originally executed on January 23, 2017, with its Chairman, Rick Mikles. Under the amended and extended agreement, the Company issued 1,600,000 shares of common stock to Mr. Mikles, valued at its trading price on the date of the grant of $172,800, which vested immediately.
On August 31, 2017, the Company entered into an advisory agreement with Donald Herrmann. Under the agreement, the Company issued 100,000 shares of common stock to Mr. Herrmann, valued at its trading price on the date of the grant of $6,550, which vested immediately, and 900,000 options to purchase common stock of the Company at an exercise price of $0.10 per share. These options have a three-year expiration and vest evenly over two years.
On September 19, 2017, the Company appointed Jennifer Peek to its Board of Directors and as its Audit Committee Chair and issued 1,500,000 shares of its common stock, valued at its trading price on the date of the grant of $76,350, which vested immediately, and 1,500,000 options to purchase shares of common stock of the Company at aan exercise price of $0.10 per share. The options vest equally over eight quarters and having an expiration of three years from the date of issue.
On November 1, 2017, the Company entered into a service agreement with a provider for information technology related services. Under the agreement, the Company issued 100,000 shares of common stock to the provider, valued at its trading price at the date of the grant of $13,492, which vested immediately, and 500,000 options to purchase common stock of the Company at an exercise price of $0.10 per share. These options have a three-year expiration and vest evenly over two years.
The Company has entered into employment agreements with its sales representatives, either as independent contractors or employees of the Company. The employees or contractors have at will contracts to provide sales and sales support services. In addition to a salary and commission, the Company has issued options to purchase common stock of the Company. The expiration periods range from 1-3 years, with options to purchase shares at an exercise price of $0.10 per share vesting over 3 years. The options granted in the aggregate total 5,700,000 shares of which 5,000,000 shares are performance-based options that vest one optionsoption for every two dollars of revenue recognized by the Company and 700,000 are time-based options which vest over 8 quarters, to a total of 8 individuals.
In June 30, 2017, the Company completed a private offering of common stock and warrants to accredited and unaccredited investors for gross proceeds of $1,119,372 which securities were offered under Regulation D, Rule 506(b) of the Securities and Exchange Act of 1933. The Company accepted subscriptions, in the aggregate, for 14,924,960 shares of common stock and one-year warrants to purchase 14,924,960 shares of common stock of which 10,600,000 shares of its common stock and 10,600,000 warrants were issued for $795,000 in cash and 4,324,960 shares of its common stock and 4,324,960 warrants were issued for $324,372 in the conversion of debt. Investors received one-year fully vested warrant to purchase up to 100% of the number of shares purchased in the offering. The warrants have an exercise price of $0.15 per share. The purchase price for each share of common stock together with the warrants was $0.075. For the debt converted, the difference between the amount of debt converted and the fair value of the common stock and warrants issued of $519,085 has been charged to interest expense.
Year ended December 31, 2018
On February 12, 2018, the Company entered into an employment agreement with Rick Mikles, the Company’s Chairman, to become Chief Marketing Officer. The agreement has a three-year term, an annual base salary of $26,000 and a quarterly payment based on 3% of the quarterly revenue recognized by the Company. Mr. Mikles was granted 5,000,000 shares of the Company’s common stock, valued at its trading price of $0.10 per share, which vested immediately. He was granted 5,000,000 options to purchase common stock of the Company at an exercise price of $0.10 per share. These options have a three-year expiration and vest one option per every 2 dollars of revenue recognized by the Company.
In September 2018, the Company issued 1,000,000 shares of the Company’s common stock to Gary Cook in exchange for advances during 2018 amounting to $75,000.
Stock Options
On January 15, 2015, the Company adopted the 2015 Stock Option and Restricted Stock Plan (the “Plan”"Plan"). In connection with adopting the Plan, the Voting Shareholders also approved a resolution that up to 45,000,000 shares of the Company’sCompany's common stock may be issued under the terms and conditions of the Plan. That is, at its discretion, the Board of Directors may elect to have issued to directors, employees and consultants it deems deserving, up to 45,000,000 newly issued shares of the Company’sCompany's common stock, options to purchase our common stock, or some combination thereof. If the Board of Directors decides to issue shares of common stock or options to purchase the Company’sCompany's common stock, the issuance of such securities would not affect the rights of the holders of the currently outstanding common stock, except for affects incidental to increasing the number of outstanding shares of common stock, such as dilution of the earnings per share and voting rights of current holders of common stock.
Options - Time Vesting
The following table shows the stock option activity during the years ended December 31, 2018 and 2017:
December 31, 2018 | December 31, 2017 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Number of | Average | Number of | Average | |||||||||||||
Options | Exercise Price | Options | Exercise Price | |||||||||||||
Options outstanding at beginning of year | 14,400,000 | $ | 0.10 | 2,400,000 | $ | 0.10 | ||||||||||
Changes during the year: | ||||||||||||||||
Granted - at market price | 1,000,000 | 0.10 | 13,000,000 | 0.10 | ||||||||||||
Exercised | - | - | - | - | ||||||||||||
Forfeited | (1,495,834 | ) | 0.10 | (1,000,000 | ) | 0.10 | ||||||||||
Adjustments | - | - | - | - | ||||||||||||
Options outstanding at end of year | 13,904,166 | 0.10 | 14,400,000 | 0.10 | ||||||||||||
Options exercisable at end of year | 13,008,334 | 0.10 | 6,675,002 | 0.10 | ||||||||||||
Weighted average fair value of options granted during the year | $ | 74,000 | $ | 0.10 | $ | 1,087,000 | $ | 0.10 | ||||||||
During the year ended December 31, 2018, options issued were valued using the Black-Sholes model assuming zero dividends, a $0.10 strike price, 3-year expiration, 1.53% average risk-free rate and 265.18% average volatility. Costs incurred in respect of stock-based compensation for employees, advisors and consultants for the years ended December 31, 2018 and December 31, 2017 were $675,200 and 2016:
| December 31, 2017 | December 31, 2016 | |||||||||||||||
| Number of Options | Weighted Average Exercise Price | Number of Options | Weighted Average Exercise Price | |||||||||||||
| Options outstanding at beginning of year | 2,400,000 | $ | 0.10 | - | $ | 0.10 | ||||||||||
| Changes during the year: | ||||||||||||||||
| Granted - at market price | 13,000,000 | $ | 0.10 | 2,400,000 | $ | 0.10 | ||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited | 1,000,000 | $ | 0.10 | - | $ | 0.10 | ||||||||||
| Options outstanding at end of year | 14,400,000 | $ | 0.10 | 2,400,000 | $ | 0.10 | ||||||||||
| Options exercisable at end of year | 6,675,002 | $ | 0.10 | - | $ | 0.10 | ||||||||||
| Weighted average fair value of options granted during the year | $ | 1,087,000 | $ | 0.10 | $ | 100,800 | $ | 0.10 | ||||||||
Unrecognized compensation costs related to options was $75,166 which is expected to be recognized ratably over approximately 18 months.
Options - Performance Vesting
The following table shows the stock option activity during the years ended December 31, 2017 AND 2016
December 31, 2018 | December 31, 2017 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Number of | Average | Number of | Average | |||||||||||||
Options | Exercise Price | Options | Exercise Price | |||||||||||||
Options outstanding at beginning of year | 31,341,094 | $ | 0.10 | 5,000,000 | $ | 0.10 | ||||||||||
Changes during the year: | ||||||||||||||||
Granted - at market price | 7,500,000 | 0.10 | 35,800,000 | 0.10 | ||||||||||||
Exercised | - | - | - | - | ||||||||||||
Expired/forfeited | (12,759,286 | ) | 0.10 | (9,458,906 | ) | 0.10 | ||||||||||
Adjustments | - | - | - | - | ||||||||||||
Options outstanding at end of year | 26,081,808 | 0.10 | 31,341,094 | 0.10 | ||||||||||||
Options exercisable at end of year | 8,627,850 | 0.10 | 3,917,052 | 0.10 | ||||||||||||
Weighted average fair value of options granted | ||||||||||||||||
during the year | $ | 623,500 | $ | 0.10 | $ | 3,114,600 | $ | 0.10 | ||||||||
Options issued were valued using the Black-Sholes model assuming zero dividends, a $0.10 strike price, 3-year expiration, 1.49%2.34% average risk-free rate and 243.75%209% average volatility. Costs incurred in respect of stock based compensation for employees, advisors and consultants for the twelve month periods ended December 31, 2017 and December 31, 2016 were $406,933 and $79,900, respectively.
| December 31, 2017 | December 31, 2016 | |||||||||||||||
| Number of Options | Weighted Average Exercise Price | Number of Options | Weighted Average Exercise Price | |||||||||||||
| Options outstanding at beginning of year | 5,000,000 | $ | 0.10 | - | $ | 0.10 | ||||||||||
| Changes during the year: | ||||||||||||||||
| Granted - at market price | 35,800,000 | $ | 0.10 | 5,000,000 | $ | 0.10 | ||||||||||
| Exercised | - | - | ||||||||||||||
| Expired/Forfeit | 9,458,906 | $ | 0.10 | - | $ | 0.10 | ||||||||||
| Options outstanding at end of year | 31,341,094 | $ | 0.10 | 5,000,000 | $ | 0.10 | ||||||||||
| Options exercisable at end of year | 3,917,052 | $ | 0.10 | 112,359 | $ | 0.10 | ||||||||||
| Weighted average fair value of options granted during the year | $ | 3,114,600 | $ | 0.10 | $ | 275,000 | $ | 0.10 | ||||||||
During the year ended December 31, 2018, options issued, including 2,500,000 options granted to non-officer employees, were valued using the Black-Sholes model.
Unrecognized compensation costs related to options was $2,503,990$1,523,866 which is expected to be recognized ratably over approximately 2417 months.
| Non-exercisable options | ||||||||
Number Issued | Average Exercise Price | |||||||
| Total non-exercisable options outstanding - December 31, 2016 | 7,287,641 | |||||||
| Options issued | 48,800,000 | 0.10 | ||||||
| Options expired | (10,346,547 | ) | 0.10 | |||||
| Options cancelled | - | 0.10 | ||||||
| Options vested | (10,592,054 | ) | 0.10 | |||||
| Total non-exercisable options outstanding - December 31, 2017 | 35,149,040 | |||||||
Warrants
The following table shows the warrant activity during the periodperiods ended December 31, 2018 and 2017:
| Weighted | ||||||||
| Number | Average | |||||||
| Of | Exercise | |||||||
| Warrants | Price | |||||||
| Warrants outstanding at beginning of year | - | |||||||
| Changes during the year: | ||||||||
| Granted | 16,924,960 | $ | 0.15 | |||||
| Exercised | - | |||||||
| Expired | - | |||||||
| Warrants outstanding at end of year | 16,924,960 | $ | 0.15 | |||||
| Warrants exercisable at end of year | 16,924,960 | |||||||
December 31, 2018 | December 31, 2017 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Number of | Average | Number of | Average | |||||||||||||
Warrants | Exercise Price | Warrants | Exercise Price | |||||||||||||
Warrants outstanding at beginning of year | 15,924,960 | $ | 0.15 | - | $ | - | ||||||||||
Changes during the year: | ||||||||||||||||
Granted | 2,050,000 | 0.15 | 15,924,960 | 0.15 | ||||||||||||
Exercised | - | - | - | - | ||||||||||||
Expired/forfeited | (14,924,960 | ) | 0.15 | - | - | |||||||||||
Warrants outstanding at end of year | 3,050,000 | 0.15 | 15,924,960 | 0.15 | ||||||||||||
Warrants exercisable at end of year | 3,050,000 | 0.15 | 15,924,960 | 0.15 | ||||||||||||
Warrants issued were valued using the Black-Scholes model assuming zero dividends, a $0.15 strike price, 1-year expiration, risk-free rate and volatility were calculated as of the respective dates of the issuance. Costs incurred for warrants issued to related parties for the conversion of debt were recorded as interest expense and were $0$199,219 and $367,662 for years ended December 31, 20162018 and December 31, 2017, respectively.
NOTE 89 – INCOME TAXES
On December 31,22, 2017, the Company had operating loss carryforwards of approximately $2,032,267U.S. government enacted comprehensive tax legislation commonly referred to as shownthe Tax Cut and Jobs Act (the “Tax Act”). The Tax Act establishes new tax laws that affects 2018 and future years, including a reduction in the table below:
| Accumulated deficit | $ | 12,439,218 | ||
| Shares and options issued for services | (4,418,951 | ) | ||
| Shares issued for purchased research in acquisition | (5,988,000 | ) | ||
| Operating loss available to offset income | $ | 2,032,267 |
The components of the income tax provisions for 2019 and 2018 are as follows:
December 31 | December 31 | |||||||
2018 | 2017 | |||||||
Current | $ | - | $ | - | ||||
Deferred | (685,198 | ) | 1,525,774 | |||||
| (685,198 | ) | 1,525,774 | ||||||
Valuation Allowance | 685,198 | (1,525,774 | ) | |||||
Total provision | $ | - | $ | - | ||||
The difference between the income tax provision and income taxes computed using the U. S. federal income tax rate of 21% consisted of the following:
2018 | 2017 | |||||||
Provision at statutory rate | 21.0 | % | 34.0 | % | ||||
Nondeductible and other items | (1.2 | )% | - | % | ||||
Change in valuation allowance | (18.5 | )% | (34.0 | )% | ||||
| (1.3 | )% | - | ||||||
Total | (0.0 | )% | (0.0 | )% | ||||
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of the Company's deferred taxes as of December 31, 2018 and 2017 are as follows:
2018 | 2017 | |||||||
Deferred tax assets: | ||||||||
Stock-based compensation for services | 1,201,147 | 927,980 | ||||||
Net operating loss carryforward | 763,000 | 426,776 | ||||||
Accrued expenses | 57,399 | - | ||||||
Allowance for bad debts | 17,862 | - | ||||||
Charitable contribution | 545 | - | ||||||
Total deferred tax assets | 2,039,953 | 1,354,756 | ||||||
Valuation allowance | (2,039,953 | ) | (1,354,756 | ) | ||||
Deferred tax assets, net | $ | - | $ | - | ||||
A full valuation allowance has been provided against the Company's deferred tax assets at December 31, 2018 as the Company believes it is more likely than not that sufficient taxable income will not be generated to realize these temporary differences.
The Company has Federal net operating losses (NOLs) of approximately $3.7 million which begin to expire in the years beginning in 2035. Pursuant to Section 382 of the Internal Revenue Code, use of the Company's NOLs and credit carry forwards may be limited if the Company experiences a cumulative change in ownership of greater than 50% in a moving three-year period.
The Company provides for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement standards as set forth in ASC Topic 740 Income Taxes, regarding accounting for uncertainty in income taxes. Amounts for uncertain tax positions are adjusted in periods when new information becomes available or when positions are effectively settled. There are no unrecognized benefits related to uncertain tax positions as of December 31, 2018. The Company does not anticipate that there will be material change in the liability for unrecognized tax benefits within the next 12 months.
NOTE 10 – COMMITMENTS AND 2016
Commitments
The Company has no long-term leases. It has a warehouse lease which terminates in December 2018. The Company’s inventory is stored in that location. The Company owned its office building until February 2018 when the building was sold to the Company’s Chairman. The Company is currently paying on a month-to-month basis for this warehouse lease and office space at $2,400 per month.
Legal Contingencies
16(b) Litigation
On September 26, 2016, Registrant filed in the United States District Court for the Middle District of Florida a Complaint against defendants The Mazzal Trust, Nissim S. Trabelsi and Shawn Telsi (collectively the “Defendants”), seeking the disgorgement of profits obtained by Defendants and certain of their shareholder affiliates defined under Rule 16a-1(a)(1) under the Exchange Act defined below (collectively, the “Group”) through “short swing profits” in violation of Section 16(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Specifically, Registrant alleged that the Group acted under the guidance and control of the Defendants, whose individual defendants had filed forms 3 and 4 with the Securities and Exchange Commission (the “SEC”, declaring themselves to be “insiders” for the purpose of Section 16(b). The Group owned 100% of the shares of Registrant at the time that members of the group were engaged in the sale and purchase of such shares. The sales and purchases referenced all occurred with six months of other sales and purchases, subjecting Defendants to disgorge to Registrant all profits made by the Group in such sales and purchases. As detailed in paragraphs 16-22 of the Complaint, the total profits received by the Group is $1,695,689. Accordingly, Registrant has demanded the return of all such profits to Registrant plus the statutory payment of attorneys’ fees.
On August 24, 2017, the Plaintiff received a Clerk’s Entry of Default against Nissim Trabelsi. The Plaintiff filed a Motion for Default Judgment for damages against Trabelsi on September 13, 2017, which to date has not been addressed by the Court. On March 5, 2018, Nissim Trabelsi filed a notice of bankruptcy. The Plaintiff is still pursuing its options in the Case and the Court has yet to address the service issues with the Mazzal Trust.
VStock Transfer Communications
On January 26, 2017, the Company received an email from its transfer agent, VStock Transfer, LLC, (“VStock”) informing the Company that it had been served with a Summons and Complaint (B2 Opportunity Fund (“B2”) v. Trabelsi et al. - Index No.:17-CV-10043, the “Claim”) and further stating that the Company was obligated to indemnify VStock for fees and expenses incurred in defending the Claim. The Company responded on February 24, 2017 stating that (1) we reviewed the Transfer Agent and Registrar Agreement between Mazzal and VStock dated May 20, 2014 and that in Article VI(c) of that agreement it states that indemnification will not be offered if the acts of VStock constitute bad faith or gross negligence, (2) we reviewed the lawsuit filed by B2 against VStock and others and find that VStock’s actions constitute gross negligence and perhaps bad faith, and we therefore deny indemnification of VStock relating to the Claim, and (3) should VStock take any action to seek indemnification by Znergy in any manner, Znergy will either join B2 in its lawsuit or will file an action on its own. The Company terminated its agreement with VStock. Management cannot at this time estimate what, if any, financialThe issue in its entirety was settled with no impact this matter will haveto the Company on the Company.
NOTE 11 – COMMITMENTS AND CONCENTRATIONS
The revenue reported by the Company are from sales of LED installations, product sales and rebate income. For the year ended December 31, 2017, 64%2018, 20% of the Company's revenue was generated by one customer and 21% of accounts receivable is from one customer.customer. For the year ended December 31, 2016, 82%2017, 64% of the Company's revenue was generated by one customer and 91%21% of its accounts receivable consisting of rebates, was dueis from one utility.
The Company purchases substantially all of its inventory from one supplier. The Company does not have any commitments with this supplier for minimum purchases.
NOTE 12 – SUBSEQUENT EVENTS
On January 1, 2019, Mr. Baker entered into an employment agreement with Dave BakerEmployment Agreement to become the Company’s Chief Operating Officer. Mr. Baker’s agreement, dated September 28, 2016, had a term of three years, an annual base salary of $100,000 which salary to be reviewed by the Compensation Committee of the Board of Directors, a signing bonus of $10,000 and a bonus in January 2017 equal to 6% of the total revenue generated by Mr. Baker in the fourth quarter of 2016 which bonus was paid on January 20th, 2017 in the amount of $10,928 (6% of $182,127). In addition, Mr. Baker was granted 500,000 shares of common stock of the Company, vested immediately, and was granted 5,000,000 options to purchase common stock of the Company at $0.10 per share. These Options have a three-year expiration and vest one option for every two dollars of revenue recognized by the Company. On December 1, 2016, Mr. Baker was promoted from Senior Vice President to Chief Operating Officer and granted a further 4,500,000 shares of the Company’s common stock, which vested immediately.
Subsequent to December 31, 2018 through the filing date, the Company has issued 50,450,000 shares of common stock. In December 2019, the Company issued 2,500,000 shares in exchange for $250,000 to an unrelated accredited investor. For the shares that were granted, 11,200,000 shares were issued to the Chairman of the Board in exchange for the cancellation of 19,000,000 stock options and 2,000,000 warrants outstanding. In addition, 4,000,000 shares were issued in exchange for business development efforts. On July 9, 2019, the Company issued 20,000,000 shares to its Chief Executive Officer. The remainder of shares were issued to various parties for services to the Company.
In April 2020, the Company received an unsecured loan (the "SBA Loan") under the Small Business Administration ("SBA") Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act CARES Act through Chase Bank (“Lender”). The SBA Loan has a two-year term expiring on April 2022. The SBA Loan has a principal amount of $237,457 with an interest rate of 1.0%. The Company expects that the full principal amount of the loan will be forgiven. Interest accrues during the period between funding date and the date the loan is forgiven.
The Company has borrowed $1,624,127 from related parties since December 31, 2018. These loans from related parties were made on various dates in March 2019, April 2019 and October 2019 to August 2020, and have various payment terms up to six (6) months. All of these loans are unsecured.
The Company has borrowed $527,962 from various third-party lenders, none of which are financial institutions. These loans were made on various dates in August 2019 and October 2019 to December 2019, have various terms payment terms up to ten (10) months and all are secured by, inventory, receivables or the equity in the corporate headquarters building.
15(a)(2). Financial Statement Schedules.
None.
15(a)(3). Exhibits.
Exhibit No. Description
1. | |
2. | |
4 | |
1. | |
2. | |
31. | |
32. | |
101 INS | XBRL Instance Document* |
101 SCH | XBRL Schema Document* |
101 CAL | XBRL Calculation Linkbase Document* |
101 DEF | XBRL Definition Linkbase Document* |
101 LAB | XBRL Labels Linkbase Document* |
101 PRE | XBRL Presentation Linkbase Document* |
* The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
Pursuant to the requirements of section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
ZNERGY, INC.:
By: /s/ David Baker
David Baker
CEO and Director
(Principal Executive Officer)
Date: June 6, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Dated: | By: |
David Baker | |
CEO and Director | |
(Principal Executive Officer) | |