Significant Accounting Policies and Restatement (Policies)

6 Months Ended

Jun. 30, 2019

Significant Accounting Policies and Restatement

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant estimates underlying the Companys reported financial position and results of operations include the allowance for doubtful accounts, fair value of stock-based compensation, fair value of derivative liabilities, valuation allowance on deferred taxes and the warranty reserve.

Cash and cash equivalents

For the purposes of the Statements of Cash Flows, the Company considers all highly liquid debt instruments with a maturity of three months or less to be cash equivalents. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced losses related to these balances.

Fair Value of Financial Instruments

The Companys financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, deferred revenue, customer deposits and notes payable are carried at historical cost. At June 30, 2019 and December 31, 2018, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments.

Inventory

Inventory consists of raw materials, work-in-process and finished goods and is stated at the lower of cost, determined by first-in, first-out method, or market. Market is determined based on the net realizable value, with appropriate consideration given to obsolescence, excessive levels, deterioration and other factors. At June 30, 2019 and December 31, 2018, the Company had $101,154 and $40,341 of raw materials, $5,031 and $12,191 of in-process inventory, and $5,443 and $652 of finished inventory, respectively. A reserve is recorded for any inventory deemed excessive or obsolete. No reserve is considered necessary at June 30, 2019 and December 31, 2018.

Property and equipment

Property and equipment are recorded at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets ranging from 3 to 7 years. Leasehold improvements are amortized over the shorter of their estimated useful lives of 5 years or the related lease term. Depreciation expense was $2,856 and $9,865 for the three months ended June 30, 2019 and 2018, respectively, and $12,722 and $19,731 for the six months ended June 30, 2019 and 2018, respectively. Gains and losses upon disposition are reflected in the Statements of Operations in the period of disposition. Maintenance and repair expenditures are charged to expense as incurred.

Intangible assets

Identified intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Companys existing intangible assets consist solely of patents. Patents are amortized over their estimated useful or economic lives of 17 to 20 years. Patent amortization expense was $5,805 and $11,925 for the three months ended June 30, 2019 and 2018, respectively and $12,309 and $12,302 for the six months ended June 30, 2019 and 2018, respectively. Based on current capitalized costs, total patent amortization expense is estimated to be approximately $22,000 per year for the next five years and thereafter.

Research and development expenses and funding proceeds

Expenditures for research and development are expensed as incurred. The Company incurred research and development costs of $39,957 and $81,098 for the three months ended June 30, 2019 and 2018, respectively and $114,644 and $165,227 for the six months ended June 30, 2019 and 2018, respectively. The Company accounts for proceeds received from government funding for research as a reduction in research and development costs. The Company recorded proceeds against research and development expenses on the Statements of Operations of $(24,109) and $16,349 for the three months ended June 30, 2019 and 2018, respectively and $(1,191) and $25,015 for the six months ended June 30, 2019 and 2018, respectively.

Revenue recognition

The Company has adopted the new revenue recognition guidelines in accordance with ASC 606, Revenue from Contracts with Customers (ASC 606), commencing from the period under this report. The Company analyzes its contracts to assess that they are within the scope and in accordance with ASC 606. In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, whether for goods and services or licensing, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company acts as a principal in its revenue transactions as the Company is the primary obligor in the transactions. Generally, the Company recognizes revenue for its products upon shipment to customers, provided no significant obligations remain and collection is probable.

In certain instances, the Companys ConsERV system product may carry a limited warranty of up to two years for all parts contained therein with the exception of the energy recovery ventilator core produced and sold by the Company. The distributor of the ConsERV system may carry a limited warranty of up to ten years. The limited warranty includes replacement of defective parts for the ConsERV system and includes workmanship and material failure for the ConsERV core. The Company recorded an accrual of $91,531 for future warranty expenses at June 30, 2019 and December 31, 2018, which is included in accrued expenses, other. 

Royalty revenue is recognized as earned. The Company recognized royalty revenue of $0 for the three and six months ended June 30, 2019 and 2018, respectively. Revenue derived from the sale of licenses is deferred and recognized as license fee revenue on a straight-line basis over the life of the license, or until the license arrangement is terminated. The Company recognized license fee revenue of $12,500 and $12,500 for the three months ended June 30, 2019 and 2018, respectively and $25,000 and $25,000 for the three months ended June 30, 2019 and 2018, respectively.

The Company accounts for revenue arrangements with multiple elements under the provisions of the Financial Accounting Standards Boards (FASB) Accounting Standards Codification (ASC) Topic 605-25, Revenue Recognition-Multiple-Element Arrangements. In order to account for these agreements, the Company must identify the deliverables included within the agreement and evaluate which deliverables represent separate units of accounting based on if certain criteria are met, including whether the delivered element has stand-alone value to the licensee. The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units.

In December 2017, the Company and Zhejiang MENRED Environmental Tech Co, Ltd., Zhejiang Province, China (Menred), entered into a License and Supply Agreement (the Agreement), effective December 21, 2017. Pursuant to the Agreement, the Company licensed certain intellectual property and improvements to Menred, for use in the manufacture and sale of energy recovery ventilators (ERV) and certain other HVAC systems for installation in commercial, residential or industrial buildings in China. Menred also agreed to purchase its requirements of certain products from the Company for Menreds use, pursuant to the terms and conditions of the Agreement. Menred will also pay royalties, as defined, to the Company on a quarterly basis, based on price and production volume as provided by Menred. No royalties are due within the first year of the Agreement. Also pursuant to the Agreement, the Company is required to purchase 50,000 square meters of Product from Menred for delivery as an annual minimum with a 10,000 square meter minimum order quantity per delivery. The Agreement has a ten-year term with mutually agreed upon five-year extensions.

Shipping and handling fees billed to customers are included in revenue. Shipping and handling fees associated with freight are generally included in cost of revenue.

Derivative liability

The Company has financial instruments that are considered derivatives or contain embedded features subject to derivative accounting. Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in the Companys balance sheet. The Company measures these instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during the period of change.

Fair Value Measurements

The Company accounts for financial instruments in accordance with FASB Accounting Standards Codification (ASC) 820 Fair value Measurement and Disclosures (ASC 820). ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entitys own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).

The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

· Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

· Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g. interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

· Level 3 - Inputs that are both significant to the fair value measurement and unobservable.

A financial asset or liabilitys classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The Company has recorded a derivative liability for its convertible notes which contain variable conversion prices. The table below summarizes the fair values of our financial liabilities as of June 30, 2019:

	Fair Value at June 30,		Fair Value Measurement Using
	2019		Level 1		Level 2		Level 3
Derivative liability	$	1,276,570	$	-	$	-	$	1,276,570

The reconciliation of the derivative liability measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows for the six months ended June 30, 2019:

Balance at beginning of period	$	1,280,188
Additions to derivative instruments		573,902
Extinguished derivative liability		(375,027	)
Gain on change in fair value of derivative liability		(202,493	)
Balance at end of period	$	1,276,570

Earnings (loss) per share

Basic income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average common shares outstanding for the period. Diluted loss per share is computed giving effect to all potentially dilutive common shares. Potentially dilutive common shares may consist of incremental shares issuable upon the exercise of stock options and warrants. In periods in which a net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive and are excluded from the calculation. Common share equivalents of 1,090,165,076 and 60,878,439 were excluded from the computation of diluted earnings per share for the three and six months ended June 30, 2019 and 2018, respectively, because their effect is anti-dilutive.

Restatement

During the three months ended March 31, 2019, the Company failed to record a convertible promissory note in the amount of $78,750 that had been issued, the proceeds of which were used to pay for legal fees. The proceeds were paid directly to the legal firm. Since the note is convertible into a variable number of shares or have a price reset feature, the conversion feature of this notes is recorded as a derivative liability. Additionally, during the three months ended June 30, 2019, a convertible note that initially had a fixed conversion price became a variable conversion price note and, as a result, became subject to derivative liability accounting.

The effects of the corrections on the interim financial statements are as follows:

Balance Sheet	June 30, 2019						June 30, 2019
(Unaudited)	As Reported			Corrections			As Restated
Accrued expenses	$	911,484		$	1,674		$	913,158
Derivative liabilities	$	886,463		$	390,107		$	1,276,570
Convertible notes payable, net	$	986,407		$	26,250		$	1,012,657
Total current liabilities	$	7,646,687		$	418,031		$	8,064,718
Total liabilities	$	7,646,687		$	418,031		$	8,064,718
Accumulated deficit	$	(51,189,257	)	$	(418,031	)	$	(51,607,288	)
Total stockholders' deficit	$	(7,208,157	)	$	(418,031	)	$	(7,626,188	)
Statement of Operations	Three Months						Three Months
Three months ended June 30, 2019	June 30, 2019						June 30, 2019
(Unaudited)	As Reported			Corrections			As Restated
Interest expense	$	(396,531	)	$	(232,542	)	$	(629,073	)
Change in fair value of derivative liabilities	$	209,015		$	(30,784	)	$	178,231
Total other income (expense), net	$	(142,040	)	$	(263,326	)	$	(405,366	)
Net loss	$	(488,610	)	$	(263,326	)	$	(751,936	)

Statement of Operations	Six Months						Six Months
Six months ended June 30, 2019	June 30, 2019						June 30, 2019
(Unaudited)	As Reported			Corrections			As Restated
Selling, general and administrative expenses	$	670,148		$	75,000		$	745,148
Total operating expenses	$	785,983		$	75,000		$	860,983
Loss from operations	$	(549,692	)	$	(75,000	)	$	(624,692	)
Interest expense	$	(836,845	)	$	(264,603	)	$	(1,101,448	)
Change in fair value of derivative liabilities	$	280,921		$	(78,428	)	$	202,493
Total other income (expense), net	$	(502,375	)	$	(343,031	)	$	(845,406	)
Net loss	$	(1,052,067	)	$	(418,031	)	$	(1,470,098	)
Statement of Cash Flows	Six Months						Six Months
Six months ended June 30, 2019	June 30, 2019						June 30, 2019
(Unaudited)	As Reported			Corrections			As Restated
Net loss	$	(1,052,067	)	$	(418,031	)	$	(1,470,098	)
Change in fair value of derivative liability	$	(280,921	)	$	78,428		$	(202,493	)
Non-cash interest expense	$	286,887		$	240,429		$	527,316
Amortization of debt discount	$	327,885		$	22,500		$	350,385
Legal fees paid through proceeds of note payable	$	-		$	75,000		$	75,000
Accrued expenses	$	281,725		$	1,674		$	283,399

Recent Accounting Pronouncements

There are new accounting pronouncements issued by the Financial Accounting Standards Board (FASB) which are have been adopted, or not yet effective as follows:

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The adoption of this ASU did not have a material effect on the Company's financial statements.