UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark one)
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Year Ended December 31, 2017
or
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
Commission File Number: 000-53635
SOLIS TEK INC.
(Exact name of registrant as specified in its charter)
| Nevada | 20-8609439 | |
| (State or Other Jurisdiction of | (I.R.S. Employer | |
| Incorporation or Organization) | Identification No.) |
| 16926 S. Keegan Ave Suite A., Carson, CA | 90746 | |
| (Address of principal executive offices) | (Zip Code) |
(888) 998-8881
(Registrant’s telephone number, including area code)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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.
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 | [ ] (Do not check if a smaller reporting company) | Smaller reporting company | [X] |
| 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 [X]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes __No __
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was $14,428,000.
As of April 2, 2018, the registrant’s outstanding common stock consisted of 41,230,482 shares, $0.001 par value.
EXPLANATORY NOTE
Solis Tek Inc. (the “Company”) is filing this Amendment No. 1 on Form 10-K/A (the “Amended Filing”) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “Original Filing”) filed with the Securities and Exchange Commission (“SEC”) on April 2, 2018, in order to make certain revisions to disclosures relating to Mr. Dennis G. Forchic. As previously reported, on or about February 8, 2018, holders of a majority of the voting power of the issued and outstanding shares of common stock entitled to vote, acting by written consent, purported to remove Mr. Forchic as a member of the board of directors of the Company (the “Board”). The Company subsequently determined that such removal was invalid under Section 78.335 of the Nevada Revised Statutes, which requires that the removal of a director requires the approval of holders of not less than two-thirds of the voting power of the issued and outstanding shares of common stock entitled to vote. As a result, the Original Filing had inaccurate disclosures regarding Mr. Forchic and his position with the Company. This Amended Filing reflects Mr. Forchic’s position as a director of the Company as of the Original Filing Date.
For the convenience of the reader, this Amended Filing sets forth the Original Filing as modified and superseded where necessary to reflect the following significant revisions:
| ● | Revised the table entitled “Directors” of “Item 10 – Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(A) of the Exchange Act” and the corresponding disclosure to include Mr. Forchic as a director; | |
| ● | Revised the disclosure under “Executive Compensation Overview” of “Item 11 – Executive Compensation” to delete references to Mr. Forchic being removed as a director and to revise inaccurate disclosures regarding the number of options Mr. Forchic was entitled to exercise at the time of his termination as Chief Executive Officer; | |
| ● | Revised the table under “Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” to reference Mr. Forchic as being a director for beneficial ownership purposes; | |
| ● | Revised the Index to Exhibits to include all exhibits required by Item 601 of Regulation S-K and incorporate by reference certain exhibits that were filed with the Original Filing; | |
| ● | Revised the signature page to include director signatures as required; | |
| ● | Revised Note 13 – Subsequent Events, to the financial statements to delete references to Mr. Forchic being removed as a director, to revise inaccurate disclosures regarding the number of options Mr. Forchic was entitled to exercise at the time of his termination as Chief Executive Officer and to include subsequent events from the date of the Original Filing to the date of the Amended Filing; | |
| ● | Obtained a revised Auditor Report to the Financial Statements to reflect the revisions to Note 13 – Subsequent Events; and | |
| ● | Made certain grammatical changes in various aspects of the Amended Filing that had no impact on the disclosures therein. |
In accordance with applicable SEC rules, this Amended Filing includes certifications from our Chief Executive Officer and Chief Financial Officer dated as of the date of this filing.
Except for the items noted above, no other information included in the Original Filing is being amended by this Amended Filing. The Amended Filing continues to speak as of the date of the Original Filing and, except as set forth in the sections indicated above, we have not updated the Original Filing to reflect events occurring subsequently to the date of the Original Filing. Accordingly, this Amended Filing should be read in conjunction with our filings made with the SEC subsequent to the filing of the Original Filing.
TABLE OF CONTENTS
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This Annual Report contains forward-looking statements, including, without limitation, in the sections captioned “Description of Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere. Any and all statements contained in this Report that are not statements of historical fact may be deemed forward-looking statements. Terms such as “may,” “might,” “would,” “should,” “could,” “project,” “estimate,” “pro forma,” “predict,” “potential,” “strategy,” “anticipate,” “attempt,” “develop,” “plan,” “help,” “believe,” “continue,” “intend,” “expect,” “future,” and terms of similar import (including the negative of any of the foregoing) may be intended to identify forward-looking statements. However, not all forward-looking statements may contain one or more of these identifying terms. Forward-looking statements in this Report may include, without limitation, statements regarding (i) the plans and objectives of management for future operations, including plans or objectives relating to exploration programs, (ii) a projection of income (including income/loss), earnings (including earnings/loss) per share, capital expenditures, dividends, capital structure or other financial items, (iii) our future financial performance, including any such statement contained in a discussion and analysis of financial condition by management or in the results of operations included pursuant to the rules and regulations of the SEC, and (iv) the assumptions underlying or relating to any statement described in points (i), (ii) or (iii) above.
The forward-looking statements are not meant to predict or guarantee actual results, performance, events or circumstances and may not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates and assumptions and are subject to a number of risks and uncertainties and other influences, many of which we have no control over. Actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of these risks and uncertainties. Factors that may influence or contribute to the inaccuracy of the forward-looking statements or cause actual results to differ materially from expected or desired results may include, without limitation, our inability to obtain adequate financing, insufficient cash flows and resulting illiquidity, our inability to expand our business, government regulations, lack of diversification, volatility in the price of gold, increased competition, results of arbitration and litigation, stock volatility and illiquidity, and our failure to implement our business plans or strategies. A description of some of the risks and uncertainties that could cause our actual results to differ materially from those described by the forward-looking statements in this Report appears in the section captioned “Risk Factors” and elsewhere in this Report.
Readers are cautioned not to place undue reliance on forward-looking statements because of the risks and uncertainties related to them. We disclaim any obligation to update the forward-looking statements contained in this Report to reflect any new information or future events or circumstances or otherwise.
Readers should read this Report in conjunction with the discussion under the caption “Risk Factors,” our financial statements and the related notes thereto in this Report, and other documents which we may file from time to time with the SEC.
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ITEM 1. DESCRIPTION OF BUSINESS.
This Report contains summaries of the material terms of various agreements executed in connection with the transactions described herein. The summaries of these agreements are subject to, and are qualified in their entirety by reference to, these agreements, all of which are incorporated herein by reference.
History and Organization
Solis Tek Inc. (the “Company”) was originally incorporated under the laws of the State of Nevada on March 2, 2007 as Cinjet, Inc. (“Cinjet”). Effective September 1, 2015, Cinjet changed its corporate name to Solis Tek Inc. On June 23, 2015, the Company entered into an Agreement of Merger and Plan of Reorganization (the “Agreement”) with Solis Tek Inc., a California corporation (“STI”), and CJA Acquisition Corp., a California corporation and a wholly owned subsidiary of the Company (“Merger Sub”), providing for the merger of Merger Sub with and into STI (the “Merger”), with STI surviving the Merger as a wholly-owned subsidiary of the Company. The Merger Agreement was approved by the Company’s Board of Directors and the sole Director of the Company, effective June 23, 2015. The Merger closed on June 23, 2015.
Upon completion of the Merger, the former stockholders of STI owned approximately 89% of the outstanding shares of the Company’s common stock and the holders of the outstanding shares of the Company’s common stock prior to the Merger owned the balance. As the former owners and management of STI have voting and operating control of the Company after the Merger, the transaction has been accounted for as a recapitalization with the STI deemed the acquiring companies for accounting purposes, and the Company deemed the legal acquirer.
Overview of Business
Solis Tek Inc. is focused on the research, design, development and manufacturing of advanced, energy efficient indoor horticulture lighting, plant nutrient products, and ancillary equipment. Our vision is to apply the latest advances in high efficiency lighting and controls technology as well as effective manufacturing techniques to deliver highly differentiated lighting and nutrient products with clear benefits at competitive prices to the greenhouse and indoor horticulture markets.
Our subsidiary, Solis Tek Inc., a California corporation, was formed in June of 2010. Its operations consist of designing, developing and sourcing of a line of Solis Tek Digital Ballasts intended for use in high intensity lighting systems used for horticulture. An electrical ballast is a device intended to limit the amount of current in an electric circuit. A familiar and widely used example is the inductive ballast used in fluorescent lamps, which limits the current through the tube, which would otherwise rise to destructive levels due to the tube’s negative resistance characteristic. Since the commencement of operations, our product line has evolved from digital ballasts to a line of lighting products including a line of specialty ballasts ranging from 400 watts to 1,000 watts with various features, a line of specialty metal halide digital lamps (our “Lamp Products”), a line of reflectors, high intensity lighting accessories and a new line of light emitting diode (“LED”) lighting technologies.
We sell our products primarily to retailers in the United States and international markets who specialize in hydroponic horticulture. Currently we have approximately 500 retailers that sell our products as well as online marketing through the major ecommerce sites. We have six full time sales employees and four wholesale distributors who cover US, Canada, Spain and the United Kingdom for both retail customers as well as commercial growers in cannabis legal states and countries.
The Company believes that almost all of the end users that use its products are using the equipment for the growing of cannabis. Currently, there are 28 States and the District of Columbia that have laws and/or regulation that recognize in one form or another, legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. In addition, the States of Colorado, Washington, Alaska, Oregon, California, Massachusetts, Nevada and the District of Columbia have recently approved the recreational use of cannabis. Many other States are considering legislation to similar effect. As of July 30, 2015, the policy and regulations of the Federal government and its agencies is that cannabis has no proven medical benefit and a range of activities including cultivation and use of cannabis for personal use is prohibited on the basis of federal law and may or may not be permitted on the basis of State law. Active enforcement of the current federal regulatory position on cannabis on a regional or national basis may directly and adversely affect the willingness of our end user customers to continue to grow cannabis. Active enforcement of the current federal regulatory position on cannabis may thus directly and adversely affect revenues and profits.
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However, the Company’s products can be, and are used for, the hydroponic and indoor growing of other horticultural products, such as hothouse vegetables, decorative plant nurseries, indoor aquariums, and industrial painting facilities. The Company intends to continue to expand and improve its products for use in as many applications as possible and to market its products to the entire indoor horticultural industry as well as other industrial applications that require artificial lighting.
In 2014, Solis Tek East, Corporation (“STE”) was incorporated in the State of New Jersey as a wholly owned subsidiary of the Company. STE was formed for the purpose of commencing its operations and servicing and supplying the Eastern part of North America with our products. In September 2014, STE leased a 10,160 square foot office and warehouse facility in South Hackensack, New Jersey. Also, in 2014, GrowPro Solutions, Inc. (“GrowPro”) was incorporated in the State of California as a wholly owned subsidiary of the Company. GrowPro was formed to develop and sell plant nutrients to help expand the market reach and maximize the revenue potential of the Company. In July of 2017, we changed the name of GrowPro to Zelda Horticulture, Inc. (“Zelda”). Zelda is sharing our facility in Carson, CA.
Our ballast products are produced in China under a proprietary manufacturing agreement. Our Lamp Products including lamps and ancillary products and equipment are manufactured to our specifications under proprietary product control and to our designs, in China.
License Agreement
In May of 2015, we entered into an Amended and Restated License Agreement with GAS Technologies, Incorporated (“GAS”) of Kapolei Hawaii, pursuant to which we agreed to pay GAS, a minimum royalty of $100,000 per year plus 7% of sales of products licensed by GAS to us over a fixed amount of licensed products sale per calendar year. In 2017 and 2016, the Company owed an additional $45,595 and $41,490, respectively under the amended agreement. The License grants to us an exclusive world-wide license to produce, manufacture, have manufactured, use, import, sell, market, distribute and sell the products and systems (the “Licensed Products”) and any further products and systems that may be developed by the Licensor for use in the horticulture and hydroponic industries (the “Industries”). Such products include our “Single Ended: and “Double Ended” metal halide digital lamps and a new line of light emitting diode (“LED”) lighting technologies and products.
The Cannabis Industry and Government Regulation
Currently, there are twenty-nine States plus the District of Columbia, Guam, and Puerto Rico that have laws and/or regulation that recognize in one form or another legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. In addition, the States of Colorado, Washington, Alaska, Oregon, California, Massachusetts, Nevada, Vermont as well as the District of Columbia, have recently approved the recreational use of cannabis. The State laws are in conflict with the Federal Controlled Substances Act, which makes marijuana use and possession illegal on a national level. The Trump Administration has effectively stated that it is not an efficient use of resources to direct law federal law enforcement agencies to prosecute those lawfully abiding by State-designated laws allowing the use and distribution of medical marijuana and we do not have a clear reading from possible changes in the Trump Administration. Additionally, any new administration that follows could change this policy and decide to enforce the federal laws strongly. Any such change in the federal government’s enforcement of current federal laws could cause significant financial damage to us and our shareholders.
Indoor Lighting Industry
Light and plant growth
Light is essential for plant growth. Natural sunlight is the cheapest source available, but for horticulture it is not always attainable in sufficient quantities due to weather and other climate challenges. Therefore, the uses of artificial or alternative light sources have become very common in order to increase production and quality predominantly in indoor or greenhouse environments. Plants have a completely different sensitivity to light spectrum than humans. Every plant has their own sensitivity and receptivity for colors and intensity of light. Using these alternate light sources for plants, effective light recipes are essential to obtain the optimal results in plant production.
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Grow lights
A grow light or plant light is an artificial light source, generally an electric light, designed to stimulate plant growth by emitting an electromagnetic spectrum appropriate for photosynthesis. Grow lights are used in applications where there is either no naturally occurring light, or where supplemental light is required. For example, in the winter months when the available hours of daylight may be insufficient for the desired plant growth, lights are used to extend the time the plants receive light.
Grow lights either attempt to provide a light spectrum similar to that of the sun, or to provide a spectrum that is more tailored to the needs of the plants being cultivated. Outdoor conditions are mimicked with varying color, temperatures and spectral outputs from the grow light, as well as varying the lumen output (intensity) and PAR output of the lamps. Depending on the type of plant being cultivated, the stage of cultivation (e.g., the germination/vegetative phase or the flowering/fruiting phase), and the photoperiod required by the plants, specific ranges of spectrum, luminous efficacy and color temperature are desirable for use with specific plants and time periods.
Specially designed artificial light sources can improve diverse growth parameters. These all depends on several factors, like crop, environmental circumstances, light recipe and many more. The following is a list of benefits that can be achieved with specially designed artificial lighting:
| ● | Increased production and yield | |
| ● | Increased aromatic flavor and higher potency | |
| ● | Shortening of the total growth cycle | |
| ● | Better plant uniformity | |
| ● | Better space utility | |
| ● | Improved plant quality | |
| ● | Energy savings | |
| ● | Better germination rate | |
| ● | Higher multiplication factor | |
| ● | Higher survival rate in rooting | |
| ● | Improved/controlled stretching process | |
| ● | Accelerated hardening phase |
Hydroponics
The great majority of our customers are retailers that specialize in Hydroponics and sell our products to Hydroponic enclosed farm and grower operators. Hydroponics is a method of growing plants in mineral nutrient solutions, in water, without soil. Terrestrial plants may be grown with their roots in the mineral nutrient solution only or in an inert medium, such as polite, gravel, expanded clay pebbles or coconut husks.
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Some of the reasons why hydroponics is being adapted around the world for plant production are the following:
| ● | No soil is needed for hydroponics. | |
| ● | The water stays in the system and can be reused - thus, a lower water requirement. | |
| ● | It is possible to control the nutrition levels in their entirety; thus, lower nutrition requirements. | |
| ● | No nutrition pollution is released into the environment because of the controlled system. | |
| ● | Stable and high yields. | |
| ● | Pests and diseases are easier to get rid of than in soil because of the container’s mobility. | |
| ● | Ease of harvesting. | |
| ● | No pesticide damage. |
Our Business Strategy
Due to the expected increase in the number of States where the use of cannabis, both for medical and recreational use is being legalized, the Company intends to take advantage of what we believe is our premium brand image within the cannabis farming and growing community. We believe that as participation in the cannabis farming industry grows, in order to supply increasing demand caused by legalization, our Solis Tek brand equipment will be sought out by existing and new cannabis farms and commercial businesses. Further, we have broadened our marketing efforts to the non-cannabis lighting market, which includes, among others, hothouse vegetables, decorative plant nurseries, indoor aquariums, and industrial painting facilities. Our strategy is to maintain and increase our market share by expanding our marketing efforts and by introducing new and improved lighting technology to help the industry become more efficient. In addition, the Company has started to market and sell a new line of plant nutrients and fertilizers through its wholly owned subsidiary Zelda Horticulture, Inc. to help expand the market reach and maximize the revenue potential of the Company. Additionally, the Company is aggressively pursuing opportunities within the cannabis sector for expansion of its product offerings, or compatible opportunities to represent other products to the retail and commercial trade.
Products
Digital Lighting Controller
The Solis Tek Digital Lighting Controller is the next level of controls with the industry’s most precise temperature monitoring for a garden. A single controller can run up to 300 lights with 150 lights per zone. The controller has been rigorously tested in multiple garden environments and has been specifically designed for both commercial grows and large gardens. The data log tracks garden activity and events with options to run up to two independent light zones, each with their own customized sunrise, sunset, and cloud modes. High temperature auto-dim and shut off prevention systems prevent system overheating and hair frying.
Ballasts
Ballasts provide the proper starting voltage, operating voltage and current to the lamp to initiate and sustain its arc. High Intensity Discharge (HID) lamps have negative resistance, which causes them to draw an increasing amount of current; hence, they require a current-limiting device. The ballast provides the following functions:
It provides starting voltage and, in some cases, ignition pulses. All ballasts must provide some specific minimum voltage to ignite the lamp. In the case of pulse start lamps, an additional high voltage pulse is needed to ionize the gases within the lamp. These pulses are superimposed near the peak starting voltage waveform; it regulates the lamp’s current and power. The ballast limits the current through the lamp once it has started. The ballast’s current is set to a level that delivers the proper power to the lamp. In addition, the ballast regulates the lamp’s current through the range of typical line voltage variations, thereby keeping the lamp’s power fairly stable to maximize the lamp’s life and performance and; it provides appropriate sustaining voltage and current wave shape to achieve the lamp’s rated life. The ballast provides sufficient voltage to sustain the lamp as it ages. Solis Tek ballasts come in a variety of voltage settings to conform to the consumer needs.
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Solis Tek Digital Ballasts were designed to with “Ignition Control” sequential lamp ignition, and “SenseSmart”, self- diagnostic safety systems. Solis Tek Digital Ballasts are software based, that makes our ballasts more versatile and enables us to incorporate special features such as sequential ballast ignition technology (“Ignition Control”) and SenseSmart technologies that ignites metal halide lamps one at a time based on load stability. Ignition Control is a main feature of our ballasts that comes as a standard feature in all of our ballasts. Ignition Control assures that no matter how many lamps are contained in a lighting array attached to one power source, only one lamp will turn on at a predetermined time. This technology (not a randomized ignition startup) detects the voltage and amperage frequencies of the electrical circuit and ignites an array of metal halide or sodium lamps when the load for each lamp is most stable. We believe that Solis Tek Digital Ballasts are the only ballasts capable of this technology. The use of our technology prevents surges and spikes in electrical environment in which an array of ballasts operates and also prevents the overloading of circuit breakers.
Our SenseSmart self-diagnosing system feature, enables our ballasts to internally safety check for over/under voltage, overheating, open circuits, short circuits and more. SenseSmart will recognize an unsafe condition and take pre-determined actions to alleviate the safety issue.
We offer a line of remote ballasts that include: 400W 120/240V, 600W 120/240V, 1000W 120/240V, 1000W 120/240V with remote control and timer, 1000W 240V only, and 1000W 277V.
A1 1000W Complete Fixture
Beginning in 2015, we introduced a new A1 complete fixture equipped with ballast, reflector, and double ended lamp.
Digital Lamps
Metal halide lamps are a type of HID (High Intensity Discharge) lamp; mercury vapor and high-pressure sodium lamps are also HID lamps. Light is generated by creating an arc between the two electrodes located inside the inner arc tube. The inner arc tube is typically made of quartz, and this is a very harsh environment, with high temperatures approaching 1000°C and pressures of 3 or 4 atmospheres. To start a metal halide lamp, a high starting voltage is applied to the lamp’s electrodes to ionize the gas before current can flow and start the lamp.
Solis Tek Digital Lamps are designed to be specifically tuned and matched with Solis Tek Digital Ballasts. Our lamps feature color enhanced full balanced spectrums, prolonged lamp life , less depreciation of lumen output over time, and precise gas combinations for increased blues, reds, and ultra violet output. Our Lamps emit a full spectrum of light tuned specifically for particular types of plants. As well, our lamps provide ample Ultra Violet light that plants thrive upon. We have designed our lamps using special low iron glass envelopes so as to prevent the blockage of the full spectrum of light that our lamps are designed to provide. Using Solis Tek lamps, growers can expect superior photo-chemical reactions, proper UV balance, advanced HID lamp designed especially for plant growth, plant quality, and plant yield.
We offer a select variety of light color spectrums in both High Pressure Sodium (HPS), Metal Halides (MH), and Ceramic Metal Halides (CMH).
LED Technology
LED (light emitting diode) lighting supports sustainable design in several ways. It uses less energy than most other types of lamps, produces less heat, lasts longer (which means less frequent replacement and therefore reduced waste), is mercury-free, and is housed in special semi-conductor “chips” designed for easier configuration, disassembly, and recycling.
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In our ongoing research and development program, we have designed and developed our next generation of high intensity lighting. Our LED technology, unlike other LED lighting sources, uses an advanced UV (Ultra Violet) diode phosphor combination to make our high intensity LED based lighting systems. Our LED systems will be available in the same light spectrums as our current HID lamps. Our design will emit lighting equivalent to the high-pressure sodium spectrum and ultra-violet spectrums and eliminate the inadequacies of current LED offerings to the horticultural industry i.e.: a) low intensity; b) lack of proper spectrum for particular plants; and c) longevity. Our LED “chips” will provide, from one LED, a full spectrum of light that mimics sunlight, as compared to other LED manufacturers of LEDs who provide arrays of several color specific LEDs in an attempt to cover the full light spectrum.
LED lighting produces significantly less heat than conventional HID and HPS lamps, so growers can control their greenhouse climate more accurately. Less heat also means more effective use of light, for example by increasing light levels, extending lighting periods, or by using LED light in greenhouses on warmer days without having to ventilate. Less heat also means you can place the light source closer to plants, reducing light loss. The Company intends to bring its LED lighting solutions to market in 2018.
Solis Tek Reflectors
Our line of “Reflectors” is designed for use with our digital ballasts and lamps. However, they additionally have standard sockets so that lamps and ballasts manufactured by others may also be used. Each Reflector features air cooling, heavily tinned wiring, low iron glass for less filtering of light, and utilize highly reflective aluminum to reflect light in the desired direction.
We offer five different variations and sizes of Reflectors.
Plant Nutrients and Fertilizers
Zelda Horticulture (“Zelda”) has developed “Terpenez™” which is a proprietary product formulated from all organic botanical extracts and is designed to assist plants with processes associated with oil and resin production. Terpenez is all natural and has organic inputs aimed at enhancing the aromatics of cannabis cultivation. Zelda commenced test marketing Terpenez in late 2016 and had rolled out the product regionally across the USA in 2017. In 2017, Zelda had substantially increased sales. We intend to commence an enhanced marketing campaign for Terpenez in 2018.
Terpenez, the first product in Solis Tek, Inc.’s launch into the approximately $32 billion nutrient/additive sector of the greenhouse and growing business, leads a new class of horticultural products aimed at enhancing the cannabis aromatic experience and intensity. It does not contain cannabis derived terpenes within, instead it is made from the finest natural components available and is specifically formulated to assist the cannabis plant with processes associated with oil and resin production and naturally enhances the cannabis plant’s terpene profile. The formula provides essential oil-bearing plants with both precursors (i.e. metabolic building blocks, trace elements, etc.) and readily available bio-identical plant compounds aiming to increase overall essential oil production and intensity. It is the first product of its kind to deliver plant nutrients to cannabis cultivating customers with a fully plant derived 0-0-0 (Nitrogen, Phosphate, and Potassium free) product. Independent bioanalytical testing laboratory analysis was conducted and determined the level of heavy metals to be below the EPA’s detection limit (BDL). Terpenez is used to increase the value of cannabis crops through the intensification of oil production, which has results in a significant improvement in flavor and aroma. Terpenez is unique in the Solis Tek family of products in that it is intended for daily use as a nutrient additive to the cannabis grow, and is available through the over 500+ retail hydroponic stores and online retailers throughout the USA and Europe.
The company plans to extensively develop additional nutrient products within the Zelda line and expects these products to flourish in an environment of lighter regulatory controls at both the State and Federal level. The company is under discussion to additionally add to the product line via custom blending in third-party laboratories under its proprietary formulations.
Additionally, the Company signed an exclusive Distributor Agreement in March 2018 with Torus Hydro, a California based manufacturer of a pH stabilizer that automatically balances the pH of a hydroponic nutrient feed. Their proprietary Capsule, keeps the ideal range of pH in a growers feed system for optimal nutrient absorption. This Capsule uses next generation ionization technology to eliminate pH swing that inhibits plant growth and weakens the plants immune Capsule. This is the perfect “razor/razor blade” model as once a customer purchases the Capsule, they will need to repurchase the recharging solution for each new grow (approximately 12 weeks).
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Marketing
We currently market our products directly and through distributors, to hydroponic retailers through direct contacts, on-line email advertising, social media, trade magazine advertising, trade show promotions, and cross-promotional offerings. Our officers, along with six retail and commercial sales representatives and four distributors, are engaged in marketing our products. Our primary brand-building marketing efforts are directed through a New York City based national firm who also coordinates our public relations efforts. In addition, we work with a select few wholesale distributors who cover parts of the United States, Canada, Spain and the United Kingdom. Approximately 3% and 5% of our revenues were derived from non-U.S. sources in 201 and 2017, respectively.
Manufacturing and Supply
All of our current lighting products are manufactured to our specifications in China. We currently rely upon one manufacturer and supplier of our ballast products. We continue to evaluate and upgrade our China manufacturing specifications and relationships and believe that the prices charged by these suppliers are industry-wide competitive. All of our other lighting products, including our lamps, are manufactured and supplied by third-party suppliers.
Our reliance upon manufacturers and suppliers located in China, subjects us to various political, economic, and other risks and uncertainties inherent in importing products from this country, including among other risks, export/import duties, quotas and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations. There can be no assurance that if there were an interruption of our supply lines from China, that we would be able to quickly find replacement suppliers of our products domestically, or from other countries, and even if we found replacement suppliers, that we would be able to obtain the products at the quality and prices we currently pay which is why our founders continue to develop alternate relationships in China light and ballast manufacturing.
Our Terpenez nutrient products are formulated in our facility in Carson, CA under the strictest of manufacturing protocols. The company intends to develop additional nutrient lines using local state-of-the-art processing labs in southern California under its proprietary formulations. Given the regulatory environment and intense scrutiny and testing required by both State and Federal agencies, we believe staying the course with natural, organic, and heavy-metal free ingredients will allow Zelda to provide substantial growth and opportunity within the industry.
Technology and Development
We have entered into an agreement with G.A.S. Technologies Inc. (“GAS”) pursuant to which GAS will provide design, supply and engineering services to the Company as well as exclusively license to the Company certain products for the horticultural industry, including all digital lighting products (the “GAS Agreement”) developed by GAS. The GAS Agreement gives the Company the exclusive right to manufacture, market and distribute all of the licensed technology. Among the technologies licensed are GAS’s designs for some of the Company’s LED products.
The GAS Agreement provides that the Company will pay to Licensor a minimum royalty at the rate of $100,000 per year (the “Minimum Annual Royalty”), commencing on the date of this Agreement, plus seven per cent (7%) of all net sales in excess of a fixed amount per calendar year (the “Additional Royalty”).
Intellectual Property
We own number of trademarks and rely on a combination of copyright and trade secrets as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brand. We rely on copyright laws to protect copy on our web site, www.solis-tek.com, and all marketing materials.
From time to time, we may encounter disputes over rights and obligations concerning intellectual property. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business, our brand and reputation, or our ability to compete. Also, protecting our intellectual property rights could be costly and time consuming.
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Government Regulation
Almost all of end users of our products have used our products for the growing of cannabis. Currently, there are twenty-nine States plus the District of Columbia, Guam, and Puerto Rico that have laws and/or regulation that recognize in one form or another legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. In addition, the States of Colorado, Washington, California, Massachusetts, Alaska, Nevada, and Oregon, Vermont as well as the District of Columbia, have recently approved the recreational use of cannabis. Many other States are considering legislation to similar effect. As of June 1, 2015, the policy and regulations of the Federal government and its agencies is that cannabis has no medical benefit and a range of activities including cultivation and use of cannabis for personal use is prohibited on the basis of federal law and may or may not be permitted on the basis of State law. Active enforcement of the current federal regulatory position on cannabis on a regional or national basis may directly and adversely affect the willingness of our end user customers to continue to grow cannabis. Active enforcement of the current federal regulatory position on cannabis may thus directly and adversely affect revenues.
Competition
Our Lighting Products currently face competition from traditional lighting fixture companies, lamp manufacturers and from non-traditional companies focused on LED lighting systems including fixtures and lamps. Lighting companies such as Acuity Brands, Inc., the Cooper Lighting division of Eaton Corporation plc, General Electric Company, Hubbell Incorporated, Philips, OSRAM, Gavita, Nanolux, Sunlight Supply and Hydrofarm are the main competitors in this market. Increasingly, however, other companies (i.e., start-ups) are beginning to emerge in the LED lighting markets in which we compete. We compete on the basis of product features, quality, product availability and price.
Our LED lighting products will compete against traditional lighting products using incandescent, fluorescent, halogen, ceramic metal halide or other lighting technology. Our LED lighting products compete against traditional lighting products based upon superior energy savings, extended life, improved lighting quality and lower total cost of ownership. Also, our LED lighting products have a reduced impact on the environment as compared to fluorescent and compact fluorescent technologies that contain mercury.
We will also compete with LED-based products from traditional and non-traditional lamp and fixture companies, some of which are customers for our LED chips and LED components. Our products compete on the basis of color quality and consistency, superior light output, reduced energy consumption, brand and lower total cost of ownership. Within the Zelda nutrient product line, the Terpenez product is unique in its product class. The formula provides essential oil-bearing plants with both precursors (i.e. metabolic building blocks, trace elements, etc.) and readily available bio-identical plant compounds aiming to increase overall essential oil production and intensity. It is the first product of its kind to deliver plant nutrients to cannabis cultivating customers with a fully plant derived 0-0-0 (Nitrogen, Phosphate, and Potassium free) product. Independent bioanalytical testing laboratory analysis was conducted and determined the level of heavy metals to be below the EPA’s detection limit (BDL). Terpenez is used to increase the value of cannabis crops through the intensification of oil production, which has results in a significant improvement in flavor and aroma. With other nutrient lines, products that provide plant growth, and insect and pest protection, are marketed through a plethora of local and regional brands with literally scores of names and claims of value and productivity- none of which compete head on with Terpenez whose lab tested and grower proven track record is beyond compare.
Patents, trademarks, franchises, concessions
We own number of trademarks and rely on a combination of copyright and trade secrets as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brands. We will rely on copyright laws to protect copy on our web site, www.solis-tek.com, and all marketing materials.
We own the trademark for our proprietary product “Terpenez”.
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From time to time, we may encounter disputes over rights and obligations concerning intellectual property. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business, our brand and reputation, or our ability to compete. Also, protecting our intellectual property rights could be costly and time consuming.
Employees
As of December 31, 2017, the Company has 21 full-time employees, employed by us in various capacities, including three Executive Officers, six in sales, four administrative, five in the warehouse, two in nutrient manufacturing and one in research and development. In addition, from time to time, we employ temporary personal to meet the business needs.
RISK FACTORS
RISKS RELATED TO MARIJUANA LAWS
Our business is dependent on laws pertaining to the marijuana industry.
Continued development of the marijuana industry is dependent upon continued legislative authorization of marijuana at the state level. Any number of factors could slow or halt progress in this area. Further, progress, while encouraging, is not assured. While there may be ample public support for legislative action, numerous factors impact the legislative process. Any one of these factors could slow or halt use of marijuana, which would negatively impact our business.
Currently, there are twenty-nine States plus the District of Columbia that have laws and/or regulation that recognize in one form or another legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. In addition, the States of Colorado, Washington, California, Massachusetts, Alaska, Nevada and Oregon, Vermont, as well as the District of Columbia, have recently approved the recreational use of cannabis. The State laws are in conflict with the Federal Controlled Substances Act, which makes marijuana use and possession illegal on a national level. The Trump Administration has indicated that it is not an efficient use of resources to direct law federal law enforcement agencies to prosecute those lawfully abiding by State-designated laws allowing the use and distribution of medical marijuana. However, there is no guarantee that the Trump Administration will not change its stated policy regarding the low-priority enforcement of federal laws. Additionally, any new administration that follows could change this policy and decide to enforce the federal laws strongly. Any such change in the federal government’s enforcement of current federal laws could cause significant financial damage to us and our shareholders.
Federal enforcement practices could change with respect to participants in the cannabis industry, which could adversely impact us. If the federal government were to change its practices or were to expand its resources attacking providers in the cannabis industry, such action could have a materially adverse effect on our operations, our customers, or the sales of our products.
It is possible that additional Federal or state legislation could be enacted in the future that would prohibit our customers from selling cannabis, and if such legislation were enacted, such customers may discontinue the use of our services, our potential source of customers would be reduced, causing revenues to decline. Further, additional government disruption in the cannabis industry could cause potential customers and users to be reluctant to use our services, which would be detrimental to the Company.
We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.
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Laws and regulations affecting the medical marijuana industry are constantly changing, which could detrimentally affect our proposed operations.
Local, state and federal medical marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or alter our business plan. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on its operations. In addition, it is possible that regulations may be enacted in the future that will be directly applicable to our proposed business. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on its business.
RISKS RELATED TO OUR BUSINESS
We have incurred significant net losses and cannot assure you that we will achieve or maintain profitable operations, and our auditors have issued a “going concern” audit opinion.
Our net loss was $(14,021,728) for the year ended December 31, 2017. As of December 31, 2017, we had stockholders’ deficit of $(6,326,189). We will need to raise additional working capital to continue our normal and planned operations. We will need to generate and sustain significant revenue levels in future periods in order to become profitable, and, even if we do, we may not be able to maintain or increase our level of profitability. We anticipate that our operating expenses will increase in the foreseeable future as we undertake increased technology and production efforts to support our business and increase our marketing and sales efforts to drive an increase in the number of customers and clients utilizing our services. In addition, as a public company, we will incur significant accounting, legal and other expenses that we did not incur as a private company. These expenditures will make it necessary for us to continue to raise additional working capital and make it harder for us to achieve and maintain profitability. Our efforts to grow our business may be costlier than we expect, and we may not be able to generate sufficient revenue to offset our higher operating expenses. If we are forced to reduce our expenses, our growth strategy could be compromised. We may incur significant losses in the future for a number of reasons, including unforeseen expenses, difficulties, complications and delays and other unknown events. Accordingly, substantial doubt exists about our ability to continue as a going concern and we cannot assure you that we will achieve sustainable operating profits as we continue to expand our infrastructure, restructure our balance sheet, further develop our marketing efforts, and otherwise implement our growth initiatives.
Our independent auditors have indicated in their report on our December 31, 2017 consolidated financial statements that there
is substantial doubt about our ability to continue as a going concern. A “going concern” opinion indicates that the
financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities
that may result if we do not continue as a going concern. Therefore, you should not rely on our consolidated balance sheet as
an indication of the amount of proceeds that would be available to satisfy claims of creditors, and potentially be available for
distribution to stockholders, in the event of liquidation.
Our manufacturing is concentrated with two key manufacturers, and if our relationship with either or both of them terminates or is otherwise impaired, we would likely experience increased costs, disruptions in the manufacture and shipment of our products and a material loss of net sales.
We have no long-term contracts with our manufacturers and as a result, our manufacturers could cease to provide products to us with no notice. Two of our manufacturers, Shenzhen Jayo Technologies Co., Ltd. and Zhuhai Relite Co., Ltd, together accounted for approximately 96% of our cost of goods sold in 2017 and 2016. Each of these manufacturers is the sole source supplier for the products that it produces. We purchase from these two manufacturers on a purchase order basis with orders generally filled between 45 and 60 days after our purchase order is placed. A loss of either or both of these manufacturers or other key manufacturers would result in delayed deliveries to our retailers and distributors, would adversely impact our net sales and may require the establishment of new manufacturing relationships. Additionally, we cannot be certain that we will not experience operational difficulties with our manufacturers, including reductions in the availability of production capacity, errors in complying with product specifications, insufficient quality control, failures to meet production deadlines, increases in manufacturing costs and increased lead times.
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Risk of reliance on suppliers and manufacturers in China for production of our lighting related products.
All of our products are imported from and manufactured in China. For this reason, a major change in the political, economic and/or legal environment, or a natural disaster in China or another center of production, could have an impact on our ability to supply products.
We face business, political, operational, financial and economic risks because a portion of our net sales are generated internationally and substantially all of our products are manufactured outside of the United States.
We face business, political, operational, financial and economic risks inherent in international business, many of which are beyond our control, including: difficulties obtaining domestic and foreign export, import and other governmental approvals, permits and licenses, and compliance with foreign laws, which could halt, interrupt or delay our operations if we cannot obtain such approvals, permits and licenses, and that could have a material adverse effect on our results of operations; difficulties encountered by our international distributors or us in staffing and managing foreign operations or international sales, including higher labor costs, which could increase our expenses and decrease our net sales and profitability; transportation delays and difficulties of managing international distribution channels, which could halt, interrupt or delay our operations; longer payment cycles for, and greater difficulty collecting, accounts receivable, which could reduce our net sales and harm our financial results; trade restrictions, higher tariffs, currency fluctuations or the imposition of additional regulations relating to import or export of our products, especially in China, where substantially all of our products are manufactured, which could force us to seek alternate manufacturing sources or increase our expenses, either of which could have a material adverse effect on our results of operations; political and economic instability, including wars, terrorism, political unrest, boycotts, curtailment of trade and other business restrictions, any of which could materially and adversely affect our net sales and results of operations; and natural disasters, which could have a material adverse effect on our results of operations.
Any of these factors could reduce our net sales, decrease our gross margin or increase our expenses. Should we establish our own operations in international territories where we currently utilize a distributor, we will become subject to greater risks associated with operating outside of the United States.
Any shortage of raw materials or components could impair our ability to ship orders of our products in a cost-efficient manner or could cause us to miss the delivery requirements of our retailers or distributors, which could harm our business.
The ability of our manufacturers to supply our products is dependent, in part, upon the availability of raw materials and certain components. Our manufacturers may experience shortages in the availability of raw materials or components, which could result in delayed delivery of products to us or in increased costs to us. Any shortage of raw materials or components or inability to control costs associated with manufacturing could increase the costs for our products or impair our ability to ship orders in a timely cost-efficient manner. As a result, we could experience cancellation of orders, refusal to accept deliveries or a reduction in our prices and margins, any of which could harm our financial performance and results of operations.
Our business could suffer if any of our manufacturers fail to use acceptable labor practices.
We do not control our manufacturers or their labor practices. The violation of labor or other laws by a manufacturer utilized by us, or the divergence of an independent manufacturer’s labor practices from those generally accepted as ethical or legal in the United States, could damage our reputation or disrupt the shipment of finished products to us if such manufacturer is ordered to cease its manufacturing operations due to violations of laws or if such manufacturer’s operations are adversely affected by such failure to use acceptable labor practices. If this were to occur, it could have a material adverse effect on our financial condition and results of operations.
Foreign currency risk.
For most products imported for our core business, transactions are conducted in U.S. dollars. Many major movements in exchange rates that persist for prolonged periods could have an adverse impact on our business results.
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We may elect from time to time to make changes to our pricing, service, hiring and marketing decisions that could increase our expenses, affect our revenues and impact our financial results.
Because our expense levels in any given quarter are based, in part, on management’s expectations regarding future revenues, if revenues are below expectations, the effect on our operating results may be magnified by our inability to adjust spending in a timely manner to compensate for a shortfall in revenues. The extent to which expenses are not subsequently followed by increased revenues would harm our operating results and could seriously impair our business.
If we are unable to generate sufficient cash flow from operations or are unable to obtain additional equity or debt financing, to meet our working capital requirements, we may have to curtail our business operations sharply or cease business altogether.
We have a relatively short operating history on which to evaluate our potential for future success. This makes it difficult to evaluate our future prospects and the risk of success or failure of our business.
We incorporated in June of 2010 and your evaluation of our business and prospects will be based on our limited history. Consequently, our short history and results of operations may not give you an accurate indication of our future results of operations or prospects. You must consider our business and prospects in light of the risks and difficulties we will encounter as an early-stage company in a highly competitive market. We may not be able to successfully address these risks and difficulties, which could materially harm our business and operating results.
As we grow our business, we cannot guarantee our business strategies will be successful or that our revenues will ever increase sufficiently to achieve and maintain profitability on a quarterly or annual basis.
Defects or disruptions in the delivery if our service could diminish demand, decrease market acceptance or decrease customer satisfaction of our service and subject us to substantial liability.
We may, from time to time, find defects in our products service may be detected in the future. Any defects with our products could hurt our reputation and may damage our customers’ businesses. If that occurs, customers could elect not to renew, or delay or withhold payment to us, we could lose future sales, or, customers may make warranty or other claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or the expense and risk of litigation.
Our inability to effectively manage our growth could harm our business and materially and adversely affect our operating results and financial condition.
Our strategy envisions growing our business. We plan to expand our product, sales, administrative and marketing organizations. Any growth in or expansion of our business is likely to continue to place a strain on our management and administrative resources, infrastructure and systems. As with other growing businesses, we expect that we will need to further refine and expand our business development capabilities, our systems and processes and our access to financing sources. We also will need to hire, train, supervise and manage new employees. These processes are time consuming and expensive, will increase management responsibilities and will divert management attention. We cannot assure you that we will be able to:
| ● | expand our products offerings effectively or efficiently or in a timely manner; | |
| ● | allocate our human resources optimally; | |
| ● | meet our capital needs; | |
| ● | identify and hire qualified employees or retain valued employees; or | |
| ● | incorporate effectively the components of any business or product line that we may acquire in our effort to achieve growth. |
Our inability or failure to manage our growth and expansion effectively could harm our business and materially and adversely affect our operating results and financial condition.
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Our operating results may fluctuate significantly based on customer acceptance of our products. As a result, period-to-period comparisons of our results of operations are unlikely to provide a good indication of our future performance.
Management expects that we will experience substantial variations in our net sales and operating results from quarter to quarter due to customer acceptance of our products. If customers do not accept our products, our sales and revenues will decline, resulting in a reduction in our operating income.
Customer interest for our products could also be impacted by the timing of our introduction of new products. If our competitors introduce new products around the same time that we issue new products, and if such competing products are superior to our own, customers’ desire for our products could decrease, resulting in a decrease in our sales and revenues. To the extent that we introduce new products and customers decide not to migrate to our new products from our older products, our revenues could be negatively impacted due to the loss of revenue from those customers. In the event that our newer products do not sell as well as our older products, we could also experience a reduction in our revenues and operating income.
As a result of fluctuations in our revenue and operating expenses that may occur, management believes that period-to-period comparisons of our results of operations are unlikely to provide a good indication of our future performance.
If we do not successfully generate additional products and services, or if such products and services are developed but not successfully commercialized, we could lose revenue opportunities.
Our future success depends, in part, on our ability to expand our product offerings. To that end we have engaged in the process of identifying new product opportunities to provide additional products to our customers. The process of identifying and commercializing new products is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging technological trends our business could be harmed. We may have to commit significant resources to commercializing new products before knowing whether our investments will result in products the market will accept. Furthermore, we may not execute successfully on commercializing those products because of errors in product planning or timing, technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate resources. This could result in competitors providing those solutions before we do and a reduction in net sales and earnings.
The success of new products depends on several factors, including proper new product definition, timely completion and introduction of these products, differentiation of new products from those of our competitors, and market acceptance of these products. There can be no assurance that we will successfully identify new product opportunities, develop and bring new products to market in a timely manner, or achieve market acceptance of our products or that products and technologies developed by others will not render our products or technologies obsolete or non-competitive.
Our inability to effectively protect our intellectual property would adversely affect our ability to compete effectively, our revenue, our financial condition and our results of operations.
We may be unable to obtain intellectual property rights to effectively protect our technology. Our ability to compete effectively may be affected by the nature and breadth of our intellectual property rights. While we intend to defend against any threats to our intellectual property rights, there can be no assurance that any such actions will adequately protect our interests. If we are unable to secure intellectual property rights to effectively protect our technology, our revenue and earnings, financial condition, or results of operations would be adversely affected.
We may be adversely affected by the financial condition of our retailers and distributors.
Some of our retailers and distributors have experienced financial difficulties in the past. A retailer or distributor experiencing such difficulties will generally not purchase and sell as many of our products as it would under normal circumstances and may cancel orders. In addition, a retailer or distributor experiencing financial difficulties generally increases our exposure to uncollectible receivables. We extend credit to our retailers and distributors based on our assessment of their financial condition, generally without requiring collateral. While such credit losses have historically been within our reserves, we cannot assure you that this will continue to be the case. Financial difficulties on the part of our retailers or distributors could have a material adverse effect on our results of operations and financial condition.
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Our industry is highly competitive and we have less capital and resources than many of our competitors, which may give them an advantage in developing and marketing products similar to ours or make our products obsolete.
We are involved in a highly competitive industry where we may compete with numerous other companies who offer alternative methods or approaches, who have far greater resources, more experience, and personnel perhaps more qualified than we do. Such resources may give our competitors an advantage in developing and marketing products similar to ours or products that make our products obsolete. There can be no assurance that we will be able to successfully compete against these other entities.
We will be required to attract and retain top quality talent to compete in the marketplace.
We believe our future growth and success will depend in part on our ability to attract and retain highly skilled managerial, product development, sales and marketing, and finance personnel. There can be no assurance of success in attracting and retaining such personnel. Shortages in qualified personnel could limit our ability to increase sales of existing products and launch new product and service offerings.
Our future success depends on our ability to grow and expand our customer base. Our failure to achieve such growth or expansion could materially harm our business.
To date, our revenue growth has been derived primarily from the sale of our products. Our success and the planned growth and expansion of our business depend on us achieving greater and broader acceptance of our products and expanding our customer base. There can be no assurance that customers will purchase our products or that we will continue to expand our customer base. If we are unable to effectively market or expand our product offerings, we will be unable to grow and expand our business or implement our business strategy. This could materially impair our ability to increase sales and revenue and materially and adversely affect our margins.
Weakened global economic conditions may adversely affect our industry, business and results of operations.
Our overall performance will depend, in part, on worldwide economic conditions. The United States and other key international economies have been impacted by falling demand for a variety of goods and services, restricted credit, going concern threats to major multinational companies and medium and small businesses, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets and bankruptcies. These conditions affect the rate of information technology spending and could adversely affect our customers’ ability or willingness to purchase our proposed enterprise cloud computing application service, delay prospective customers’ purchasing decisions, reduce the value or duration of their subscription contracts, or affect renewal rates, all of which could adversely affect our operating results.
If we experience significant fluctuations in our rate of anticipated growth and fail to balance our expenses with our revenue forecasts, our results could be harmed.
Due to our evolving business model, the unpredictability of new markets that we intend to enter and the unpredictability of future general economic and financial market conditions, we may not be able to accurately forecast our rate of growth. We plan our expense levels and investment on estimates of future revenue and future anticipated rate of growth. As a result, we expect that our revenues, operating results and cash flows may fluctuate significantly on a quarterly basis.
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We may in the future be sued by third parties for alleged infringement of their proprietary rights.
The lighting industry are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. We may receive in the future communications from third parties claiming that we have infringed the intellectual property rights of others. We may in the future be, sued by third parties for alleged infringement of their proprietary rights. Our technologies may not be able to withstand any third-party claims against their use. The outcome of any litigation is inherently uncertain. Any intellectual property claims, whether with or without merit, could be time-consuming and expensive to resolve, could divert management attention from executing our business plan and could require us to change our technology, change our business practices and/or pay monetary damages or enter into short- or long-term royalty or licensing agreements which may not be available in the future at the same terms or at all. In addition, many of our subscription agreements require us to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us of an adverse ruling on such a claim. Any adverse determination related to intellectual property claims or litigation could prevent us from offering our service to others or could otherwise adversely affect our operating results or cash flows or both in a particular quarter.
Supporting a growing customer base could strain our personnel and corporate infrastructure, and if we are unable to scale our operations and increase productivity, we may not be able to successfully implement our business plan.
Our current Management and human resources infrastructure is comprised of our CEO, President, Executive Vice President, Chief Operating Officer, Chief Compliance Officer and Secretary. Our success will depend, in part, upon the ability of our Management to manage our proposed business effectively. To do so, we will need to hire, train and manage new employees as needed. To manage the expected domestic growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. If we fail to successfully scale our operations and increase productivity, we will be unable to execute our business plan.
We are dependent on our CEO, President and Executive Vice President, and the loss of one or more of these individuals could harm our business and prevent us from implementing our business plan in a timely manner.
Our success depends substantially upon the continued services of our executive officers and other key members of management, particularly Alan Lien, our Chief Executive Officer, President, and Chief Financial Officer, and Alvin Hao, our Executive Vice President. However, we do not have employment agreements with Mr. Lien and Mr. Hao. Our officers are “at will” employees and could terminate their employment with us at any time. We do not maintain key person life insurance policies on our Chief Executive Officer, President and Chief Financial Officer or our Executive Vice President. The loss of the services of our Chief Executive Officer, President and Chief Financial Officer and our Executive Vice President could seriously harm our business.
Failure to manage growth properly could seriously harm our business.
We have experienced, and may continue to experience, significant growth in our business. If we do not effectively manage our growth, the quality of our business may suffer, which could negatively affect our reputation and demand for our offerings. Our growth has placed, and is expected to continue to place, a significant strain on our managerial, administrative, operational, and financial resources and our infrastructure. Our future success will depend, in part, upon the ability of our senior management to manage growth effectively. Among other things, this will require us to: implement additional management information systems; further develop our operating, administrative, legal, financial, and accounting systems and controls; hire additional personnel; develop additional levels of management within our company; locate additional office space; maintain and improve coordination among our engineering, product, operations, legal, finance, sales, marketing, and customer service and support organizations; and manage our expanding international operations.
Moreover, as our sales increase, we may be required to concurrently deploy our business infrastructure at multiple additional locations and/or provide increased levels of customization. As a result, we may lack the resources to deploy our products on a timely and cost-effective basis. Failure to accomplish any of these requirements could impair our ability to deliver our products in a timely fashion, fulfill existing customer commitments or attract and retain new customers.
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Our ability to grow our business may depend on developing a positive brand reputation and member loyalty.
Establishing and maintaining a positive brand reputation and nurturing customer loyalty is critical to attracting new customers. We expect to expend reasonable but limited resources to develop, maintain and enhance our brand in the near future. In addition, nurturing customer loyalty will depend on our ability to provide high-quality products which we may not do successfully. If we are unable to maintain and enhance our brand reputation and customer loyalty, our ability to attract new marketplace participants will be harmed.
There can be no assurance that we will be able to compete against the numerous direct, indirect and partial competitors, many of which have valuable industry relationships and access to greater resources than we do.
Our retail and online distribution channels compete for customers and sales with many different companies and products that are competitive today and likely to be even more competitive in the future. Accordingly, it is essential that we continue to develop, improve and refine our products and the value propositions that are offered to customers.
We also face competition from other companies that offer equipment. Moreover, as the negative stigma associated with cannabis horticulture diminishes, it is very possible that other better capitalized public and private companies many enter the market and may effectively challenge the value proposition offered by us. These competitors may be able to attract customers more easily because of their financial resources. Our larger competitors can also devote substantially more resources to business development and may adopt more aggressive pricing policies. There can be no assurance that we will be successful in accomplishing our business initiatives, or that we will be able to maintain significant levels of revenues, or recognize net income, from the sale of our products and services.
We do not anticipate paying dividends in the foreseeable future.
We anticipate that we will retain all future earnings and other cash resources for the future operation and development of our business and we do not intend to declare or pay any cash dividends in the foreseeable future. Future payment of cash dividends will be at the discretion of our board of directors after taking into account many factors, including our operating results, financial condition and capital requirements. Corporations that pay dividends may be viewed as a better investment than corporations that do not.
We are dependent to some extent on our Chief Technology Consultant for new and improved products.
The Company’s Chief Technology Consultant is GAS Technologies Incorporated (“GAST”). Should GAST or any other participating technology providers be unable to execute their portion of the development effort, new development of exclusive products of Solis Tek or any of its future plans could be delayed until a replacement is found.
Legal Contingencies.
From time to time, we may be involved in routine legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of our business. The ultimate amount of liability, if any, for any claims of any type (either alone or in the aggregate) may materially and adversely affect our financial condition, results of operations and liquidity. In addition, the ultimate outcome of any litigation is uncertain. Any outcome, whether favorable or unfavorable, may materially and adversely affect us due to legal costs and expenses, diversion of management attention and other factors. We expense legal costs in the period incurred. We cannot assure you that additional contingencies of a legal nature or contingencies having legal aspects will not be asserted against us in the future, and these matters could relate to prior, current or future transactions or events. Except as described below, we are not currently a party to any material litigation.
We may need to raise additional capital. If we are unable to raise additional capital, we may not be able to achieve our business plan.
We may need to raise additional funds through public or private debt or equity financings as well as obtain credit from vendors to be able to fully execute our business plan. Any additional capital raised through the sale of equity may dilute current shareholders’ ownership interest. We may not be able to raise additional funds on favorable terms, or at all. If we are unable to obtain additional funds or credit from our vendors, we will be unable to execute our business plan and you could lose your investment.
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We have limited protection of our intellectual property.
There can be no assurance that we will be able to adequately protect our trade secrets. In the event competitors independently develop or otherwise obtain access to our know-how, concepts or trade secrets, we may be adversely affected.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
There is minimal active liquid trading market for the Company’s common stock.
The Company common stock is quoted on the OTCQB. However, there is relatively small active trading market in the Company’s common stock, and we cannot give an assurance that a more active trading market will develop. If a more active market for the Company’s common stock develops, there is a significant risk that the Company’s stock price may fluctuate dramatically in the future in response to any of the following factors, some of which are beyond our control, such as:
| ● | Actual or anticipated variations in our operating results (including whether we have achieved our key business targets, and/or earnings estimates) and prospects; | |
| ● | Announcements of technological innovations by us or our competitors; | |
| ● | Announcements by us or our competitors of significant acquisitions, business achievements, strategic partnerships, joint ventures, or capital commitments; | |
| ● | Additions or departures of key personnel; | |
| ● | Introduction of new services by us or our competitors; | |
| ● | Sales of our common stock or other securities in the open market (particularly if overall trading volume is not high); | |
| ● | General market conditions and broader political and economic conditions; | |
| ● | Actual or anticipated monetization’s of our patents; and | |
| ● | Other events or factors, many of which are beyond our control. |
The assets of the Company are now pledged under the recent agreements with a Secured Lender and may prevent the Company from obtaining any additional asset based financing.
In conjunction with a Secured Convertible Debenture, all assets of the Company and its subsidiaries are secured under an agreement with YA II PN, LTD., a Cayman Islands exempt company (Sometimes referred to as the “Secured Lender”). Without any unsecured assets, the Company could be unable to obtain any future asset-based financing.
The agreements with the Secured Lender contains terms that could place the Company in default related to the outstanding borrowings.
The agreements with the Secured Lender include terms of default related to the funds borrowed. These include default due to non-payment, failure to pay taxes, failure to perform under the agreements, failure to disclose items of a material nature under certain representations and warranties, attachments to any secured assets or the indictment of the Company or its executive officers for any criminal acts. This default could result in the loss of the business.
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The agreement with the Secured Lender contains terms where the Secured Lenders can convert their Debenture to common shares and exercise warrants for common shares which could have an adverse effect upon the price of our common shares.
The Secured Lender’s conversions of indebtedness to common shares and exercise of warrants at fixed conversion and exercise prices, would: i) dilute the current shareholders' equity in the Company; ii) limit the Company’s ability to raise additional equity capital; and iii) depress the price of our common shares in the market.
Our board of directors has the authority to issue up to 5 million shares of “blank check” preferred stock. The issuance of any preferred stock may adversely affect the holders of common stock.
Our Certificate of Incorporation authorizes the issuance of up to 20,000,000 shares of preferred stock with designations, rights and preferences determined from time to time by its Board of Directors. Accordingly, our Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting, or other rights which could adversely affect the voting power or other rights of the holders of the common stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Although we have no present intention to issue any shares of our authorized preferred stock, there can be no assurance that the Company will not do so in the future.
Future issuance of our Common Stock could dilute the interests of existing shareholders.
We may issue additional shares of our Common Stock in the future. The issuance of a substantial amount of Common Stock could have the effect of substantially diluting the interests of our shareholders. In addition, the sale of a substantial amount of Common Stock in the public market, either in the initial issuance or in a subsequent resale by the target company in an acquisition which received such Common Stock as consideration or by investors who acquired such Common Stock in a private placement could have an adverse effect on the market price of our Common Stock.
We have no plans to pay dividends.
To date, we have paid no cash dividends on our common shares. For the foreseeable future, earnings generated from our operations will be retained for use in our business and not to pay dividends.
The application of the Securities and Exchange Commission’s “penny stock” rules to our Common Stock could limit trading activity in the market, and our shareholders may find it more difficult to sell their stock.
It is expected our Common Stock will be trading at less than $5.00 per share and is therefore subject to the SEC penny stock rules. Penny stocks generally are equity securities with a price of less than $5.00. Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The broker-dealer must also 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. These requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that becomes subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our securities, which could severely limit their market price and liquidity of our securities. These requirements may restrict the ability of broker-dealers to sell our Common Stock and may affect your ability to resell our Common Stock.
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If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our Common Stock.
Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. We maintain a system of internal control over financial reporting, which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
As a public company, we have significant requirements for enhanced financial reporting and internal controls. We will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company.
We cannot assure you that we will not, in the future, identify areas requiring improvement in our internal control over financial reporting. We cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or that we will implement and maintain adequate controls over our financial processes and reporting in the future as we continue our growth. If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our Common Stock.
Lack of experience as officers of publicly-traded companies of our management team may hinder our ability to comply with Sarbanes-Oxley Act.
It may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance staff or consultants in order to develop and implement appropriate internal controls and reporting procedures.
We incur costs as a public company which may affect our profitability.
As a public company, we incur significant legal, accounting and other expenses. We are subject to the SEC’s rules and regulations relating to public disclosure. SEC disclosures generally involve a substantial expenditure of financial resources. Compliance with these rules and regulations will significantly increase our legal and financial compliance costs and some activities will become more time-consuming and costly. Management may need to increase compensation for senior executive officers, engage additional senior financial officers who are able to adopt financial reporting and control procedures, allocate a budget for an investor and public relations program, and increase our financial and accounting staff in order to meet the demands and financial reporting requirements as a public reporting company. Such additional personnel, public relations, reporting and compliance costs may negatively impact our financial results.
Public company compliance may make it more difficult to attract and retain officers and directors.
The Sarbanes-Oxley Act and rules implemented by the SEC require changes in corporate governance practices of public companies. As a public company, these rules and regulations increase our compliance costs and make certain activities more time consuming and costly. As a public company, these rules and regulations make it more difficult and expensive for us to obtain director and officer liability insurance in the future and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.
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Because our directors and executive officers are among our largest shareholders, they can exert significant control over our business and affairs and have actual or potential interests that may depart from those of shareholders.
Our directors and executive officers own or control a significant percentage of the Common Stock. Additionally, the holdings of our directors and executive officers may increase in the future if they otherwise acquire additional shares of our Common Stock. The interests of such persons may differ from the interests of our other shareholders. As a result, in addition to their board seats and offices, such persons will have significant influence over and control all corporate actions requiring shareholder approval, irrespective of how the Company’s other shareholders, including purchasers in the Offering, may vote, including the following actions:
| ● | to elect or defeat the election of our directors; | |
| ● | to amend or prevent amendment of our Certificate of Incorporation or By-laws; | |
| ● | to effect or prevent a merger, sale of assets or other corporate transaction; and | |
| ● | to control the outcome of any other matter submitted to our shareholders for vote. |
Such persons’ stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company, which in turn could reduce our stock price or prevent our shareholders from realizing a premium over our stock price.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company does not own any real property. Our principal executive offices and warehouse are located at 16926 S. Keegan Avenue, Unit A, Carson, California. We occupy the 19,060 square foot facility pursuant to a lease with an independent party ending on August 31, 2020, with an unaffiliated party, pursuant to which we pay $14,676 per month in rental charges. The Company has just given notice to vacate the Keegan Ave. address and have signed a five-year lease to move to a 17,640 square foot facility located at 853 East Sandhill Avenue, Carson, CA 90746 effective May 1, 2018.
On October 1, 2014, our wholly owned subsidiary, Solis Tek East, Corporation executed a lease with an independent party for a 10,160 square foot offices and warehouse facilities located at 89 Leuning Street, Unit D2, South Hackensack New Jersey. The lease, with an unaffiliated party, is for the five year period ending on December 31, 2019, pursuant to which Solis Tek East, Corporation pays $8,818 per month in rental charges. The Company has guaranteed Solis Tek East, Corporation’s performance under the lease. The Company recently gave notice to the landlord of the intent to sublease this facility and consolidate operations into the west coast Carson facility effective May 1, 2018.
We know of no material, existing or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest.
ITEM 4. MINE SAFETY DISCLOSURE
Inapplicable.
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is quoted on the Financial Industry Regulatory Authority’s OTCQB under the symbol “SLTK”. The following quotations obtained from Yahoo! Finance reflect the highs and low bids for our common stock based on inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
The high and low bid prices of our common stock for the previous two fiscal years are as follows:
| Quarter Ended | High | Low | ||||||
| 31-Dec-17 | $ | 2.23 | $ | 1.08 | ||||
| 30-Sep-17 | $ | 1.54 | $ | 1.02 | ||||
| 30-Jun-17 | $ | 3.37 | $ | 1.00 | ||||
| 31-Mar-17 | $ | 1.39 | $ | 0.51 | ||||
| 31-Dec-16 | $ | 0.77 | $ | 0.25 | ||||
| 30-Sep-16 | $ | 0.50 | $ | 0.50 | ||||
| 30-Jun-16 | $ | 0.50 | $ | 0.50 | ||||
| 31-Mar-16 | $ | 1.00 | $ | 0.20 | ||||
On March 28, 2018, the closing high and low bid prices for our common stock was $1.11 - $1.13.
Transfer Agent
Our Transfer Agent and Registrar for our common stock is Action Stock Transfer Corp., 2469 E. Fort Union Blvd., Suite 214, Salt Lake City, UT. 84121.
Holders of Common Stock
As of December 31, 2017, there were approximately 52 shareholders of record holding a total of 41,230,482 shares of Common Stock. The holders of the Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. Holders of the Common Stock have no preemptive rights and no right to convert their Common Stock into any other securities. There are no redemption or sinking fund provisions applicable to the Common Stock.
Dividends
We have not declared any cash dividends since inception and do not anticipate paying any dividends in the foreseeable future. The payment of dividends is within the discretion of the Board of Directors and will depend on the Company’s earnings, capital requirements, financial condition and other relevant factors. There are no restrictions that currently limit the Registrant’s ability to pay dividends on its Common Stock other than those generally imposed by applicable state law.
ITEM 6. SELECTED FINANCIAL DATA.
As a smaller reporting company, we are not required to provide the information required by this Item.
ITEM 7. - Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. See “Note Regarding Forward-Looking Statements.” Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors discussed in “Risk Factors” and elsewhere in this report.
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The following discussion and analysis of the Company’s financial condition and results of operations is based on the preparation of our financial statements in accordance with U.S. generally accepted accounting principles. You should read this discussion and analysis together with such financial statements and the related notes thereto.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to impairment of long-lived assets, including finite lived intangible assets, accrued liabilities, fair value of warrant derivatives and certain expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
Our significant accounting policies are more fully described in Note 1 to our financial statements. 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, liabilities, revenues, and expenses, and the related disclosures of contingent assets and liabilities. Actual results could differ from those estimates under different assumptions or conditions. We believe that the following critical accounting policies are subject to estimates and judgments used in the preparation of our consolidated financial statements:
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, the age of the accounts receivable balances, credit quality, economic conditions that may affect a customer’s ability to pay and expected default frequency rates. Trade receivables are written off at the point when they are considered uncollectible.
Inventories
The Company provides inventory reserves based on excess and obsolete inventories determined primarily by historical sales and future demand forecasts. The write down amount is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Inventories under warranty claims
In the ordinary course of business, the Company receives product returns from its customers. The product returns are almost entirely ballasts. Since its inception, the Company has purchased its ballasts from two Chinese manufacturers and one of them offers a three year warranty on its products. Through December 31, 2017, that manufacturer was not able to repair the Company’s ballasts that have been returned under warranty as the Company could not return the products to the manufacturer’s facility due to Chinese customs reasons. As such, the vendor issued the Company a credit memo for the entire amount of their returned product, totaling $740,927 and $453,778, in 2017 and 2016, respectively. The Company is planning to send the products to a free trade zone in Hong Kong or to another location in China, to repair, or replace, the defective products. As the manufacturer has issued the Company a credit for all of the defective product, the Company has not recorded a reserve on any of those products.
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Results of Operations for the year ended December 31, 2017 compared to the year ended December 31, 2016
Revenue and Cost of Goods Sold
Revenue for the years ended December 31, 2017 and 2016 was $8,975,840 and $8,563,751, respectively, an, increase of $412,089, or 5%. The increase was primarily due to more market penetration within our hydroponic customers and commercial facilities during 2017, as compared to 2016.
Cost of goods sold for the years ended December 31, 2017 and 2016, was $5,830,568 and $5,439,982, respectively. Gross profit for the years ended December 31, 2017 and 2016, was $3,145,272 and $3,123,859, respectively. The increase in gross profit of $21,413 or 1% was primarily due to increase in revenue. As a percentage of revenue, gross profit for years ended December 31, 2017 and 2016, was 35.0% and 36.5%, respectively. The decrease in gross profit percentage was due to product mix.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses for the years ended December 31, 2017 and 2016 was $11,804,322 and $3,173,851, respectively, an increase of $8,630,471 or 272%. Included in the increase in SG&A expenses was an increase in stock-based compensation expense of $6,342,596. Excluding the increase in stock-based compensation expense, SG&A increased $2,287,875 due to an increase in payroll, professional fees, consulting, marketing, and other operating expenses to support our current business objectives.
Research and Development Expenses
Research and development (“R&D”) expenses for the years ended December 31, 2017 and 2016 was $231,770 and $370,625, respectively, a decrease of $138,855 or 37%. The decrease in R&D expenses was primarily related to the timing and scope of R&D projects as compared to the same period of last year.
Other Income and Expenses
Other expenses, net, for the years ended December 31, 2017 and 2016 was $5,123,753 and $117,293, respectively, an increase of $5,006,460. The increase in other income and expenses was due to the recording of financing costs of $2,353,234 and the change in fair value of derivative liability of $2,545,918, all of which did not exist during the prior year period (see Note 9 of the Consolidated Financial Statements). Interest expense increased over the prior year period by $128,409 due to increase in borrowings.
Net Loss
Our net loss for the years ended December 31, 2017 and 2016 was $14,021,728 and $538,710, respectively, an increase of $13,483,018. The increase in net loss was due to the increase in gross profit offset by increases in operating expenses and other income and expenses as discussed above.
Liquidity and Capital Resources
Cash and Liquidity
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.
Cash flows (used in) provided by operating activities
During the year ended December 31, 2017, the Company used $2,060,576 in operating activities, compared to cash provided by operating activities of $580,634 during the year ended December 31, 2016. During the year ended December 31, 2017, cash flow was impacted by our net loss, excluding non-cash expenses, and the change in our working capital accounts as compared to the same period prior year.
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Cash flows used in investing activities
During the years ended December 31, 2017 and 2016, the Company used $3,200 and $8,185 in cash from investing activities to purchase property and equipment, respectively.
Cash flows provided by (used in) financing activities
During the year ended December 31, 2017, the Company generated $2,755,936 in cash from financing activities compared to cash used in financing activities of $402,982 for the year ended December 31, 2016. For the year ended December 31, 2017, the Company received $1,647,500 through the issuance of a convertible note payable, $455,000 through an issuance of common stock, $295,410 from a private placement offering, $100,000 from the sale of common stock to a former officer, and $300,000 from notes payable to related parties. Part of the proceeds received were used to pay notes payable to a related party of $20,000.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, during the year ended December 31, 2017, the Company incurred a net loss of $14,021,728 and used cash in operations of $2,060,576 and had a stockholders’ deficit of $6,326,189 as of December 31, 2017. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date of the financial statements being issued. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
At December 31, 2017, the Company had cash on hand in the amount of $967,943. The Company raised an additional $2,010,000 from January 2018 through March 2018 through the sale of its debt and equity securities (see Note 13). Management estimates that the current funds on hand will be sufficient to continue operations through December 2018. The continuation of the Company as a going concern is dependent upon its ability to obtain necessary debt or equity financing to continue operations until it begins generating positive cash flow. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case or equity financing.
Historically, we have financed our operations primarily through private sales of common stock, a line of credit, loans from a third party financial institutions, related parties, and operations. We anticipate that our primary capital source will be positive cash flow from operations commencing third quarter 2018. If our sales goals do not materialize as planned, we believe that the Company can reduce its operating costs and achieve positive cash flow from operations. However, we may not generate sufficient revenues from product sales in the future to achieve profitable operations. If we are not able to achieve profitable operations at some point in the future, we may have insufficient working capital to maintain our operations as we presently intend to conduct them or to fund our expansion, marketing, and product development plans. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all.
On July 1, 2012, the Company entered into note payable agreements with Alan Lien and Alvin Hao, two of its officers/shareholders at that time. The maximum borrowings allowed under each individual note was $200,000. The notes are unsecured, bear interest at a rate of 8% per annum, and are due 30 days after demand. Amounts owed on the combined note balances were $195,000 at December 31, 2017 and 2016, respectively.
In May 2016, the Company entered into two separate notes payable agreements with the aforementioned two officers/shareholders. Under each of the agreements, the Company borrowed $300,000 from each of the officers/shareholders. The notes accrue interest at a rate of 8% per annum, are unsecured and are due on or before May 31, 2018. A total of $600,000 was due on the combined notes at December 31, 2017 and 2016.
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In February 2017, the Company executed two separate promissory notes and borrowed $300,000 from the relatives of one of the directors of the Company. The notes are unsecured, payable on demand and carry an interest of 14% per annum. A total of $300,000 was outstanding on the combined notes at December 31, 2017.
The Company entered into note agreements with the parents of one of the Company’s officer/shareholders. The loans accrue interest at 10% per annum, are unsecured and were due on or before December 31, 2016. A total of $50,000 and $70,000 was due on the loans as of December 31, 2017 and 2016, respectively.
During the year ended December 31, 2017, the Company has raised a total of $455,000 through an issuance of 511,957 shares through a Private Placement Offering to accredited investors pursuant to Regulation D. On September 3, 2017, the Company closed the Private Placement Offering.
In October 2017, the Company engaged Garden State Securities to develop potential accredited investors to participate in the Company’s private offering to raise up to $3,000,000 in convertible Preferred Series A stock. Each unit consisted of (i) three shares of Series A Convertible Preferred Stock of the Company (the “Series A”) and (ii) a warrant to purchase 1,936 shares of the Company’s common stock at $1.25 per share (the “Warrants). Each Series A share is convertible into 1,000 shares of common stock of the Company. The minimum subscription amount was 84 Units for $252,000, at $3,000 per unit. The purchase of the Series A have registration rights to have the Company register the underlying common shares. October 24, 2017 an accredited investor, FirstFire Global Opportunity Fund LLC purchased 117 Units which consisted of 117 Series A and Warrants to purchase 283,140 shares of common stock for $351,000. The Company received a total of $295,410 after fees and expenses. The conversion price of the stock is the lower of $1.00 or a potential 20% discount to the market price at the date of conversion. On November 8, 2017, the Company terminated the Unit offering. Subsequently, per the terms of the agreements, the company issued an additional 168,860 cash warrants at $1.10 per share. Subsequent to December 31, 2017, the Company issued 168,860 shares of its common stock from the conversion of warrants, at $1.10 per share, resulting in proceeds of $187,746, and issued 316,050 shares of common stock on the conversion of 316 shares of Series-A preferred shares.
On November 8, 2017, the Company issued a secured convertible debenture (the “Note”) to YA II PN, LTD., a Cayman Islands exempt company (“YPL”) in the principal amount of $1,750,000 with interest at 5% per annum (15% on default) and due 18 months from closing. The Note is secured by all the assets of the Company and its subsidiaries STI, STE and Zelda. The Note Conversion Price are convertible into common stock of the Company at $1.00 per share (the “Conversion Price”). The Conversion Price may be adjusted by YA II PN, Ltd. YPL on the earlier of (a) the 90-day anniversary of the closing with effectiveness of a registration statement or (b) the 180-day anniversary of the closing to a 20% discount to the lowest daily VWAP over the prior 10 trading days, if lower than $1.00 per share (“Ownership Cap”). Subject to the Ownership Cap, the Note will automatically convert if the Company’s stock has traded 250% above the Conversion Price for a period of 20 consecutive trading days provided that the shares can be sold pursuant to an effective registration statement or Rule 144 without any limitations, and the Company’s common stock has an average daily trading value of $350,000 per day for a period of 20 consecutive trading days. The Company will repay the outstanding principal of the Note in equal installments of $250,000 per month starting on the 270-day anniversary of the closing date either in cash by paying the installment amount plus the Redemption Premium or in kind through conversion into free trading common stock at a price equal to the less of (i) the Fixed Conversion Price, or (ii) a 20% discount to the lowest daily VWAP of the Common Stock during the 10 trading days prior to the payment date (or any combination of cash and stock). The Company will not be required to make a monthly amortization payment if the 10-day lowest VWAP is at or above 125% of the then effective Conversion Price. YA II PN, Ltd. will have the option to defer any monthly amortization payment to the maturity date at is sole discretion. The stock component of each monthly amortization payment will be limited to 300% of the average daily dollar traded value over the previous 10 trading days. The Company may redeem in cash amounts owed under the Note prior to the maturity date by provided YA II PN, Ltd. with 10 business days advance note provided that the common stock is trading below the conversion price at the time of the redemption note. The Company shall pay the redemption premium equal to the percentage of the principal amount being redeemed as follows: 10% for first 180 days following the closing, 15% for day 181 to 360 following the closing; and 20% for day 361 to the maturity date. The Company issued to YPL, 5 years warrants to purchase 1,137,500 shares of common stock the Company at $1.10 per share. The Company paid 5% of aggregate funding as commitment fee to YA II PN, Ltd. YPL and $15,000 towards due diligence and structuring fee. The Company netted $1,647,500 after fee and expenses. Currently there remains 450,000 warrants unconverted at $1.10 per share, and none of the $1,750,000 convertible debenture has been converted.
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Adjusted EBITDA (Non-GAAP Financial Measure)
In addition to our GAAP results, we present Adjusted EBITDA as a supplemental measure of our performance. However, Adjusted EBITDA is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measure derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of liquidity. We define Adjusted EBITDA as net income (loss), plus other expense, net, provision for income taxes, depreciation and amortization, and stock-based compensation. Non-GAAP adjustments to our results prepared in accordance with GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
Set
forth below is a reconciliation of Adjusted EBITDA to net loss for the years ended December 31, 2017 and 2016.
| Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Net loss | $ | (14,021,728 | ) | $ | (538,710 | ) | ||
| Provision for income taxes | 7,155 | 800 | ||||||
| Other expense, net | ||||||||
| Financing costs | 2,353,234 | - | ||||||
| Change in fair value of derivative liability | 2,545,918 | - | ||||||
| Interest expense | 224,879 | 96,470 | ||||||
| Interest income | (255 | ) | (4,500 | ) | ||||
| Other (income) expense | (23 | ) | 25,323 | |||||
| Total other expense, net | 5,123,753 | 117,293 | ||||||
| Depreciation and amortization expense | 69,893 | 70,950 | ||||||
| Stock based compensation expense | 6,342,596 | 111,000 | ||||||
| Adjusted EBITDA | $ | (2,478,331 | ) | $ | (238,667 | ) | ||
We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Adjusted EBITDA has limitations as an analytical tool, which includes, among others, the following:
● Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
● Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
● Adjusted EBITDA does not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; and
● although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements
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New Accounting Standards
See Note 2 of the financial statements for a discussion of recent accounting pronouncements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital resources that is material to investors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
| 30 |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
| 31 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholder’s and Board of Directors
Solis Tek Inc.
Carson, California
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Solis Tek, Inc. (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years 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 consolidated financial position of the Company as of December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company experienced a net loss and utilized cash from operations during the year ended December 31, 2017, and has stockholders’ deficit at December 31, 2017. These matters 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 1 to the financial statements. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company'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") 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 audits 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, and 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’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 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 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 financial statements. We believe that our audits provide a reasonable basis for our opinion.
Weinberg & Company, P.A.
We have served as the Company's auditor since 2015.
Los Angeles, California
April 2, 2018, except for Notes 1 and 13 for which the date is July 13, 2018.
| F-1 |
SOLIS TEK INC.
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 967,943 | $ | 275,783 | ||||
| Accounts Receivable, net of allowance for doubtful accounts and returns of $396,499 and $359,395 | 417,484 | 628,691 | ||||||
| Inventories, net | 1,684,463 | 2,880,804 | ||||||
| Advances to suppliers – formerly a related party | 735,730 | - | ||||||
| Prepaid expenses and other current assets | 134,374 | 72,531 | ||||||
| Income tax receivable | - | 2,578 | ||||||
| Total current assets | 3,939,994 | 3,860,387 | ||||||
| Property and equipment, net | 138,243 | 204,936 | ||||||
| Other assets | 37,980 | 32,071 | ||||||
| TOTAL ASSETS | $ | 4,116,217 | $ | 4,097,394 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 1,124,349 | $ | 552,057 | ||||
| Due to former related party vendor | 381,457 | 1,083,764 | ||||||
| Note payable - related parties | 1,145,000 | 265,000 | ||||||
| Convertible note payable, current portion, net of discount of $1,555,556 | 194,444 | - | ||||||
| Due to related parties | 146,534 | 134,086 | ||||||
| Capital lease obligations, current portion | 9,665 | 13,711 | ||||||
| Loans payable, current portion | 8,476 | 8,262 | ||||||
| Total Current Liabilities | 3,009,925 | 2,056,880 | ||||||
| Capital lease obligations, net of current portion | - | 9,665 | ||||||
| Loans payable, net of current portion | 17,481 | 25,958 | ||||||
| Convertible note payable, net of current portion, net of discount of $500,000 | - | - | ||||||
| Notes payable related parties, net of current portion | 600,000 | |||||||
| Derivative liability | 7,415,000 | - | ||||||
| Total liabilities | 10,442,406 | 2,692,503 | ||||||
| Series-A Convertible Preferred Shares, net of discount of $351,000, no par value, 351,000 shares issued and outstanding at December 31, 2017 | ||||||||
| Commitments and Contingencies | ||||||||
| Shareholders’ Equity (Deficit) | ||||||||
| Preferred stock, no par value, 20,000,000 shares authorized; no shares issued and outstanding at December 31, 2017 and 2016, respectively | - | - | ||||||
| Common stock, $0.0001 par value, 100,000,000 shares authorized; 38,522,034 and 29,721,998 shares issued and outstanding at December 31, 2017 and 2016, respectively | 3,852 | 2,972 | ||||||
| Additional paid-in-capital | 9,112,360 | 2,822,592 | ||||||
| Accumulated deficit | (15,442,401 | ) | (1,420,673 | ) | ||||
| Total Shareholders’ Equity (Deficit) | (6,326,189 | ) | 1,404,891 | |||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | $ | 4,116,217 | $ | 4,097,394 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-2 |
SOLIS TEK INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Years ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Sales | $ | 8,975,840 | $ | 8,563,751 | ||||
| Cost of goods sold (including $3,905,248 and $3,474,012 from a former related party) | 5,830,568 | 5,439,892 | ||||||
| Gross profit | 3,145,272 | 3,123,859 | ||||||
| Operating expenses | ||||||||
| Selling, general and administrative expenses | 11,804,322 | 3,173,851 | ||||||
| Research and development | 231,770 | 370,625 | ||||||
| Total operating expenses | 12,036,092 | 3,544,476 | ||||||
| Loss from operations | (8,890,820 | ) | (420,617 | ) | ||||
| Other income (expenses) | ||||||||
| Financing costs | (2,353,234 | ) | - | |||||
| Change in fair value of derivative liability | (2,545,918 | ) | - | |||||
| Interest expense (including $109,863 and $56,626 to related parties) | (224,879 | ) | (96,470 | ) | ||||
| Interest income | 255 | 4,500 | ||||||
| Other income (expenses) | 23 | (25,323 | ) | |||||
| Total other income (expenses) | (5,123,753 | ) | (117,293 | ) | ||||
| Loss before income taxes | (14,014,573 | ) | (537,910 | ) | ||||
| Provision for income taxes | 7,155 | 800 | ||||||
| Net Loss | (14,021,728 | ) | (538,710 | ) | ||||
| Deemed dividend to Series-A Preferred Stockholders | (606,948 | ) | - | |||||
| Net Loss Attributable to Common Stockholders | $ | (14,628,676 | ) | $ | (538,710 | ) | ||
| BASIC AND DILUTED LOSS PER SHARE | $ | (0.38 | ) | $ | (0.02 | ) | ||
| WEIGHTED - AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED | 37,158,145 | 29,632,824 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
SOLIS TEK INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
| Additional | ||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance, December 31, 2015 | 29,576,998 | 2,958 | 2,711,606 | (881,963 | ) | 1,832,601 | ||||||||||||||
| Fair value of common stock issued to employees | 145,000 | 14 | 110,986 | - | 111,000 | |||||||||||||||
| Net loss for the year ended December 31, 2016 | (538,710 | ) | (538,710 | ) | ||||||||||||||||
| Balance, December 31, 2016 | 29,721,998 | $ | 2,972 | $ | 2,822,592 | $ | (1,420,673 | ) | $ | 1,404,891 | ||||||||||
| Net proceeds from sale of common stock | 511,957 | 51 | 454,949 | 455,000 | ||||||||||||||||
| Fair value of common stock issued for services | 1,717,000 | 172 | 2,480,828 | 2,481,000 | ||||||||||||||||
| Fair value of common stock issued to employees | 5,786,765 | 579 | 3,286,921 | 3,287,500 | ||||||||||||||||
| Fair value of common stock purchased by officer | 784,314 | 78 | 399,922 | 400,000 | ||||||||||||||||
| Fair value of vested stock options | 274,096 | 274,096 | ||||||||||||||||||
| Deemed dividend related to sale of Series-A Convertible Preferred Shares | (606,948 | ) | (606,948 | ) | ||||||||||||||||
| Net loss for the year ended December 31, 2017 | (14,021,728 | ) | (14,021,728 | ) | ||||||||||||||||
| Balance, December 31, 2017 | 38,522,034 | $ | 3,852 | 9,112,360 | $ | (15,442,401 | ) | $ | (6,326,189 | ) | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
SOLIS TEK INC.
CONSOLIDATED STAEMENTS OF CASH FLOWS
| Years ended December 31 | ||||||||
| 2017 | 2016 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net Loss | $ | (14,021,728 | ) | $ | (538,710 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Provision for allowance for doubtful accounts and sales returns | 37,104 | 214,416 | ||||||
| Provision for inventory reserves | 11,034 | - | ||||||
| Depreciation and amortization | 69,893 | 70,950 | ||||||
| Amortization of loan fees | - | 28,370 | ||||||
| Fair value of vested stock options | 274,096 | |||||||
| Fair value of common stock issued for services | 2,481,000 | - | ||||||
| Fair value of common stock issued to employees | 3,287,500 | 111,000 | ||||||
| Common stock purchase by officer at discount | 300,000 | - | ||||||
| Financing costs | 2,513,668 | - | ||||||
| Change in the fair value of derivative liability | 2,545,918 | - | ||||||
| Changes in Assets and Liabilities | ||||||||
| (Increase) Decrease in: | ||||||||
| Accounts receivable | 174,103 | (282,133 | ) | |||||
| Inventories | 1,185,308 | 939,055 | ||||||
| Inventories under warranty claims | - | 75,621 | ||||||
| Advances to suppliers | (735,730 | ) | 22,420 | |||||
| Prepaid expenses and other | (61,843 | ) | (62,290 | ) | ||||
| Income taxes receivable | 2,578 | 72,812 | ||||||
| Other assets | (5,909 | ) | - | |||||
| (Decrease) Increase in: | ||||||||
| Accounts payable and accrued expenses | 572,291 | (12,388 | ) | |||||
| Due to former related party vendor | (702,307 | ) | (87,990 | ) | ||||
| Due to related parties | 12,448 | - | ||||||
| Interest expense on notes payable to officers | - | 29,501 | ||||||
| Net cash provided by (used in) operating activities | (2,060,576 | ) | 580,634 | |||||
| Cash Flows from Investing Activities | ||||||||
| Purchase of property and equipment | (3,200 | ) | (8,185 | ) | ||||
| Net cash used in investing activities | (3,200 | ) | (8,185 | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from sale of common stock | 455,000 | - | ||||||
| Proceeds from sale of common stock to officer | 100,000 | - | ||||||
| Proceeds from sale of convertible preferred stock | 295,410 | - | ||||||
| Proceeds from convertible note payable | 1,647,500 | - | ||||||
| Proceeds from notes payable related parties | 300,000 | 610,000 | ||||||
| Proceeds from loans payable | - | 110,000 | ||||||
| Payments on notes payable related party | (20,000 | ) | - | |||||
| Payments on capital lease obligations | (13,711 | ) | (12,844 | ) | ||||
| Payments on loans payable | (8,262 | ) | (487,458 | ) | ||||
| Payment on line of credit | - | (600,000 | ) | |||||
| Payments on due to related parties | - | (22,680 | ) | |||||
| Net cash provided by (used in) financing activities | 2,755,936 | (402,982 | ) | |||||
| Net increase in cash | 692,160 | 169,467 | ||||||
| Cash beginning of period | 275,783 | 106,316 | ||||||
| Cash end of period | $ | 967,943 | $ | 275,783 | ||||
| Interest paid | $ | 32,686 | $ | 8,989 | ||||
| Taxes (refund) paid | $ | 3,200 | $ | (79,315 | ) | |||
| Non-Cash Financing Activities | ||||||||
| Fair value of derivative created upon issuance of convertible debt recorded as debt discount | $ | 3,767,724 | $ | - | ||||
| Fair value of derivative created upon issuance of convertible preferred stock and associated warrants | $ | 1,101,358 | $ | - | ||||
| Deemed dividend related to Series-A Preferred stockholders | $ | 606,948 | $ | - | ||||
The accompanying notes are integral part of these consolidated financial statements.
| F-5 |
SOLIS TEK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
NOTE 1 – BASIS OF PRESENTATION
History and Organization
Solis Tek Inc. (the “Company”) was originally incorporated under the laws of the State of Nevada on March 2, 2007 as Cinjet, Inc. (“Cinjet”). Effective September 1, 2015, Cinjet changed its corporate name to Solis Tek Inc. On June 23, 2015, the Company entered into an Agreement of Merger and Plan of Reorganization (the “Agreement”) with Solis Tek Inc., a California corporation (“STI”), and CJA Acquisition Corp., a California corporation and a wholly owned subsidiary of the Company (“Merger Sub”), providing for the merger of Merger Sub with and into STI (the “Merger”), with STI surviving the Merger as a wholly-owned subsidiary of the Company. The Merger was accounted for as a recapitalization of the Company with STI being deemed the accounting acquirer.
Overview of Business
The Company is an importer, distributer and marketer of digital lighting equipment and manufacturer of nutrient products for the hydroponics industry. Using certain of its proprietary technologies, the Company provides innovative light spectrum aptitudes with its ballast, reflector and lamp products. The Company additionally has a line of nutrients under the Zelda brand for sale to the same supply chain channel as its lighting products. The Company’s customers include retail stores, distributors and commercial growers in the United States and abroad.
Going Concern
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, during the year ended December 31, 2017, the Company incurred a net loss of $14,021,728 and used cash in operations of $2,060,576 and had a stockholders’ deficit of $6,326,189 as of December 31, 2017. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date of the financial statements being issued. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
At December 31, 2017, the Company had cash on hand in the amount of $967,943. The Company raised an additional $4,505,000 from January 2018 through June 2018 through the sale of its debt and equity securities (see Note 13). Management estimates that the current funds on hand will be sufficient to continue operations through December 2018. The continuation of the Company as a going concern is dependent upon its ability to obtain necessary debt or equity financing to continue operations until it begins generating positive cash flow. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case or equity financing.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries Solis Tek East Corporation (“STE”), an entity incorporated under the laws of the State of New Jersey and GrowPro Solutions, Inc. (“GrowPro”), and entity incorporated under the laws of the State of California. Intercompany transactions and balances have been eliminated in consolidation.
| F-6 |
Loss per Share Calculations
Basic earnings per share are computed by dividing net loss available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
Options to acquire 3,000,000 shares of common stock and 2,101,000 shares to be issued upon conversion of our convertible notes and preferred stock have been excluded from the calculation of weighted average common shares outstanding at December 31, 2017 as their effect would have been anti-dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the years ended December 31, 2016, as the Company had no outstanding equity instruments other than its outstanding common shares.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in valuing our allowances for doubtful accounts, reserves for inventory obsolescence, valuing equity instruments issued for services and valuation allowance for deferred tax assets, among others. Actual results could differ from these estimates.
Segment Reporting
The Company operates in one segment for the manufacture and distribution of our products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying consolidated financial statements.
Revenue Recognition
The Company recognizes revenue upon shipment of the Company’s products to its customers, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured. Title to the Company’s products primarily is transferred to the customer once the product is shipped from the Company’s warehouses. Products are not shipped until there is a written agreement with the customer with a specified payment arrangement. Any discounts that are offered are done as a reduction of the invoiced amount at the time of billing. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as customer deposits.
The Company does not offer a general right of return on any of its sales and considers all sales as final. The Company generally provides a three-year warranty on its ballasts. However, the Company does not maintain a warranty reserve as the Company is able to chargeback its vendors for all warranty claims. As of December 31, 2017, and December 31, 2016, the Company recorded a reserve for returned product in the amount of $114,119 and $45,410, respectively, which reduced the accounts receivable balances as of those periods.
Accounts Receivable
The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding.
| F-7 |
The allowance for doubtful accounts and returns is established through a provision reducing the carrying value of receivables. At December 31, 2017, and December 31, 2016, the allowance for doubtful accounts and returns was $396,499 and $359,395, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is computed on a first-in, first-out basis. The Company’s inventories consist almost entirely of finished goods as of December 31, 2017 and 2016.
The Company provides inventory reserves based on excess and obsolete inventories determined primarily by future demand forecasts. The write down amount is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. At December 31, 2017 and December 31, 2016, the reserve for excess and obsolete inventory was $112,339 and $101,305, respectively.
Inventories under warranty claims
In the ordinary course of business, the Company receives product returns from its customers. The product returns are almost entirely ballasts. Since its inception, the Company has purchased its ballasts from two Chinese manufacturers and one of them (formally a related party entity, see Note 4) offers a three-year warranty on certain of its products. Through December 31, 2017, that manufacturer was not able to repair the Company’s ballasts, as the Company could not return the products to the manufacturer’s facility due to Chinese customs reasons. As such, the vendor issued the Company a credit memo for the entire amount of their returned product, totaling $740,927 and $453,778 in 2017 and 2016, respectively. The Company is planning to send the products to a free trade zone in Hong Kong or to another location in China, to repair, or replace, the defective products. As the manufacturer has issued the Company a credit for the entire defective product, the Company has not recorded a reserve on any of those products in its ending inventory.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The Company has determined the estimated useful lives of its property and equipment, as follows:
| Machinery and equipment | 5 years | |||
| Computer equipment | 3 years | |||
| Furniture and fixtures | 7 years |
Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the related accounts and the resulting gain or loss is reflected in the statements of operations.
Research and Development
Research and development costs are expensed in the period incurred. The costs primarily consist of personnel and supplies.
Shipping and handling costs
The Company’s shipping and handling costs relating to inbound freight are reported as cost of goods sold in the consolidated Statements of Operations, while shipping and handling costs relating to outbound freight are reported as selling, general and administrative expenses in the consolidated Statements of Operations. The Company classifies amounts billed to customers for shipping fees as revenues.
| F-8 |
Income Taxes
Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized. The Company has recorded a valuation allowance against its deferred tax assets as of December 31, 2017 and 2016.
The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50 percent likely of being realized upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that the Company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes.
Concentration Risks
The Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits. At December 31, 2017 and 2016, the Company had cash deposits that exceeded the federally insured limit of $250,000. The Company believes that no significant concentration of credit risk exists with respect to these cash balances because of its assessment of the creditworthiness and financial viability of the financial institution.
The Company operates in markets that are highly competitive and rapidly changing. Significant technological changes, shifting customer needs, the emergence of competitive products or services with new capabilities, and other factors could negatively impact the Company’s operating results. State and federal government laws could have a material adverse impact on the Company’s future revenues and results of operations.
The Company’s products require specific components that currently are available from a limited number of sources. The Company purchases some of its key products and components from single vendors. During the years ended December 31, 2017 and 2016, its ballasts, lamps and reflectors, which comprised the clear majority of the Company’s purchases during those periods, were each only purchased from one separate vendor. The ballast vendor is a former related party (see Note 4).
The Company performs a regular review of customer activity and associated credit risks and does not require collateral or other arrangements. There were no customers that accounted for more than 10% of the Company’s revenue for the years ended December 31, 2017 and 2016. Shipments to customers outside the United States comprised 2.2% and 1% for the years ended December 31, 2017 and 2016, respectively.
As of December 31, 2017, four customers accounted for 17.1%, 14.8%, 14.5% and 14.3% of the Company’s trade accounts receivable balance, and as of December 31, 2016, one customer accounted for 18% of the Company’s trade accounts receivable balance.
Fair Value measurements
The Company determines the fair value of its assets and liabilities based on the exchange price in U.S. dollars 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. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:
| ● | Level 1 — Quoted prices in active markets for identical assets or liabilities. | |
| ● | Level 2 — Inputs, other than Level 1, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
| ● | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
| F-9 |
The carrying amounts of financial instruments such as cash, accounts receivable, inventories, and accounts payable and accrued liabilities, approximate the related fair values due to the short-term maturities of these instruments.
The fair value of the derivative liabilities of $7,415,000 at December 31, 2017, were valued using Level 2 inputs.
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures, but does not believe there will be a material effect, if any.
In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. 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 Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.
In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” (“ASU 2017-11”). ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered, and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The guidance in ASU 2017-11 can be applied using a full or modified retrospective approach. The Company is currently evaluating the impact of the adoption of ASU 2017-11 on the Company’s financial statement presentation or disclosures.
| F-10 |
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2017 and 2016:
| 2017 | 2016 | |||||||
| Machinery and equipment | $ | 234,706 | $ | 231,506 | ||||
| Computer equipment | 12,448 | 12,448 | ||||||
| Furniture and fixtures | 97,451 | 97,451 | ||||||
| Leasehold improvements | 7,000 | 7,000 | ||||||
| 351,605 | 348,405 | |||||||
| Less: accumulated depreciation and amortization | (213,362 | ) | (143,469 | ) | ||||
| Property and equipment, net | $ | 138,243 | $ | 204,936 | ||||
Depreciation and amortization expense for the years ended December 31, 2017 and 2016 was $69,893 and $70,950, respectively.
Property and equipment include assets acquired under capital leases of $64,632 at December 31, 2017 and 2016, respectively.
NOTE 4 – RELATED PARTY TRANSACTIONS
Supplier (Former Related Party)
A family member of an officer/shareholder owned a minority interest in a company in China, which is the sole supplier of ballasts to the Company. Purchases from the related party for the years ended December 31, 2017 and 2016 totaled approximately $3,805,248 and $3,119,000, respectively. The Company believes purchase prices from this vendor approximated what the Company would have to pay from an independent third party vendor. In 2017, the Company determined that due to a change in relationship status, this vendor that was formerly considered a related party, was deemed to no longer be a related party. At December 31, 2017 and 2016, the Company owed the former related party $381,457 and $1,083,764, respectively. At December 31, 2017, the Company had made advanced deposit payments to this vendor for $735,730, which will be applied to purchased inventory upon delivery.
Due to Related Parties
As of December 31, 2017, and December 31, 2016, the Company owed related parties $146,534 and $134,086, respectively. Included in the balances were short-term loans from the two officers/shareholders to the Company totaling $3,297 as of December 31, 2017 and 2016, respectively. The balances are payable on demand, bear zero interest and are unsecured. The balances also included interest owed on the notes payable to related parties, which totaled to $65,222 and $68,471 at December 31, 2017 and 2016, respectively. Also included is $29,580 and $62,319 of unpaid compensation, which was owed to the officers/shareholders as of December 31, 2017 and 2016, respectively.
| F-11 |
NOTE 5 – NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consists of the following at December 31, 2017 and 2016:
| 2017 | 2016 | |||||||
| Notes payable to officers/shareholders (a) | $ | 195,000 | $ | 195,000 | ||||
| Notes payable to officers/shareholders (b) | 600,000 | 600,000 | ||||||
| Notes payable to related parties (c) | 300,000 | - | ||||||
| Notes payable to related parties (d) | 50,000 | 70,000 | ||||||
| 1,145,000 | 865,000 | |||||||
| Less: current portion | (1,145,000 | ) | (265,000 | ) | ||||
| Non-current portion | $ | - | $ | 600,000 | ||||
| a. | On July 1, 2012, the Company entered into note payable agreements with Alan Lien and Alvin Hao, two of its officers/shareholders at that time. The maximum borrowings allowed under each individual note was $200,000. The notes are unsecured, bear interest at a rate of 8% per annum, and are due 30 days after demand. Amounts owed on the combined note balances were $195,000 at December 31, 2017 and 2016, respectively. | |
| b. | In May 2016, the Company entered into two separate notes payable agreements with the aforementioned two officers/shareholders. Under each of the agreements, the Company borrowed $300,000 from each of the officers/shareholders. The notes accrue interest at a rate of 8% per annum, are unsecured and are due on or before May 31, 2018. A total of $600,000 was due on the combined notes at December 31, 2017 and 2016. | |
| c. | In February 2017, the Company executed two separate promissory notes and borrowed $300,000 from the relatives of one of the directors of the Company. The notes are unsecured, payable on demand and carry an interest of 14% per annum. A total of $300,000 was outstanding on the combined notes at December 31, 2017. | |
| d. | The Company entered into note agreements with the parents of one of the Company’s officer/shareholders. The loans accrue interest at 10% per annum, are unsecured and were due on or before December 31, 2016. A total of $50,000 and $70,000 was due on the loans as of December 31, 2017 and 2016, respectively. |
Interest expense on the notes to related parties for the year ended December 31, 2017 and 2016 was $109,863 and $56,626, respectively. Interest paid to the related parties during the year ended December 31, 2017 and 2016 amounted to $7,200 and $17,124, respectively. Accrued interest included in amounts due to related parties at December 31, 2017 and 2016 was $146,534 and $68,471, respectively.
NOTE 6 – LOANS PAYABLE
Loans payable consist of the following as of December 31, 2017 and December 31, 2016:
| 2017 | 2016 | |||||||
| Automobile loans | $ | 25,957 | $ | 34,220 | ||||
| Less: current portion | (8,476 | ) | (8,262 | ) | ||||
| Non-current portion | $ | 17,481 | $ | 25,958 | ||||
In 2015, the Company entered into two loan agreements to purchase automobiles. The combined principal amount of the loans was $44,093 and they mature by November 2021. The loans require a combined monthly payment of principal and interest of $747. A total of $25,957 and $34,220 was owed on the loans as of December 31, 2017 and 2016, respectively.
Principal payments due on long-term debt as of December 31, 2017 for each of the next five years are as follows:
| Years ending December 31, | Amount | |||
| 2018 | 8,476 | |||
| 2019 | 7,542 | |||
| Thereafter | 9,939 | |||
| Total | $ | 25,957 | ||
| F-12 |
NOTE 7 – CONVERTIBLE NOTE PAYABLE
Convertible note payable consist of the following as of December 31, 2017:
| Amount | ||||
| YA II PN, Ltd. Advisors Global, LP | $ | 1,750,000 | ||
| Less debt discount | (1,555,556 | ) | ||
| Convertible note payable, net | $ | 194,444 | ||
On November 8, 2017, the Company issued a secured convertible debenture (the “Note”) to Yorkville Advisors Global, LP (“YPL”) in the principal amount of $1,750,000 with interest at 5% per annum (15% on default) and due 18 months from closing. The Note is secured by all the assets of the Company and its subsidiaries. The Note Conversion Price is convertible into common stock of the Company at $1.00 per share (the “Conversion Price”). The Conversion Price may be adjusted by YPL on the earlier of (a) the 90-day anniversary of the closing with effectiveness of a registration statement or (b) the 180-day anniversary of the closing to a 20% discount to the lowest daily Volume Weighted Average Price (VWAP) over the prior 10 trading days, if lower than $1.00 per share (“Ownership Cap”). Subject to the Ownership Cap, the Note will automatically convert if the Company’s stock has traded 250% above the Conversion Price for a period of 20 consecutive trading days provided that the shares can be sold pursuant to an effective registration statement or Rule 144 without any limitations, and the Company’s common stock has an average daily trading value of $350,000 per day for a period of 20 consecutive trading days. As part of the issuance, the Company also granted YPL a 5 year warrant to purchase 1,137,500 shares of the Company at $1.10 per share
The Company will repay the outstanding principal of the Note in equal installments of $250,000 per month starting on September 1, 2018 either in cash by paying the installment amount plus the Redemption Premium or in kind through conversion into free trading common stock at a price equal to the less of (i) the Fixed Conversion Price, or (ii) a 20% discount to the lowest daily VWAP of the Common Stock during the 10 trading days prior to the payment date (or any combination of cash and stock). The Company will not be required to make a monthly installment payment if the 10-day lowest VWAP is at or above 125% of the then effective Conversion Price. YPL will have the option to defer any monthly installment payment to the maturity date at its sole discretion. The stock component of each monthly installment payment will be limited to 300% of the average daily dollar traded value over the previous 10 trading days. The Company may redeem in cash amounts owed under the Note prior to the maturity date by providing YPL with 10 business days advance note provided that the common stock is trading below the conversion price at the time of the redemption note. The Company shall pay the Redemption Premium equal to the percentage of the principal amount being redeemed as follows: 10% for first 180 days following the closing, 15% for day 181 to 360 following the closing; and 20% for day 361 to the maturity date.
The Company paid 5% of aggregate funding as commitment fee to YPL and $15,000 towards due diligence and structuring fee. The Company netted $1,647,500 after fee and expenses of $102,500.
The Company determined that since the conversion floor had no limit to the conversion price, that the Company could no longer determine if it had enough authorized shares to fulfil the conversion obligation. Furthermore, the Company determined that the exercises prices of the warrants were not a fixed amount because they were subject to an adjustment based on the occurrence of future offerings or events. As such, the Company determined that the conversion feature and the warrants created a derivative with a fair value of $3,767,724 at the date of issuance. The Company accounted for the fair value of the derivative up to the face amount of the note of $1,750,000 as a valuation discount to be amortized over the life of the note, and the excess of $2,017,724 being recorded as a finance cost.
During the year ended December 31, 2017, amortization of debt discount was $194,444 and was recorded as a financing costs. The unamortized balance of the debt discount was $1,555,556 as of December 31, 2017.
The following table presents scheduled principal payments on our long-term debt as of December 31, 2017:
| Years ending December 31, | Amount | |||
| 2018 | $ | 1,250,000 | ||
| 2019 | 500,000 | |||
| Total | $ | 1,750,000 | ||
| F-13 |
NOTE 8 – SERIES-A CONVERTIBLE PREFERRED STOCK AND WARRANTS
Series-A Convertible Preferred Shares Subscription Agreement consisted of the following as of December 31, 2017:
| Amount | ||||
| 5% Series-A preferred stock, $0.0001 par value, 351,000 shares issued and outstanding | $ | 351,000 | ||
| Discount relating to fair value of conversion feature and warrants granted upon issuance | (351,000 | ) | ||
| Preferred stock | $ | - | ||
In October 2017, the Company engaged Garden State Securities to develop potential accredited investors to participate in the Company’s private offering to raise up to $3,000,000 in convertible Preferred Series-A stock. Each unit consisted of (i) three shares of Series-A Convertible Preferred Stock of the Company (the “Series-A”) and (ii) a warrant to purchase 1,936 shares of the Company’s common stock at $1.25 per share (the “Warrants). Each Series-A share is convertible into 1,000 shares of common stock of the Company. Each share is convertible to common stock at a lesser of $1.00 per share or discounted VWAP (80% of the 10 trading days prior to conversion), whichever is lower.
October 24, 2017 FirstFire Global Opportunities Fund LLC (“FirstFire”) purchased 117 Units which consisted of 351,000 shares of Series-A preferred stock and Warrants to purchase 283,140 shares of common stock for $351,000. The Company received a total of $295,410 after fees and expenses. The Series-A offering was terminated after this issuance without the Minimum Amount being raised.
The Series-A will automatically convert if (i) the Company’s Common Stock trades at a price equal to or greater than 250% of the Series-A Conversion Price for ten (10) consecutive Trading Days, (ii) the Conversion Shares are eligible for resale pursuant to an effective registration statement or Rule 144 without any limitations, and (iii) the average trading volume for the Company’s Common Stock during the same ten (10) consecutive Trading Day period is equal to or greater than 125,000 shares of the Company’s Common Stock, then all outstanding shares of Series-A Preferred Stock shall, automatically, and without the payment of additional consideration by the Series-A Investor, and without any notice to the Series-A Investor be converted into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing the Stated Value per share plus accrued and unpaid dividends thereon by the Series-A Conversion Price then in effect. The purchase of the Series-A had registration rights to have the Company register the underlying common shares, and such registration statement was declared effective in January 2018. As part of the offering, the Company also granted First Fire a right to refuse or participate in any future debt or equity offering. The registration statement was filed in December 2017 and declared effective in January 2018.
As part of the issuance, the Company initially granted warrants to purchase 226,512 shares of common stock to FirstFire. The Company subsequently issued 56,628 additional warrants to First Fire as part of the offering, bringing the total warrants issued to them to 283,140. The warrants are exercisable at $1.25 per share and will expire in five years. The exercise price, and the number of warrants to be issued, are subject to adjustment. The exercise price of the warrants is subject to a reset provision (down round protection) in case the Company will issue similar debt or equity instruments with price lower than $1.25 per share. The number of warrants shall also be increased upon the occurrence of certain events.
The Company considered the accounting guidance and determined the appropriate treatment is to account the Series-A conversion feature as a liability since the instrument is convertible into a variable number of shares (i.e. the conversion price continuously reset) and that the Company could no longer determine if it had enough authorized shares to fulfil the conversion obligation. Furthermore, the Company determined that the exercises prices of the warrants were not a fixed amount because they were subject to an adjustment based on the occurrence of future offerings or events. As such, the Company determined that the conversion feature of the Series-A preferred stock had a fair value of $564,000 at issuance, and the fair value of 283,140 warrants had a fair value of $338,358 at issuance, which created a derivative with an aggregate fair value of $902,358 at the date of issuance. The Company accounted for the fair value of the derivative up to the face amount of the preferred as a reduction of the fair value of the preferred stock of $295,410, and the excess of $606,948 is being recorded as a deemed dividend and a charge to paid in capital. The Company will revalue these liabilities each reporting period.
| F-14 |
In November 2017, FirstFire informed the Company that it was exercising its right to participate in the YPL debt offering described in Note 7, however, YPL refused and threatened to back out of the offering if FirstFire was included in it. The YPL debt offering was consummated without FirstFire. In December 2017, as a settlement with FirstFire for not to exercising its right to participate in the YPL debt offering, the Company granted FirstFire warrants to purchase 166,860 shares of common stock at $1.00 per share. The warrant contained down-round/reset provision (both exercise price and number of shares) in case the Company will issue similar instrument at a price lower than $1.25 per shares, and as such, is subject to derivative liability accounting. The Company determined that the issuance of these additional warrants was part of a negotiated settlement with FirstFire, and recorded the fair value of the warrant of $199,000 as a liability and as a financing cost.
The Company also considered the guidance of ASC 480-10-S99-3A, and determined that as redemption is outside control of the issuer as the conversion price not fixed, such preferred shares should be recognized outside of permanent equity.
NOTE 9 – DERIVATIVE LIABILITY
The FASB has issued authoritative guidance whereby instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The conversion prices and the exercise prices of the notes, Series-A preferred stock, and warrants described in Notes 7 and 8 were not a fixed amount because they were either subject to an adjustment based on the occurrence of future offerings or events or they were variable. Since the number of shares is not explicitly limited, the Company is unable to conclude that enough authorized and unissued shares are available to settle the conversion option. In accordance with the FASB authoritative guidance, the conversion features have been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.
As of December 31, 2017, the derivative liabilities were valued using a probability weighted average Monte Carlo pricing model with the following assumptions:
| Issued During 2017 | December 31, 2017 | |||||||
| Exercise Price | $ | 1.10 – 1.25 | $ | 1.10 – 1.25 | ||||
| Stock Price | $ | 1.26 – 1.80 | $ | 2.23 | ||||
| Risk-free interest rate | 1.53 – 2.03 | % | 1.76 – 2.20 | % | ||||
| Expected volatility | 172 | % | 172 | % | ||||
| Expected life (in years) | 1.49 – 5.00 | 1.30 – 5.00 | ||||||
| Expected dividend yield | 0 | % | 0 | % | ||||
| Warrants | $ | 1,979,082 | $ | 3,000,000 | ||||
| Convertible debt | 2,326,000 | 3,633,000 | ||||||
| Series-A Preferred Stock | 564,000 | 782,000 | ||||||
| Fair Value: | $ | 4,869,082 | $ | 7,415,000 | ||||
The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate the future volatility for its common stock. The expected life of the conversion feature of the notes was based on the remaining term of the notes. The expected dividend yield was based on the fact that the Company has not customarily paid dividends in the past and does not expect to pay dividends in the future.
| F-15 |
During the year ended December 31, 2017, the Company recognized $2,545,918 as the change in the fair value of the derivative from the respective prior period. In addition, the Company recognized derivative liabilities of $4,869,082 upon issuance of convertible notes and convertible preferred shares during the period.
NOTE 10 – SHAREHOLDERS’ EQUITY
Common shares issued for cash
During the year ended December 31, 2017, the Company issued 511,957 shares of common stock for a total of $455,000 in a Private Placement Offerings per Reg. D.
Common stock issued for services
During 2017, the Company entered into various consulting agreements with third parties (“Consultants”) pursuant to which these Consultants provided business development, sales promotion, introduction to new business opportunities, strategic analysis, accounting, and, sales and marketing activities. In accordance with these agreements, the Company agreed to issue an aggregate of 1,717,000 shares to the Consultants for the services rendered. The Company accounted for the aggregate fair value of the shares of common stock issued to Consultants in accordance with current accounting guidelines and determined the aggregate fair value of these shares to be $2,481,000 based on the trading prices per share of the Company’s stock at every issuance date. As there were no performance commitment and shares issued were nonrefundable, the Company recognized the full amount of the fair value of the common stock issued as stock compensation expense on its statement of Operations for the period ended December 31, 2017.
Common shares issued to employees for services
As part of an employment agreement, dated March 27, 2017, with Mr. Dennis G. Forchic to become Chief Executive Officer, the Company issued a total of 5,411,765 shares of common stock valued at $2,760,000 (based on trading price at date of grant). In addition, Mr. Forchic purchased an additional 784,314 shares with a fair value at the date of purchase of $400,000 for a consideration of $100,000. The fair value of the shares on the date of grant over consideration received was $300,000, which was recorded as additional stock compensation expense.
On December 27, 2017, the Company entered into a four year employment agreement with Stanley L. Teeple as the Company’s Chief Compliance Officer. As part of the Employment Agreement, Mr. Teeple was granted 1,000,000 million shares of the Company’s common stock of which 250,000 shares vested and were issued on the signing of the employment agreement and 250,000 shares vest annually on the anniversary of the employment agreement. The fair value of the shares on the date of grant was $1,710,000, of which $427,500 was recorded as stock-based compensation during the year ended December 31, 2017 and $1,282,000 is being amortized ratably over the three year vesting period.
In November 2015, the Company entered into a four year employment agreement with one of its employees in which the employee was granted 500,000 shares of the Company’s common stock. The shares vest equally in six month periods over the four years. The fair value of the shares on the date of grant was $400,000, which is being amortized ratably over the four year service period. A total of 125,000 shares with a fair value of $100,000 were issued under the agreement during both years ended December 31, 2017 and 2016. In 2016, 20,000 common shares with a fair value of $11,000 were granted to two employees for their services in 2016. The amount amortized as stock based compensation in 2017 and 2016 was $100,000 and $111,000, respectively.
| F-16 |
Summary of Stock Options
A summary of stock options for the year ended December 31, 2017 is as follows:
| Weighted | ||||||||
| Number | Average | |||||||
| of | Exercise | |||||||
| Options | Price | |||||||
| Balance outstanding, December 31, 2016 | - | - | ||||||
| Options granted | 3,000,000 | 0.60 | ||||||
| Options exercised | - | - | ||||||
| Options expired or forfeited | - | - | ||||||
| Balance outstanding, December 31, 2017 | 3,000,000 | $ | 0.60 | |||||
| Balance exercisable, December 31, 2017 | - | $ | - | |||||
As part of the Employment Agreement with Mr. Forchic, he was granted an option to purchase 3,000,000 shares of common stock at $0.60 per share, with 33.3% of these shares vesting on the one year anniversary of the date of grant and the remainder vesting in equal installments at the end of each month over the next three years. The options were valued at $835,767 at the date of grant using a Black Scholes options pricing model and will be amortized as an expense over the vesting period.
The fair value of each option on the date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
| 2017 | ||||
| Risk free rate of return | 1.92 | % | ||
| Option lives in years | 6.0 | |||
| Annual volatility of stock price | 198.03 | % | ||
| Dividend yield | - | % | ||
Information relating to outstanding stock options at December 31, 2017, summarized by exercise price, is as follows:
| Outstanding | Exercisable | |||||||||||||||||||
| Weighted | Weighted | |||||||||||||||||||
| Exercise | Average | Average | ||||||||||||||||||
| Price Per Share | Shares | Life (Years) | Exercise Price | Shares | Exercise Price | |||||||||||||||
| $0.60 | 3,000,000 | 5.00 | $ | 0.60 | - | $ | - | |||||||||||||
The Company recorded compensation expense pursuant to authoritative guidance provided by the ASC Topic 718 – Stock Compensation for the year ended December 31, 2017 of $274,096. As of December 31, 2017, the Company has outstanding unvested options with future compensation costs of $561,671, which will be recorded as compensation cost as the options vest over their remaining average vesting period of 2.00 years. As of December 31, 2017, the outstanding options had an intrinsic value of $4,890,000.
NOTE 11- COMMITMENTS
Operating Leases
The Company leases office and warehouse facilities under two non-cancellable lease agreements, one in Southern California and one in New Jersey. The Southern California lease was initiated in September 2013 and expires August 31, 2020. Subsequent to December 31, 2017, the Company provided notice to vacate its existing facility in Southern California and signed a five-year lease, effective May 1, 2018, to move to a 17,640 square foot facility at 853 East Sandhill Avenue, Carson, CA 90746. The New Jersey lease was initiated in October 2014 and expires September 30, 2019.
| F-17 |
Minimum annual rental commitments under non-cancelable leases are as follows:
| Years ending December 31, | Amount | |||
| 2018 | $ | 243,000 | ||
| 2019 | 180,000 | |||
| 2020 | 180,000 | |||
| 2021 | 180,000 | |||
| 2022 and thereafter | 360,000 | |||
| TOTAL | $ | 1,143,000 | ||
Rent expense was $242,484 and $218,997 for the years ended December 31, 2017 and 2016, respectively.
Capital Leases
The Company leases equipment under capital lease agreements. As of December 31, 2017, the outstanding balance was $9,665 and due in 2018.
Technology License Agreement
The Company entered into a Technology License Agreement with a third-party vendor for consulting services. Under the agreement, the Company will pay the vendor a minimum consulting amount of $100,000 per year, plus a royalty of 7% of all net sales of the vendor’s products above $1,428,571 per calendar year. For each of the years ended December 31, 2017 and 2016, $100,000 was recorded as research and development expense under the agreement on the consolidated Statements of Operations related to the minimum annual fee. For each of years ended December 31 2017 and 2016, $45,595 and $41,490 related to the royalty was recorded as cost of goods sold on the Consolidated Statements of Operations. A total of $190,713 and $165,553 was owed under the amended agreement at December 31, 2017 and 2016, respectively.
Employment Agreements
Agreement with Chief Executive Officer
On January 6, 2017, the company extended an offer to Dennis G. Forchic to become Chief Executive Officer. Mr. Forchic accepted the offer and contracts were executed on March 27, 2017. As part of the Employment Agreement, the Company issued a total of 5,411,765 shares valued at $2,760,000. In addition, Mr. Forchic purchased an additional 784,314 shares valued at $400,000 for a consideration of $100,000. The fair value of the shares on the date of grant over consideration received was $300,000, which was recorded as stock compensation expense, (See Note 13).
Agreement with Chief Compliance Officer, Secretary
On December 27, 2017, the Company entered into a four year employment agreement with Stanley L. Teeple as the Company’s Chief Compliance Officer. As part of the Employment Agreement, Mr. Teeple was granted 1,000,000 million shares of the Company’s common stock of which 250,000 shares vested on the signing of the employment agreement and 250,000 shares vest annually on the anniversary of the employment agreement. The fair value of the shares on the date of grant was $1,710,000, of which $427,500 was recorded as stock-based compensation during the year ended December 31, 2017 and $1,282,000 is being amortized ratably over the three year employment agreement period.
NOTE 12 – INCOME TAXES
At December 31, 2017, the Company had available Federal and state net operating loss carryforwards to reduce future taxable income. The amounts available were approximately $3,400,000 for Federal and state purposes. The carryforwards expire in various amounts through 2035. Given the Company’s history of net operating losses, management has determined that it is more likely than not that the Company will not be able to realize the tax benefit of the carryforwards. Accordingly, the Company has not recognized a deferred tax asset for this benefit.
| F-18 |
Effective January 1, 2007, the Company adopted FASB guidelines that address the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. This guidance also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as of December 31, 2017 and 2016, the Company did not have a liability for unrecognized tax benefits, and no adjustment was required at adoption.
The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2017, and 2016, the Company has not accrued interest or penalties related to uncertain tax positions. Additionally, tax years 2014 through 2017 remain open to examination by the major taxing jurisdictions to which the Company is subject.
Upon the attainment of taxable income by the Company, management will assess the likelihood of realizing the tax benefit associated with the use of the carryforwards and will recognize the appropriate deferred tax asset at that time.
The Company’s effective income tax rate differs from the amount computed by applying the federal statutory income tax rate to loss before income taxes as follows:
| December 31, 2017 | December 31, 2016 | |||||||
| Income tax benefit at federal statutory rate | (34.0 | )% | (34.0 | )% | ||||
| State income tax benefit, net of federal benefit | (6.0 | )% | (6.0 | )% | ||||
| Change in valuation allowance | 40.00 | % | 40.00 | % | ||||
| Income taxes at effective tax rate | - | - | % | |||||
The components of deferred taxes consist of the following at December 31, 2017 and 2016:
| December 31, 2017 | December 31, 2016 | |||||||
| Inventory reserves | $ | 11,000 | $ | 41,000 | ||||
| Allowance for doubtful accounts and returns | 38,000 | 143,000 | ||||||
| Impairment of note receivable | - | 40,000 | ||||||
| Other accrued expenses | - | 91,000 | ||||||
| Depreciation | (70,000 | ) | (55,000 | ) | ||||
| Net operating loss carryforwards | 930,000 | 295,000 | ||||||
| Less: Valuation allowance | (909,000 | ) | (555,000 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
NOTE 13 – SUBSEQUENT EVENTS
On February 5, 2018, the Company terminated its employment agreement with Mr. Dennis G. Forchic, its Chief Executive Officer and a member of the Company’s Board of Directors.
In accordance with the severance terms of his Employment Agreement: (i) all 3,000,000 Options previously granted to Mr. Forchic were terminated as they had not vested; (ii) the Company will pay Mr. Forchic at the annual rate of $162,000 per annum, from February 5, 2018 through the fourth anniversary date of the Employment Agreement; and, (iii) the Company will reimburse Mr. Forchic for each month until the fourth anniversary of January 6, 2017, an amount equal to 50% of Employee’s health care coverage, to the extent such coverage was in place as at February 5, 2018.
On February 14, 2018, the Company entered into a three year employment agreement with Tiffany Davis as its Chief Operating Officer. Ms. Davis is to receive an annual salary of $150,000 and is entitled to receive 1,000,000 shares of the Company’s common stock of which 250,000 shares immediately vested on the signing of the employment agreement and 250,000 shares vest each year on the anniversary date of the employment agreement. Prior to the date of employment with the Company, Ms. Davis was a consultant to the Company.
In February 2018, the Company received proceeds of $1,068,000 from the issuance of 821,538 shares of common stock, at $1.30 per share, as part of a Regulation D offering.
Subsequent to December 31, 2017, and through the date the financial statements were available to be issued, the Company issued 1,306,360 shares of its common stock from the conversion of warrants, at $1.10 per share, resulting in proceeds of $1,437,000, and 368,550 shares of common stock on the conversion of 351 shares of Series-A preferred shares.
Subsequent to December 31, 2017, and through the date the financial statements were available to be issued, the Company issued 1,270,000 shares of its common stock as payment for the receipt of outside professional services.
| F-19 |
New Facility Lease
The Company provided notice to vacate its existing facility in Southern California and signed a five-year lease, effective May 1, 2018, to relocate to a 17,640 square foot facility at 853 East Sandhill Avenue, Carson, CA 90746.
Closure of East Coast Facility
On May 7, 2018 the Company signed a sublease with Atlas Company for subletting its east coast facility in East Hackensack, NJ. The decision to close the east coast operations was a consolidation move to better serve the customer base with all shipments coming out of the west coast facility in Carson, CA. With this move, the serviceability and supply chain fulfillment has eliminated multiple shipping destinations out of China, and split shipment to customers from both east and west in the USA. The sublease has been executed and provides a zero out-of-pocket cost to the Company for the remainder of the lease.
Standby Equity Distribution Agreement
On April 16, 2018, the Company entered into a Standby Equity Distribution Agreement (“SEDA”) with YA II PN, LTD. (the “SEDA Investor”), a Cayman Islands exempted company. The SEDA establishes what is sometimes termed an equity line of credit or an equity draw-down facility. The $25,000,000 facility may be drawn-down upon by the Company in installments, the maximum amount of each of which is limited to $1,000,000. For each share of common stock purchased under the SEDA, the SEDA Investor will pay 90% of the lowest volume weighted average price (“VWAP”) of the Company’s shares during the five trading days following our draw-down notice to the SEDA Investor . The VWAP that will be used in the calculation will be that reported by Bloomberg, LLC, a third-party reporting service. In general, the VWAP represents the sum of the value of all the sales of our common stock for a given day (the total shares sold in each trade times the sales price per share of the common stock for that trade), divided by the total number of shares sold on that day.
In connection with the SEDA, the Company has issued to the SEDA Investor, a five-year Commitment Fee Warrant (the “Fee Warrant”) to purchase 1,000,000 shares of the Company’s common stock at $0.01 per share.
The Company has agreed to prepare and file a registration statement under the Securities Act of 1933, as amended, that includes the shares of common stock issuable pursuant to the Standby Equity Distribution Agreement, the shares of common stock issuable pursuant to Fee Warrants. The Company cannot sell shares of common stock to the SEDA Investor under the Standby Equity Distribution Agreement until such registration statement is declared effective by the Securities and Exchange Commission.
| F-20 |
Convertible Debenture Termination
Subsequent to December 31, 2017, Yorkville Advisors Global, LP (“YPL”) (see Note 7), notified the Company in writing that it elected to convert all remaining outstanding principal and interest accrued and otherwise payable under the Debenture, which included the conversion of $1,750,000 of principal and $38,082 of interest. Upon the Conversion of the Debenture, the Company issued an aggregate of 1,788,082 shares of its Common Stock to the Investor. Upon the Conversion, the Debenture and the Security Agreement were both terminated in accordance with their respective terms effective as of April 18, 2018, and all security interest and liens under the Security Agreement were released and terminated.
Series A Preferred Stock Conversion
On April 24, 2018, the Company received a Notice of Conversion from the Series A-Investor (see Note 8), pursuant to which the Series-A Investor elected to convert all of the remaining outstanding Series-A into common shares of the Company. Upon the conversion of the balance of the Series-A, the Company issued 52,500 shares. Upon the conversion by the Series-A Investor, no Series-A were outstanding.
Option Agreement for Arizona Property
On April 19, 2018, Solis Tek Inc., (the “Company”) entered into an Option Agreement (the “Option”) with MSCP, LLC, a non-affiliated Arizona limited liability company (the “Lessor”), pursuant to which, a wholly owned subsidiary of the Company, (the “Company Subsidiary”), was granted an option to enter into a certain Lease Agreement (the “Lease”) for the real property, including the structure and all improvements, identified in the Option (the “Premises”). The Premises consists of 70,000 square feet of space and is to be used for the sole purpose of providing services related to the management, administration and operation of a cultivation and processing facility (“Facility”) on behalf of an Arizona limited liability company operating as a nonprofit organization (“Arizona Licensee”) which has been allocated a Medical Marijuana Dispensary Registration Certificate by the Arizona Department of Health Services (“AZDHS”). The activities within the Facility shall be limited to the cultivation, processing, production and packaging of medical marijuana (“MMJ”) and manufactured and derivative products which contain medical marijuana (collectively “MMJ Products”), with no right to sell or dispense any such plants or products. The Lease is for a 5-year initial term (the “Term”) with an option to renew for an additional 5 year term. The base rent for the initial year of the Term is $101,500 per month with additional pro-rata net-lease charges.
As consideration for the Option, the Company paid to Lessor, $160,000.00 (the “Deposit”). If the Company’s Subsidiary executes the Lease by May 19, 2018, the Deposit shall be treated as a security deposit and rent advance and governed in accordance with the terms and conditions of the Lease, and the Company will become a guarantor of the Company Subsidiary’s obligations under the Lease, on behalf of Arizona Licensee. If the Lease is not executed by the Company Subsidiary, the Deposit shall be deemed non-refundable.
Purchase of YLK Partners NV, LLC from Related Parties
On May 10, 2018, the Company entered into an Acquisition Agreement with the members, which in the aggregate, own 100% of the membership interests (the “Sellers”) in YLK Partners NV, LLC, a Nevada limited liability company (“YLK”). Pursuant to the Acquisition Agreement, in consideration of the Company acquiring all of the outstanding membership interests of YLK, the Company issued to the Sellers, a total of 5,000,000 warrants (the “Warrants”) to purchase 5,000,000 common shares, at an exercise price of $0.01 per share. The Warrants are estimated to be valued at approximately $5,500,000 and are exercisable until May 9, 2023.
The Sellers were
(a) LK Ventures, LLC a Nevada limited liability company and a related party. One half of the membership interests of LK Ventures, LLC is owned by Alan Lien, Chief Executive Officer, President and a director of the Company, and the remaining one half is owned by a non-affiliated party. LK Ventures LLC received 2,250,000 Warrants under the Acquisition Agreement for the 45% membership interests held in YLK.
| F-21 |
(b) MDM Cultivation LLC, a Delaware limited liability company and a related party. The members of MDM Cultivation are affiliates of YA II PN, Ltd. and, D-Beta One EQ, Ltd., which presently hold (i) 2,258,382 shares of Solis Tek’s common stock, (ii) warrants to purchase 11,200,000 shares of the Company’s common stock and (iii) a Secured Promissory Note issued by Solis Tek in the original principal amount of $1.5 million. In addition, YA II PN, Ltd. and the Company are parties to that Standby Equity Distribution Agreement pursuant to which YA II PN, Ltd. has agreed to purchase up to $25.0 million of the Company’s common stock, subject to the terms and conditions thereof. MDM Cultivation owned 45% of the outstanding membership interests of YLK. MDM Cultivation was issued 2,250,000 Warrants under the Acquisition Agreement. As affiliates of MDM Cultivation, YA II PN, Ltd. and D-Beta One EQ, Ltd. will be deemed to be the beneficial owners of the 2,250,000 Warrants in addition to the other shares and warrants presently held by them.
(c) Future Farm Technologies Inc of Vancouver British Columbia, Canada. Future Farm Technologies, Inc. was issued 500,000 Warrants under the Acquisition Agreement for the 10% membership interests held in YLK.
Cultivation Management Services Agreement
On January 5, 2018, a wholly owned subsidiary of YLK (the “YLK Subsidiary”) entered into a Cultivation Management Services Agreement (the “Management Agreement”) with an Arizona Licensee. The Arizona Licensee is authorized to operate a medical marijuana dispensary, one (1) onsite Facility and one (1) offsite Facility, to produce, sell and dispense medical marijuana and manufactured and derivative products which contain marijuana pursuant to Title 9; Chapter 17 of the Arizona Department of Health Services Medical Marijuana Program, (the “AZDHS Rules”) and A.R.S. § 36-2801 et seq., as amended from time to time (the “Act”) (collectively referred to herein as the “AMMA”). Pursuant to the Management Agreement, YLK Subsidiary will provide the management services for the offsite Facility, on behalf of the Arizona Licensee.
As consideration for the exclusive right of YLK Subsidiary to manage Arizona Licensee’s Facility, pursuant to the Management Agreement; (i) YLK Subsidiary paid $750,000 to the Arizona Licensee; (ii) agreed to pay an additional $250,000 within 10 days after receipt of the AZDHS Approval to Operate (“ATO”) the Facility; and (iii) agreed to pay a total of $600,000, payable in 44 equal monthly installments commencing on April 1, 2019.
The term of the Management Agreement is 5 years. The YLK Subsidiary has the option to extend the term for an additional 5 years with the payment of $1,000,000.00 at the commencement of the additional term and a total of $1,000,000.00 payable in equal monthly installments over the extended term of the Management Agreement.
The Management Agreement provides, among other things, that:
YLK Subsidiary as an independent contractor, act as the manager (“Manager”) of the Facility, on behalf of and in conjunction with Arizona Licensee, and shall be responsible for the acquisition, design, planning, zoning, entitlement, development and construction of a Facility, and for the preparation, submission and acquisition of the ATO for the Facility from AZDHS as its authorized offsite Facility, including payment of all costs, fees, and expenses incurred in the acquisition of all authorizations, permits, certificates and approvals, including acquiring the ATO from AZDHS.
Manager shall be responsible for implementation of the Facility’s Business Plan, Security Policies and Procedures, Inventory and Quality Control Policies and Procedures, and any other policies and procedures or any amendments thereto, subject to approval and as adopted by Arizona Licensee for the Facility, in accordance with the AMMA and applicable rules and regulations. As compensation for rendering the services and the ongoing successful operation of the Facility, Arizona Licensee shall pay to Manager, certain management fees agreed to by the Parties.
Manager shall be responsible for taking any action necessary to comply with any change whatsoever in the AMMA and any applicable law, rule, statute, or regulation related to the development, operation, or management of the Facility that comes into being, occurs, accrues, becomes effective, or otherwise becomes applicable after the Effective Date.
| F-22 |
Manager shall implement all actions necessary to ensure the quality, safety and security of the Facility and the MMJ and MMJ Products at the Facility, including providing product testing at industry standards for all products grown or developed for Arizona Licensee at the Facility. Manager shall also be responsible for all costs and expenses related to the testing of MMJ and MMJ Products cultivated and produced at the Facility to ensure effectiveness, quality and safety in compliance with the AMMA and all other state and local rules, regulations, requirements and laws. In the event Arizona Licensee reasonably requires the additional testing of MMJ and MMJ Products at the Facility, beyond what is required therein, Arizona Licensee agrees to bear the responsibility of any costs, fees and expenses incurred as a result of such additional testing.
Unregistered Sales of Equity Securities.
On May 10, 2018, the Company entered in to a Securities Purchase Agreement with YA PN II, LLC, pursuant to which the Company sold and issued the following:
| ● | 500,000 shares of the Company’s common shares for a consideration of $500,000. | |
| ● | A Secured Promissory Note (the “Note”) in the amount of $1,500,000. The Note bears interest at the rate of 8% per annum and has a maturity date of February 9, 2019. | |
| ● | A warrant to purchase 1,000,000 shares of the company’s common stock at an exercise price of $1.50 per share for a term expiring on May 10, 2023. The warrant exercise price is adjustable to the price used if the Company sells any shares of common stock (other than excluded securities as defined in the warrant agreement) for a consideration per shares less than the warrant exercise price in effect. | |
| ● | Warrants to purchase 6,500,000 shares of the company’s common stock at an exercise price of $1.50 per share for a term expiring on May 10, 2023. The warrant exercise price is adjustable to the price used if the Company sells any shares of common stock (other than excluded securities as defined in the warrant agreement) for a consideration per shares less than the warrant exercise price in effect. At any time, the Company has the right and option to purchase any unexercised warrant shares for a purchase price of $0.03 per warrant share so purchased if and only if the average volume weighted average price (“VWAP”) (as reported by Bloomberg, LP) of the Company’s Common Stock is greater than $1.75 per share for the five (5) consecutive trading days immediately preceding the Company’s delivery of a Notice of Exercise. The Company has the right and option to compel the Holder to exercise any unexercised warrant shares on the terms set forth in warrants if and only if the average VWAP of the Company’s Common Stock is greater than $1.75 per Share for the five (5) consecutive trading days immediately preceding the Company’s delivery of a Notice of Exercise. |
In connection with the Securities Purchase Agreement, the Company executed: (i) a Registration Rights Agreement pursuant to which we are required to file a registration statement (the “Registration Statement”) with the SEC for the resale of certain of the Shares and Warrant Shares; (ii) A Global Guaranty Agreement pursuant to which the Company and all of the Company’s subsidiaries, guaranteed the repayment of the Note; and a Security Agreement pursuant to which the Company and all of its subsidiaries pledged all of their assets as collateral for the repayment of the Note.
| F-23 |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Based upon an evaluation of the effectiveness of our disclosure controls and procedures performed by our Chief Executive Officer as of the end of the period covered by this report, our Chief Executive Officer concluded that our disclosure controls and procedures have not been effective as a result of a weakness in the design of internal control over financial reporting identified below.
As used herein, “disclosure controls and procedures” mean controls and other procedures of our company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) under the Securities Exchange Act of 1934. Our Chief Executive Officer/Chief Accounting Officer conducted an evaluation of the effectiveness of our control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on management’s evaluation under the framework, management has concluded that our internal control over financial reporting was not effective as of December 31, 2016.
We identified material weaknesses in our internal control over financial reporting primarily attributable to (i) lack of segregation of incompatible duties; and (ii) insufficient Board of Directors representation. These weaknesses are due to our inadequate staffing during the period covered by this report and our lack of working capital to hire additional staff. Management has retained an outside, independent financial consultant to record and review all financial data, as well as prepare our financial reports, in order to mitigate this weakness. Although management will periodically re-evaluate this situation, at this point it considers that the risk associated with such lack of segregation of duties and the potential benefits of adding employees to segregate such duties are not cost justified. We intend to hire additional accounting personnel to assist with financial reporting as soon as our finances will allow.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting occurred during the year ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Directors
As of March 31, 2018, we had three directors. The name, age and appointment details are as follows:
| Name | Position Held with the Company | Age | Date First Elected or Appointed | |||||
| Alan Lien | Director | 34 | June 23, 2015 | |||||
| Alvin Hao | Director | 35 | June 23, 2015 | |||||
| Dennis G. Forchic | Director | 52 | March 27, 2017 | |||||
Executive Officers
As of March 31, 2018, we have four Executive Officers. The name, age and appointment details are as follows:
| Name | Position
Held with the Company |
Age | Date
First Elected or Appointed | |||
| Alan Lien | Chairman, President, CEO, Chief Financial Officer | 34 | June 23, 2015 | |||
| Alvin Hao | Executive Vice-President | 35 | June 23, 2015 | |||
| Stanley Teeple | Chief Compliance Officer, Secretary, Sr. VP | 65 | December 27, 2017 | |||
| Tiffany Davis | Chief Operating Officer | 39 | February 21, 2018 |
On January 6, 2017, the company extended an offer to Dennis G. Forchic to become CEO. Mr. Forchic accepted the offer and contracts were executed on March 27, 2017. On February 5, 2018, the Company terminated its employment agreement with Mr. Forchic.
Business Experience
The following is a brief account of the education and business experience for at least the past five years of our directors and our executive officers, indicating each person’s business experience, principal occupation during the period, and the name and principal business of the organization by which they were employed.
Officers and Directors
Alan Lien is a co-founder of the Company, and has served as the Chairman, President, Director, and Chief Financial since June 23, 2015. Mr. Lien is responsible for setting the sales, product development, product strategy, and input on the strategic direction of the Company. He leads the manufacturing, development and sourcing of Solis Tek products and setting up company infrastructure. Mr. Lien received his BS in Marketing from Monmouth University in 2006.
Alvin Hao is a co-founder of the Company, and has serves as Executive Vice President and Director since June 23, 2015. Mr. Hao has broad knowledge of the hydroponics industry, including aspects of hardware and years of gardening experience. Mr. Hao is responsible for creating and maintaining corporate infrastructure, oversee daily operations, sales, and financial planning, lead marketing strategy, He received his BS in Business Administration and Marketing from California State University Long Beach in 2007.
Dennis G. Forchic (co)-founded five start-up entities over the last 25 years. His experience includes leading multiple early stage growth companies to top line revenues in the mid-to-upper eight figure range prior to exiting through successful sales transactions to the investment communities. One of the transactions, an east coast manufacturing company, had an annual run rate approaching nine figures and 400+ employees at the time of his exit. Mr Forchic brings national and international business experience and full spectrum business acumen along with experienced leadership skills to the Solis Tek management team. Over the last 15 months Mr. Forchic has acted as senior advisor to Solis Tek’s Chief Executive Officer, and integrated himself into the agri-grow, hydroponic, and cannabis industry. Mr. Forchic obtained a BBA in Finance in 1988 from the University of Miami.
Stanley L. Teeple is currently the Corporate Compliance Officer, Secretary, and Senior Vice President of Solis Tek, Inc. During the last 18 months, as President of Stan Teeple, Inc. Mr. Teeple has provided services on a consulting basis as Chief Compliance Officer and Secretary for Solis Tek, Inc. Previously Mr. Teeple was Chief Financial Officer for Indigo-Energy, Inc. a publicly traded company in the oil and gas exploration business from 2006 through 2012, as Interim Chief Financial Officer for Versant International, Inc. an investment holding company during 2013, and as Chief Financial Officer for Element Renewal, a private water treatment company during 2014-2015. Over the last 30 years Stan has held numerous senior management positions in a number of public and private companies across a broad spectrum of industries. Additionally, he has operated and worked for various court appointed trustees and principals as CEO, COO, and CFO in the entertainment, pharmaceuticals, food, travel, and tech industries. Prior to becoming an officer and employee of Solis Tek, Inc. he operated his consulting business on a project-to-project basis, and has held various other directorships. His businesses operational strengths include knowing how to manage and maximize the resources and preserve the integrity of a company from start-up through to maturity.
| 33 |
Tiffany Davis is the Chief Operating Officer. Ms. Davis has had 19 years of experience as a financial professional working in both Management Consulting and Private Equity. She has held several key leadership positions in accounting, finance, and operations. She has extensive experience in supply chain functionality, financial and operational due diligence, cash flow forecasting, financial statement analysis, development and value retention in a number of industries including most recently in the cannabis industry. From 2016 through 2017, Ms. Davis has worked as a senior executive for a US based cannabis consulting group supporting legal grows, assisting in license applications, developing programs for cultivators, business structuring for medical dispensaries including developing M&A opportunities and initiation of several start-up ventures. Beginning in 2012 into 2016 Ms. Davis worked as a Group Vice President for a US based private equity group, performing due diligence tasks resulting in placing hundreds of millions of dollars in creative investment and debt instruments for appropriate investment opportunities. From 2009 to 2011 Ms. Davis was a Manger of Corporate Advisory for Grant Thornton, one of the Big 6 worldwide accounting firms, again in accounting and supply chain services during the automotive crisis in the US, specifically on the Chrysler turnaround project. From 2005-2008 Ms. Davis worked for an international technology sector company with $500 million in revenues as a Vice President of Special Projects for an automobile parts sourcing project in India from the Company headquarters in Chicago, Il. Ms. Davis received her B.S. from DePaul University in 2002 and a MBA from University of Chicago Graduate School of Business in 2009.
Committees
The board of directors has no standing committees. However, the Company intends to implement a comprehensive corporate governance program, including establishing various board committees and adopting a Code of Ethics in the future. In addition, the Company has secured Directors and Officers insurance consistent with the Company’s and Board of Director’s mandates.
Family Relationships
No family relationship has ever existed between any director, executive officer of the Company, and any person contemplated to become such.
Involvement in Certain Legal Proceedings
Our directors and executive officers have not been involved in any of the following events during the past ten years:
| 1. | any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; | |
| 2. | any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); | |
| 3. | being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities; | |
| 4. | being found by a court of competent jurisdiction in a civil action, the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a Federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; | |
| 5. | being subject of, or a party to, any Federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any Federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or | |
| 6. | being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
| 34 |
ITEM 11. EXECUTIVE COMPENSATION.
Executive Compensation Overview
Historically, our executive compensation program has reflected our growth and development-oriented corporate culture. As of December 31, 2017, the compensation of our executive officers has consisted of a base salary. Our executive officers and all salaried employees are also eligible to receive health and welfare benefits.
As we have transitioned from a private company to a publicly-traded company, we have and will continue to evaluate our compensation values and philosophy and compensation plans and arrangements as circumstances require. At a minimum, we expect to review executive compensation annually. As part of this review process, we expect the Board of Directors to apply our values and philosophy, while considering the compensation levels needed to ensure our executive compensation program remains competitive. We will also review whether we are meeting our retention objectives and the potential cost of replacing a key employee.
The Company’s growth and progress centered around its ability to innovate its technology to respond to the changing needs of the industry, and stay ahead of the sales curve relating to new states becoming cannabis enabled and legal, thereby creating new demand in medical and recreational growers. The Company’s requirements in these areas of sales and technology demanded that the Company’s founders devote more and more of their time to growth and development creating a need in the areas of business management with particular attention to the public company sector. The company’s search for key executives to fill these growth needs demands that the Company find a seasoned high level executive with broad based multi-national experience in a growth industry yet intimately knowledgeable of the needs associated with early stage growth companies.
On January 6, 2017, the Company extended an offer to Dennis G. Forchic to become Chief Executive Officer. Mr. Forchic accepted the offer and an Employment Agreement was executed on March 27, 2017, to take effect retroactively to January 6, 2017. As part of the Employment Agreement, the Company issued a total of 5,411,765 shares valued at $2,760,000, allowed Mr. Forchic to purchase an additional 784,314 shares valued at $400,000 for a consideration of $100,000. The fair value of the shares on the date of grant over consideration received was $3,060,000, which was recorded as stock compensation expense. In addition, Mr. Forchic was granted an option to purchase 3,000,000 shares at $0.60 per share (the “Forchic Options”), with 33.3% of these shares vesting on the one year anniversary of the date of grant and the remainder vesting in equal installments at the end of each month over the next two years. The options were valued at $835,767 using a Black Scholes options pricing model.
On February 5, 2018, the board of directors of the Company discharged Dennis G. Forchic as the Chief Executive Officer of the Company. The board of directors removed Mr. Forchic because of the board determined that Mr. Forchic’s leadership and management of the Company was incompatible with the majority of the Founding Directors’ plans and expectations for the Company.
In accordance with the terms of his Employment Agreement: (i) all of the Forchic Options were terminated as they had not vested; (ii) the Company will pay Mr Forchic at the annual rate of $162,000 per annum, from through the fourth anniversary date of the Employment Agreement; and, (iii) the Company will reimburse Mr. Forchic for each month until the fourth anniversary of January 6, 2017, an amount equal to 50% of Employee’s health care coverage, to the extent such coverage was in place as at February 5, 2018.
Compensation Risk Assessment
We believe that although a portion of the compensation provided to our executive officers and other employees may be in the future performance-based, our executive compensation program will not encourage excessive or unnecessary risk taking. This is primarily due to the fact that our compensation programs will be designed to encourage our executive officers and other employees to remain focused on both short-term and long-term strategic goals, in particular in connection with our pay-for-performance compensation philosophy. As a result, we do not believe that our compensation programs will reasonably be likely to have a material adverse effect on us.
Summary Compensation Table
The following table presents information regarding the total compensation awarded to, earned by, and paid to each individual who served as our Chief Executive Officer and Chief Operating Officers at any time during the last completed fiscal year. There were only three individuals who were serving as Executive Officers at the end of the last completed fiscal year for services rendered in all capacities to us for the years ended December 31, 2017 and 2016. These individuals were our named executive officers of Solis Tek Inc. for 2017 and 2016.
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||||
| Alan Lien, Director, CEO, Pres. | 2017 | 162,500 | N/A | N/A | N/A | N/A | N/A | N/A | 162,500 | |||||||||||||||||||||||
| and CFO | 2016 | 162,500 | N/A | N/A | N/A | N/A | N/A | N/A | 162,500 | |||||||||||||||||||||||
| Alvin Hao, EVP and | 2017 | 162,500 | N/A | N/A | N/A | N/A | N/A | N/A | 162,500 | |||||||||||||||||||||||
| 2016 | 162,500 | N/A | N/A | N/A | N/A | N/A | N/A | 162,500 | ||||||||||||||||||||||||
| Dennis G. Forchic, Former CEO (a) | 2017 | 162,000 | N/A | 2,760,000 | 835,767 | N/A | N/A | 300,000 | 4,057,767 | |||||||||||||||||||||||
| Stanley Teeple, Chief Compliance Officer (b) | 2017 | - | N/A | 1,710,000 | N/A | N/A | N/A | N/A | 1,710,000 | |||||||||||||||||||||||
| 35 |
| (a) | On January 6, 2017, the company extended an offer to Dennis G. Forchic to become CEO. Mr. Forchic accepted the offer and contracts were executed on March 27, 2017. As part of the Employment Agreement, the Company issued a total of 5,411,765 shares valued at $2,760,000. Mr. Forchic was also granted an option to purchase 3,000,000 shares at $0.60 per share, with 33.3% of these shares vesting on the one year anniversary of the date of grant and the remainder vesting in equal installments at the end of each month over the next three years. The options were valued at $835,767 using a Black Scholes options pricing model and will be amortized as an expense over the vesting period. Mr. Forchic purchased an additional 784,314 shares valued at $400,000 for a consideration of $100,000. The fair value of the shares on the date of grant over consideration received was $300,000, which was recorded as stock compensation expense. On January 6, 2017, the Company extended an offer to Dennis G. Forchic to become CEO. Mr. Forchic accepted the offer and contracts were executed on March 27, 2017. On February 5, 2018, the Company terminated its employment agreement with Mr. Forchic. | |
| (b) | On December 27, 2017, the Company entered into a four year employment agreement with Stanley L. Teeple as it Chief Compliance Officer, Secretary, and Sr. VP. Mr. Teeple is to receive an annual salary of $145,000 and is entitled to receive 1,000,000 shares of the Company’s common stock, valued at $1,710,000 of which 250,000 immediately vested and were issued on the signing of the employment agreement and 250,000 shares vest each year on the anniversary date of the employment agreement. Prior to the date of employment with the Company, Mr. Teeple was a consultant to the Company. |
Director Compensation
Employees of the Company who also serve as directors do not receive additional compensation for their performance of services as directors. For 2017 and 2016, directors of the Company did not receive additional consideration for their service as directors.
Option Plan
There are no stock option plans or common shares set aside for any stock option plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information as of April 2, 2018 with respect to the holdings of: (1) each person known to us to be the beneficial owner of more than 5% of our Common Stock; (2) each of our directors, nominees for director and named executive officers; and (3) all directors and executive officers as a group. To the best of our knowledge, each of the persons named in the table below as beneficially owning the shares set forth therein has sole voting power and sole investment power with respect to such shares, unless otherwise indicated.
| 36 |
| Name and Address of Beneficial Owner | Title of Class | Amount and Nature of Beneficial Owner | Percent of Class(1) | |||||||
| Alan Lien Director, Chairman, President, CFO, 16926 S. Keegan Ave. Unit A, Carson, CA 90746 | Common Stock | 10,000,002 | 24.25 | % | ||||||
| Alvin Hao Director and EVP 16926 S. Keegan Ave. Unit A, Carson, CA 90746 | Common Stock | 10,000,002 | 24.25 | % | ||||||
| Dennis G. Forchic Director 16926 S. Keegan Ave. Unit A, Carson, CA | Common Stock | 6,496,079 | (2) | 15.64 | % | |||||
| Stanley L. Teeple CCO, Secretary Sr. VP 16926 Keegan Ave, Unit A, Carson, CA 90746 | Common Stock | 250,000 | * | |||||||
| Tiffany N. Davis COO 16926 Keegan Ave, Unit A, Carson, CA 90746 | Common Stock | 250,000 | * | |||||||
| All Directors, 5% shareholders and Officers as a group (5 persons) | Common Stock | 26,996,083 | (2) | 65.00 | % | |||||
* Represents less than 1%.
| (1) | Based on 41,230,482 shares of common stock issued and outstanding as of April 2, 2018. | |
| (2) | Includes 300,000 shares issuable upon exercise of an outstanding warrant. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Amounts Due to Officers/Shareholders
On July 1, 2012, the Company entered into a notes payable agreement with Lydia Hao, who is the mother of Alvin Hao, our executive vice president and a director. The maximum borrowings allowed under the note are $200,000. Through December 31, 2013, the note bore interest at 20% per annum. Beginning on January 1, 2014, the interest rate on the note was reduced to 8% per annum. The note is due 30 days after demand. Amounts owed on the note balance were $195,000 at December 31, 2017 and 2016. There was no interest paid to Ms. Hao relating to the note for the years ended December 31, 2017 and 2016. Interest expense on the note for the years ended December 31, 2017 and 2016 was $15,600 and $15,643, respectively.
On May 9, 2016, the Company also entered into notes payable agreements with Alan Lien and Alvin Hao, each an officer and director, to borrow $300,000 under each individual note. Pursuant to the terms of each of these agreements, the Company borrowed $300,000 from each of Alan Lien and Alvin Hao. The notes accrue interest at a rate of 8% per annum, are unsecured and were due on or before May 31, 2018. A total of $600,000 was due on the combined notes at December 31, 2017 and 2016.
| 37 |
As of December 31, 2017 and 2016, the Company also owed Alan Lien and Alvin Hao an additional $146,534 and $134,088, respectively. Included in the balances were short-term loans from Alan Lien and Alvin Hao to the Company totaling $3,297 and $3,297 as of December 31, 2017 and 2016, respectively. The balances are payable on demand, bear zero interest and are unsecured. The balances also included interest owed on the notes payable described above, which totaled to $65,222 and $68,472 at December 31, 2017 and 2016, respectively. Also included is $29,580 and $62,319 of unpaid compensation, which was owed to Alan Lien and Alvin Hao at December 31, 2017 and 2016, respectively.
Supplier (Former Related Party)
A family member of Alien Lien, our president and a director, owned a minority interest in a company in China, which is the sole supplier of ballasts to the Company. Purchases from the related party for the years ended December 31, 2017 and 2016 totaled approximately $3,805,248 and $3,119,000, respectively. The Company believes purchase prices from this vendor approximated what the Company would have to pay from an independent third party vendor. In 2017, the Company determined that due to a change in relationship status, this vendor that was formerly considered a related party, was deemed to no longer be a related party. At December 31, 2017 and 2016, the Company owed the former related party $381,457 and $1,083,764, respectively. At December 31, 2017, the Company had made advanced deposit payments to this vendor for $735,730, which will be applied to purchased inventory upon delivery.
DIRECTOR INDEPENDENCE
Our Board of Directors is currently composed of three members, who do not qualify as independent directors in accordance with the published listing requirements of the NASDAQ Global Market. The NASDAQ independence definition includes a series of objective tests, such as that the director is not, and has not been for at least three years, one of our employees and that neither the director, nor any of his family members has engaged in various types of business dealings with us. In addition, our Board of Directors has not made a subjective determination as to each director that no relationships exist which, in the opinion of our Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director, though such subjective determination is required by the NASDAQ rules. Had our Board of Directors made these determinations, our Board of Directors would have reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and relationships as they may relate to us and our management.
We do not have any independent directors. We do not have an audit committee, compensation committee or nominating committee. We currently do not have a code of ethics that applies to our officers, employees and directors.
LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The following table sets forth the fees billed to the Company for professional services rendered by the Company’s independent registered public accounting firm, for the years ended December 31, 2017 and 2016:
| Fees | 2017 | 2016 | ||||||
| Weinberg & Company, CPAs | ||||||||
| Audit fees | $ | 94,232 | $ | 98,775 | ||||
| Audit Related Fees | - | |||||||
| Tax fees | 23,135 | 15,385 | ||||||
| All other fees | - | |||||||
| Total Fees | $ | 117,367 | $ | 114,160 | ||||
| 38 |
Audit Fees. Consist of fees billed for professional services rendered for the audits of our financial statements and reviews of our interim consolidated financial statements included in quarterly reports.
Tax Fees. Weinberg & Company, CPAs did provide us with professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| (a) | List of Documents Filed as a Part of This Report: |
| Report of Independent Registered Public Accounting Firm | F-1 | |
| Consolidated balance sheets as of December 31, 2017 and 2016 | F-2 | |
| Consolidated statements of operations for the years ended December 31, 2017 and 2016 | F-3 | |
| Consolidated statements of shareholders’ equity (deficit) for the years ended December 31, 2017 and 2016 | F-4 | |
| Consolidated statements of cash flows for the years ended December 31, 2017 and 2016 | F-5 | |
| Notes to consolidated financial statements | F-6 |
| (b) | Index to Financial Statement Schedules: |
All schedules have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or required.
| (c) | Index to Exhibits |
The Exhibits listed below are identified by numbers corresponding to the Exhibit Table of Item 601 of Regulation S-K. The Exhibits designated by an asterisk (*) are management contracts or compensatory plans or arrangements required to be filed pursuant to Item 15.
None.
| 39 |
Pursuant to the requirements 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.
SOLIS TEK INC. | ||
| By: | /s/ Alan Lien | |
| Alan Lien | ||
| Chief Executive Officer | ||
| July 13, 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.
| Name | Position | Date | ||
| /s/ ALAN LIEN | Director | July 13, 2018 | ||
| Alan Lien | ||||
| /s/ ALVIN HAO | Director | July 13, 2018 | ||
| Alvin Hao | ||||
| /s/ Dennis G. Forchic | Director | July 13, 2018 | ||
| Dennis G. Forchic |
| 40 |
Exhibit 21.1
List of Subsidiaries
1. Solis Tek Inc., a California corporation
2. Solis Tek East, Corporation, a New Jersey corporation
3. Zelda Horticultural, Inc. a California corporation
4. YLK Partners NV, LLC, a Nevada limited liability company
Exhibit 31.1
CERTIFICATION
I, Alan Lien, certify that:
| 1. | I have reviewed this amended annual report on Form 10-K/A of Solis Tek Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
| Date: July 13, 2018 | |
| /s/ ALAN LIEN | |
| Alan Lien | |
| Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Alan Lien, certify that:
| 1. | I have reviewed this amended annual report on Form 10-K/A of Solis Tek Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
| Date: July 13, 2018 | |
| /s/ ALAN LIEN | |
| Alan Lien | |
| Chief Financial Officer |
Exhibit 32.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Alan Lien, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the amended Annual Report of Solis Tek Inc. on Form 10-K/A for the fiscal year ended December 31, 2017 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in this amended Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Solis Tek Inc.
| By: | /s/ ALAN LIEN |
|
| Date: July 13, 2018 | Name: | Alan Lien |
| Title: | Chief Executive Officer and Chief Financial Officer |
Document and Entity Information - USD ($) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2017 |
Apr. 02, 2018 |
Jun. 30, 2017 |
||||||||||||||||||||||||||||||||||||||||||||||
| Document And Entity Information | ||||||||||||||||||||||||||||||||||||||||||||||||
| Entity Registrant Name | Solis Tek, Inc./NV | |||||||||||||||||||||||||||||||||||||||||||||||
| Entity Central Index Key | 0001398137 | |||||||||||||||||||||||||||||||||||||||||||||||
| Document Type | 10-K/A | |||||||||||||||||||||||||||||||||||||||||||||||
| Document Period End Date | Dec. 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||
| Amendment Flag | true | |||||||||||||||||||||||||||||||||||||||||||||||
| Amendment Description |
Solis Tek Inc. (the “Company”) is filing this Amendment No. 1 on Form 10-K/A (the “Amended Filing”) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “Original Filing”) filed with the Securities and Exchange Commission (“SEC”) on April 2, 2018, in order to make certain revisions to disclosures relating to Mr. Dennis G. Forchic. As previously reported, on or about February 8, 2018, holders of a majority of the voting power of the issued and outstanding shares of common stock entitled to vote, acting by written consent, purported to remove Mr. Forchic as a member of the board of directors of the Company (the “Board”). The Company subsequently determined that such removal was invalid under Section 78.335 of the Nevada Revised Statutes, which requires that the removal of a director requires the approval of holders of not less than two-thirds of the voting power of the issued and outstanding shares of common stock entitled to vote. As a result, the Original Filing had inaccurate disclosures regarding Mr. Forchic and his position with the Company. This Amended Filing reflects Mr. Forchic’s position as a director of the Company as of the Original Filing Date. For the convenience of the reader, this Amended Filing sets forth the Original Filing as modified and superseded where necessary to reflect the following significant revisions:
In accordance with applicable SEC rules, this Amended Filing includes certifications from our Chief Executive Officer and Chief Financial Officer dated as of the date of this filing.
Except for the items noted above, no other information included in the Original Filing is being amended by this Amended Filing. The Amended Filing continues to speak as of the date of the Original Filing and, except as set forth in the sections indicated above, we have not updated the Original Filing to reflect events occurring subsequently to the date of the Original Filing. Accordingly, this Amended Filing should be read in conjunction with our filings made with the SEC subsequent to the filing of the Original Filing. |
|||||||||||||||||||||||||||||||||||||||||||||||
| Current Fiscal Year End Date | --12-31 | |||||||||||||||||||||||||||||||||||||||||||||||
| Entity a Well-known Seasoned Issuer | No | |||||||||||||||||||||||||||||||||||||||||||||||
| Entity a Voluntary Filer | No | |||||||||||||||||||||||||||||||||||||||||||||||
| Entity's Reporting Status Current | Yes | |||||||||||||||||||||||||||||||||||||||||||||||
| Entity Filer Category | Smaller Reporting Company | |||||||||||||||||||||||||||||||||||||||||||||||
| Entity Public Float | $ 14,428,000 | |||||||||||||||||||||||||||||||||||||||||||||||
| Entity Common Stock, Shares Outstanding | 41,230,482 | |||||||||||||||||||||||||||||||||||||||||||||||
| Trading Symbol | SLTK | |||||||||||||||||||||||||||||||||||||||||||||||
| Document Fiscal Period Focus | FY | |||||||||||||||||||||||||||||||||||||||||||||||
| Document Fiscal Year Focus | 2017 |
Consolidated Balance Sheets (Parenthetical) - USD ($) |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Accounts receivable, allowance for doubtful accounts | $ 396,499 | $ 359,395 |
| Convertible note payable discount, current | 1,555,556 | |
| Convertible note payable discount, non current | 500,000 | |
| Series A convertible preferred shares, discount | $ 351,000 | |
| Preferred stock, no par value | ||
| Preferred stock, shares authorized | 20,000,000 | 20,000,000 |
| Preferred stock, shares issued | ||
| Preferred stock, shares outstanding | ||
| Common stock, par value | $ 0.0001 | $ 0.0001 |
| Common stock, shares authorized | 100,000,000 | 100,000,000 |
| Common stock, shares issued | 38,522,034 | 29,721,998 |
| Common stock, shares outstanding | 38,522,034 | 29,721,998 |
| Series-A Convertible Preferred Shares [Member] | ||
| Series A convertible preferred shares, discount | $ 351,000 | |
| Preferred stock, no par value | ||
| Preferred stock, shares issued | 351,000 | |
| Preferred stock, shares outstanding | 351,000 |
Consolidated Statements of Operations (Parenthetical) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| Income Statement [Abstract] | ||
| Cost of goods sold from related party | $ 3,905,248 | $ 3,474,012 |
| Interest expense to related parties | $ 109,863 | $ 56,626 |
Basis of Presentation |
12 Months Ended |
|---|---|
Dec. 31, 2017 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| Basis of Presentation |
NOTE 1 – BASIS OF PRESENTATION
History and Organization
Solis Tek Inc. (the “Company”) was originally incorporated under the laws of the State of Nevada on March 2, 2007 as Cinjet, Inc. (“Cinjet”). Effective September 1, 2015, Cinjet changed its corporate name to Solis Tek Inc. On June 23, 2015, the Company entered into an Agreement of Merger and Plan of Reorganization (the “Agreement”) with Solis Tek Inc., a California corporation (“STI”), and CJA Acquisition Corp., a California corporation and a wholly owned subsidiary of the Company (“Merger Sub”), providing for the merger of Merger Sub with and into STI (the “Merger”), with STI surviving the Merger as a wholly-owned subsidiary of the Company. The Merger was accounted for as a recapitalization of the Company with STI being deemed the accounting acquirer.
Overview of Business
The Company is an importer, distributer and marketer of digital lighting equipment and manufacturer of nutrient products for the hydroponics industry. Using certain of its proprietary technologies, the Company provides innovative light spectrum aptitudes with its ballast, reflector and lamp products. The Company additionally has a line of nutrients under the Zelda brand for sale to the same supply chain channel as its lighting products. The Company’s customers include retail stores, distributors and commercial growers in the United States and abroad.
Going Concern
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, during the year ended December 31, 2017, the Company incurred a net loss of $14,021,728 and used cash in operations of $2,060,576 and had a stockholders’ deficit of $6,326,189 as of December 31, 2017. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date of the financial statements being issued. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
At December 31, 2017, the Company had cash on hand in the amount of $967,943. The Company raised an additional $4,505,000 from January 2018 through June 2018 through the sale of its debt and equity securities (see Note 13). Management estimates that the current funds on hand will be sufficient to continue operations through December 2018. The continuation of the Company as a going concern is dependent upon its ability to obtain necessary debt or equity financing to continue operations until it begins generating positive cash flow. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case or equity financing. |
Summary of Significant Accounting Policies |
12 Months Ended | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2017 | |||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||
| Summary of Significant Accounting Policies |
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries Solis Tek East Corporation (“STE”), an entity incorporated under the laws of the State of New Jersey and GrowPro Solutions, Inc. (“GrowPro”), and entity incorporated under the laws of the State of California. Intercompany transactions and balances have been eliminated in consolidation.
Loss per Share Calculations
Basic earnings per share are computed by dividing net loss available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
Options to acquire 3,000,000 shares of common stock and 2,101,000 shares to be issued upon conversion of our convertible notes and preferred stock have been excluded from the calculation of weighted average common shares outstanding at December 31, 2017 as their effect would have been anti-dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the years ended December 31, 2016, as the Company had no outstanding equity instruments other than its outstanding common shares.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in valuing our allowances for doubtful accounts, reserves for inventory obsolescence, valuing equity instruments issued for services and valuation allowance for deferred tax assets, among others. Actual results could differ from these estimates.
Segment Reporting
The Company operates in one segment for the manufacture and distribution of our products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying consolidated financial statements.
Revenue Recognition
The Company recognizes revenue upon shipment of the Company’s products to its customers, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured. Title to the Company’s products primarily is transferred to the customer once the product is shipped from the Company’s warehouses. Products are not shipped until there is a written agreement with the customer with a specified payment arrangement. Any discounts that are offered are done as a reduction of the invoiced amount at the time of billing. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as customer deposits.
The Company does not offer a general right of return on any of its sales and considers all sales as final. The Company generally provides a three-year warranty on its ballasts. However, the Company does not maintain a warranty reserve as the Company is able to chargeback its vendors for all warranty claims. As of December 31, 2017, and December 31, 2016, the Company recorded a reserve for returned product in the amount of $114,119 and $45,410, respectively, which reduced the accounts receivable balances as of those periods.
Accounts Receivable
The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding.
The allowance for doubtful accounts and returns is established through a provision reducing the carrying value of receivables. At December 31, 2017, and December 31, 2016, the allowance for doubtful accounts and returns was $396,499 and $359,395, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is computed on a first-in, first-out basis. The Company’s inventories consist almost entirely of finished goods as of December 31, 2017 and 2016.
The Company provides inventory reserves based on excess and obsolete inventories determined primarily by future demand forecasts. The write down amount is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. At December 31, 2017 and December 31, 2016, the reserve for excess and obsolete inventory was $112,339 and $101,305, respectively.
Inventories under warranty claims
In the ordinary course of business, the Company receives product returns from its customers. The product returns are almost entirely ballasts. Since its inception, the Company has purchased its ballasts from two Chinese manufacturers and one of them (formally a related party entity, see Note 4) offers a three-year warranty on certain of its products. Through December 31, 2017, that manufacturer was not able to repair the Company’s ballasts, as the Company could not return the products to the manufacturer’s facility due to Chinese customs reasons. As such, the vendor issued the Company a credit memo for the entire amount of their returned product, totaling $740,927 and $453,778 in 2017 and 2016, respectively. The Company is planning to send the products to a free trade zone in Hong Kong or to another location in China, to repair, or replace, the defective products. As the manufacturer has issued the Company a credit for the entire defective product, the Company has not recorded a reserve on any of those products in its ending inventory.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The Company has determined the estimated useful lives of its property and equipment, as follows:
Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the related accounts and the resulting gain or loss is reflected in the statements of operations.
Research and Development
Research and development costs are expensed in the period incurred. The costs primarily consist of personnel and supplies.
Shipping and handling costs
The Company’s shipping and handling costs relating to inbound freight are reported as cost of goods sold in the consolidated Statements of Operations, while shipping and handling costs relating to outbound freight are reported as selling, general and administrative expenses in the consolidated Statements of Operations. The Company classifies amounts billed to customers for shipping fees as revenues.
Income Taxes
Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized. The Company has recorded a valuation allowance against its deferred tax assets as of December 31, 2017 and 2016.
The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50 percent likely of being realized upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that the Company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes.
Concentration Risks
The Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits. At December 31, 2017 and 2016, the Company had cash deposits that exceeded the federally insured limit of $250,000. The Company believes that no significant concentration of credit risk exists with respect to these cash balances because of its assessment of the creditworthiness and financial viability of the financial institution.
The Company operates in markets that are highly competitive and rapidly changing. Significant technological changes, shifting customer needs, the emergence of competitive products or services with new capabilities, and other factors could negatively impact the Company’s operating results. State and federal government laws could have a material adverse impact on the Company’s future revenues and results of operations.
The Company’s products require specific components that currently are available from a limited number of sources. The Company purchases some of its key products and components from single vendors. During the years ended December 31, 2017 and 2016, its ballasts, lamps and reflectors, which comprised the clear majority of the Company’s purchases during those periods, were each only purchased from one separate vendor. The ballast vendor is a former related party (see Note 4).
The Company performs a regular review of customer activity and associated credit risks and does not require collateral or other arrangements. There were no customers that accounted for more than 10% of the Company’s revenue for the years ended December 31, 2017 and 2016. Shipments to customers outside the United States comprised 2.2% and 1% for the years ended December 31, 2017 and 2016, respectively.
As of December 31, 2017, four customers accounted for 17.1%, 14.8%, 14.5% and 14.3% of the Company’s trade accounts receivable balance, and as of December 31, 2016, one customer accounted for 18% of the Company’s trade accounts receivable balance.
Fair Value measurements
The Company determines the fair value of its assets and liabilities based on the exchange price in U.S. dollars 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. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:
The carrying amounts of financial instruments such as cash, accounts receivable, inventories, and accounts payable and accrued liabilities, approximate the related fair values due to the short-term maturities of these instruments.
The fair value of the derivative liabilities of $7,415,000 at December 31, 2017, were valued using Level 2 inputs.
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures, but does not believe there will be a material effect, if any.
In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. 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 Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.
In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” (“ASU 2017-11”). ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered, and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The guidance in ASU 2017-11 can be applied using a full or modified retrospective approach. The Company is currently evaluating the impact of the adoption of ASU 2017-11 on the Company’s financial statement presentation or disclosures.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements. |
Property and Equipment |
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| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property and Equipment |
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2017 and 2016:
Depreciation and amortization expense for the years ended December 31, 2017 and 2016 was $69,893 and $70,950, respectively.
Property and equipment include assets acquired under capital leases of $64,632 at December 31, 2017 and 2016, respectively. |
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Related Party Transactions |
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Dec. 31, 2017 | |
| Related Party Transactions [Abstract] | |
| Related Party Transactions |
NOTE 4 – RELATED PARTY TRANSACTIONS
Supplier (Former Related Party)
A family member of an officer/shareholder owned a minority interest in a company in China, which is the sole supplier of ballasts to the Company. Purchases from the related party for the years ended December 31, 2017 and 2016 totaled approximately $3,805,248 and $3,119,000, respectively. The Company believes purchase prices from this vendor approximated what the Company would have to pay from an independent third party vendor. In 2017, the Company determined that due to a change in relationship status, this vendor that was formerly considered a related party, was deemed to no longer be a related party. At December 31, 2017 and 2016, the Company owed the former related party $381,457 and $1,083,764, respectively. At December 31, 2017, the Company had made advanced deposit payments to this vendor for $735,730, which will be applied to purchased inventory upon delivery.
Due to Related Parties
As of December 31, 2017, and December 31, 2016, the Company owed related parties $146,534 and $134,086, respectively. Included in the balances were short-term loans from the two officers/shareholders to the Company totaling $3,297 as of December 31, 2017 and 2016, respectively. The balances are payable on demand, bear zero interest and are unsecured. The balances also included interest owed on the notes payable to related parties, which totaled to $65,222 and $68,471 at December 31, 2017 and 2016, respectively. Also included is $29,580 and $62,319 of unpaid compensation, which was owed to the officers/shareholders as of December 31, 2017 and 2016, respectively. |
Notes Payable to Related Parties |
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| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Payable to Related Parties |
NOTE 5 – NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consists of the following at December 31, 2017 and 2016:
Interest expense on the notes to related parties for the year ended December 31, 2017 and 2016 was $109,863 and $56,626, respectively. Interest paid to the related parties during the year ended December 31, 2017 and 2016 amounted to $7,200 and $17,124, respectively. Accrued interest included in amounts due to related parties at December 31, 2017 and 2016 was $146,534 and $68,471, respectively. |
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Loans Payable |
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| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans Payable |
NOTE 6 – LOANS PAYABLE
Loans payable consist of the following as of December 31, 2017 and December 31, 2016:
In 2015, the Company entered into two loan agreements to purchase automobiles. The combined principal amount of the loans was $44,093 and they mature by November 2021. The loans require a combined monthly payment of principal and interest of $747. A total of $25,957 and $34,220 was owed on the loans as of December 31, 2017 and 2016, respectively.
Principal payments due on long-term debt as of December 31, 2017 for each of the next five years are as follows:
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Convertible Note Payable |
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| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||
| Convertible Note Payable |
NOTE 7 – CONVERTIBLE NOTE PAYABLE
Convertible note payable consist of the following as of December 31, 2017:
On November 8, 2017, the Company issued a secured convertible debenture (the “Note”) to Yorkville Advisors Global, LP (“YPL”) in the principal amount of $1,750,000 with interest at 5% per annum (15% on default) and due 18 months from closing. The Note is secured by all the assets of the Company and its subsidiaries. The Note Conversion Price is convertible into common stock of the Company at $1.00 per share (the “Conversion Price”). The Conversion Price may be adjusted by YPL on the earlier of (a) the 90-day anniversary of the closing with effectiveness of a registration statement or (b) the 180-day anniversary of the closing to a 20% discount to the lowest daily Volume Weighted Average Price (VWAP) over the prior 10 trading days, if lower than $1.00 per share (“Ownership Cap”). Subject to the Ownership Cap, the Note will automatically convert if the Company’s stock has traded 250% above the Conversion Price for a period of 20 consecutive trading days provided that the shares can be sold pursuant to an effective registration statement or Rule 144 without any limitations, and the Company’s common stock has an average daily trading value of $350,000 per day for a period of 20 consecutive trading days. As part of the issuance, the Company also granted YPL a 5 year warrant to purchase 1,137,500 shares of the Company at $1.10 per share
The Company will repay the outstanding principal of the Note in equal installments of $250,000 per month starting on September 1, 2018 either in cash by paying the installment amount plus the Redemption Premium or in kind through conversion into free trading common stock at a price equal to the less of (i) the Fixed Conversion Price, or (ii) a 20% discount to the lowest daily VWAP of the Common Stock during the 10 trading days prior to the payment date (or any combination of cash and stock). The Company will not be required to make a monthly installment payment if the 10-day lowest VWAP is at or above 125% of the then effective Conversion Price. YPL will have the option to defer any monthly installment payment to the maturity date at its sole discretion. The stock component of each monthly installment payment will be limited to 300% of the average daily dollar traded value over the previous 10 trading days. The Company may redeem in cash amounts owed under the Note prior to the maturity date by providing YPL with 10 business days advance note provided that the common stock is trading below the conversion price at the time of the redemption note. The Company shall pay the Redemption Premium equal to the percentage of the principal amount being redeemed as follows: 10% for first 180 days following the closing, 15% for day 181 to 360 following the closing; and 20% for day 361 to the maturity date.
The Company paid 5% of aggregate funding as commitment fee to YPL and $15,000 towards due diligence and structuring fee. The Company netted $1,647,500 after fee and expenses of $102,500.
The Company determined that since the conversion floor had no limit to the conversion price, that the Company could no longer determine if it had enough authorized shares to fulfil the conversion obligation. Furthermore, the Company determined that the exercises prices of the warrants were not a fixed amount because they were subject to an adjustment based on the occurrence of future offerings or events. As such, the Company determined that the conversion feature and the warrants created a derivative with a fair value of $3,767,724 at the date of issuance. The Company accounted for the fair value of the derivative up to the face amount of the note of $1,750,000 as a valuation discount to be amortized over the life of the note, and the excess of $2,017,724 being recorded as a finance cost.
During the year ended December 31, 2017, amortization of debt discount was $194,444 and was recorded as a financing costs. The unamortized balance of the debt discount was $1,555,556 as of December 31, 2017.
The following table presents scheduled principal payments on our long-term debt as of December 31, 2017:
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Series-A Convertible Preferred Stock and Warrants |
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| Equity [Abstract] | |||||||||||||||||||||
| Series-A Convertible Preferred Stock and Warrants |
NOTE 8 – SERIES-A CONVERTIBLE PREFERRED STOCK AND WARRANTS
Series-A Convertible Preferred Shares Subscription Agreement consisted of the following as of December 31, 2017:
In October 2017, the Company engaged Garden State Securities to develop potential accredited investors to participate in the Company’s private offering to raise up to $3,000,000 in convertible Preferred Series-A stock. Each unit consisted of (i) three shares of Series-A Convertible Preferred Stock of the Company (the “Series-A”) and (ii) a warrant to purchase 1,936 shares of the Company’s common stock at $1.25 per share (the “Warrants). Each Series-A share is convertible into 1,000 shares of common stock of the Company. Each share is convertible to common stock at a lesser of $1.00 per share or discounted VWAP (80% of the 10 trading days prior to conversion), whichever is lower.
October 24, 2017 FirstFire Global Opportunities Fund LLC (“FirstFire”) purchased 117 Units which consisted of 351,000 shares of Series-A preferred stock and Warrants to purchase 283,140 shares of common stock for $351,000. The Company received a total of $295,410 after fees and expenses. The Series-A offering was terminated after this issuance without the Minimum Amount being raised.
The Series-A will automatically convert if (i) the Company’s Common Stock trades at a price equal to or greater than 250% of the Series-A Conversion Price for ten (10) consecutive Trading Days, (ii) the Conversion Shares are eligible for resale pursuant to an effective registration statement or Rule 144 without any limitations, and (iii) the average trading volume for the Company’s Common Stock during the same ten (10) consecutive Trading Day period is equal to or greater than 125,000 shares of the Company’s Common Stock, then all outstanding shares of Series-A Preferred Stock shall, automatically, and without the payment of additional consideration by the Series-A Investor, and without any notice to the Series-A Investor be converted into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing the Stated Value per share plus accrued and unpaid dividends thereon by the Series-A Conversion Price then in effect. The purchase of the Series-A had registration rights to have the Company register the underlying common shares, and such registration statement was declared effective in January 2018. As part of the offering, the Company also granted First Fire a right to refuse or participate in any future debt or equity offering. The registration statement was filed in December 2017 and declared effective in January 2018.
As part of the issuance, the Company initially granted warrants to purchase 226,512 shares of common stock to FirstFire. The Company subsequently issued 56,628 additional warrants to First Fire as part of the offering, bringing the total warrants issued to them to 283,140. The warrants are exercisable at $1.25 per share and will expire in five years. The exercise price, and the number of warrants to be issued, are subject to adjustment. The exercise price of the warrants is subject to a reset provision (down round protection) in case the Company will issue similar debt or equity instruments with price lower than $1.25 per share. The number of warrants shall also be increased upon the occurrence of certain events.
The Company considered the accounting guidance and determined the appropriate treatment is to account the Series-A conversion feature as a liability since the instrument is convertible into a variable number of shares (i.e. the conversion price continuously reset) and that the Company could no longer determine if it had enough authorized shares to fulfil the conversion obligation. Furthermore, the Company determined that the exercises prices of the warrants were not a fixed amount because they were subject to an adjustment based on the occurrence of future offerings or events. As such, the Company determined that the conversion feature of the Series-A preferred stock had a fair value of $564,000 at issuance, and the fair value of 283,140 warrants had a fair value of $338,358 at issuance, which created a derivative with an aggregate fair value of $902,358 at the date of issuance. The Company accounted for the fair value of the derivative up to the face amount of the preferred as a reduction of the fair value of the preferred stock of $295,410, and the excess of $606,948 is being recorded as a deemed dividend and a charge to paid in capital. The Company will revalue these liabilities each reporting period.
In November 2017, FirstFire informed the Company that it was exercising its right to participate in the YPL debt offering described in Note 7, however, YPL refused and threatened to back out of the offering if FirstFire was included in it. The YPL debt offering was consummated without FirstFire. In December 2017, as a settlement with FirstFire for not to exercising its right to participate in the YPL debt offering, the Company granted FirstFire warrants to purchase 166,860 shares of common stock at $1.00 per share. The warrant contained down-round/reset provision (both exercise price and number of shares) in case the Company will issue similar instrument at a price lower than $1.25 per shares, and as such, is subject to derivative liability accounting. The Company determined that the issuance of these additional warrants was part of a negotiated settlement with FirstFire, and recorded the fair value of the warrant of $199,000 as a liability and as a financing cost.
The Company also considered the guidance of ASC 480-10-S99-3A, and determined that as redemption is outside control of the issuer as the conversion price not fixed, such preferred shares should be recognized outside of permanent equity. |
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Derivative Liability |
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| Derivative Instruments and Hedging Activities Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative Liability |
NOTE 9 – DERIVATIVE LIABILITY
The FASB has issued authoritative guidance whereby instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The conversion prices and the exercise prices of the notes, Series-A preferred stock, and warrants described in Notes 7 and 8 were not a fixed amount because they were either subject to an adjustment based on the occurrence of future offerings or events or they were variable. Since the number of shares is not explicitly limited, the Company is unable to conclude that enough authorized and unissued shares are available to settle the conversion option. In accordance with the FASB authoritative guidance, the conversion features have been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.
As of December 31, 2017, the derivative liabilities were valued using a probability weighted average Monte Carlo pricing model with the following assumptions:
The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate the future volatility for its common stock. The expected life of the conversion feature of the notes was based on the remaining term of the notes. The expected dividend yield was based on the fact that the Company has not customarily paid dividends in the past and does not expect to pay dividends in the future.
During the year ended December 31, 2017, the Company recognized $2,545,918 as the change in the fair value of the derivative from the respective prior period. In addition, the Company recognized derivative liabilities of $4,869,082 upon issuance of convertible notes and convertible preferred shares during the period. |
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Shareholders' Equity |
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| Shareholders' Equity |
NOTE 10 – SHAREHOLDERS’ EQUITY
Common shares issued for cash
During the year ended December 31, 2017, the Company issued 511,957 shares of common stock for a total of $455,000 in a Private Placement Offerings per Reg. D.
Common stock issued for services
During 2017, the Company entered into various consulting agreements with third parties (“Consultants”) pursuant to which these Consultants provided business development, sales promotion, introduction to new business opportunities, strategic analysis, accounting, and, sales and marketing activities. In accordance with these agreements, the Company agreed to issue an aggregate of 1,717,000 shares to the Consultants for the services rendered. The Company accounted for the aggregate fair value of the shares of common stock issued to Consultants in accordance with current accounting guidelines and determined the aggregate fair value of these shares to be $2,481,000 based on the trading prices per share of the Company’s stock at every issuance date. As there were no performance commitment and shares issued were nonrefundable, the Company recognized the full amount of the fair value of the common stock issued as stock compensation expense on its statement of Operations for the period ended December 31, 2017.
Common shares issued to employees for services
As part of an employment agreement, dated March 27, 2017, with Mr. Dennis G. Forchic to become Chief Executive Officer, the Company issued a total of 5,411,765 shares of common stock valued at $2,760,000 (based on trading price at date of grant). In addition, Mr. Forchic purchased an additional 784,314 shares with a fair value at the date of purchase of $400,000 for a consideration of $100,000. The fair value of the shares on the date of grant over consideration received was $300,000, which was recorded as additional stock compensation expense.
On December 27, 2017, the Company entered into a four year employment agreement with Stanley L. Teeple as the Company’s Chief Compliance Officer. As part of the Employment Agreement, Mr. Teeple was granted 1,000,000 million shares of the Company’s common stock of which 250,000 shares vested and were issued on the signing of the employment agreement and 250,000 shares vest annually on the anniversary of the employment agreement. The fair value of the shares on the date of grant was $1,710,000, of which $427,500 was recorded as stock-based compensation during the year ended December 31, 2017 and $1,282,000 is being amortized ratably over the three year vesting period.
In November 2015, the Company entered into a four year employment agreement with one of its employees in which the employee was granted 500,000 shares of the Company’s common stock. The shares vest equally in six month periods over the four years. The fair value of the shares on the date of grant was $400,000, which is being amortized ratably over the four year service period. A total of 125,000 shares with a fair value of $100,000 were issued under the agreement during both years ended December 31, 2017 and 2016. In 2016, 20,000 common shares with a fair value of $11,000 were granted to two employees for their services in 2016. The amount amortized as stock based compensation in 2017 and 2016 was $100,000 and $111,000, respectively.
Summary of Stock Options
A summary of stock options for the year ended December 31, 2017 is as follows:
As part of the Employment Agreement with Mr. Forchic, he was granted an option to purchase 3,000,000 shares of common stock at $0.60 per share, with 33.3% of these shares vesting on the one year anniversary of the date of grant and the remainder vesting in equal installments at the end of each month over the next three years. The options were valued at $835,767 at the date of grant using a Black Scholes options pricing model and will be amortized as an expense over the vesting period.
The fair value of each option on the date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
Information relating to outstanding stock options at December 31, 2017, summarized by exercise price, is as follows:
The Company recorded compensation expense pursuant to authoritative guidance provided by the ASC Topic 718 – Stock Compensation for the year ended December 31, 2017 of $274,096. As of December 31, 2017, the Company has outstanding unvested options with future compensation costs of $561,671, which will be recorded as compensation cost as the options vest over their remaining average vesting period of 2.00 years. As of December 31, 2017, the outstanding options had an intrinsic value of $4,890,000. |
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Commitments |
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| Commitments and Contingencies Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||
| Commitments |
NOTE 11- COMMITMENTS
Operating Leases
The Company leases office and warehouse facilities under two non-cancellable lease agreements, one in Southern California and one in New Jersey. The Southern California lease was initiated in September 2013 and expires August 31, 2020. Subsequent to December 31, 2017, the Company provided notice to vacate its existing facility in Southern California and signed a five-year lease, effective May 1, 2018, to move to a 17,640 square foot facility at 853 East Sandhill Avenue, Carson, CA 90746. The New Jersey lease was initiated in October 2014 and expires September 30, 2019.
Minimum annual rental commitments under non-cancelable leases are as follows:
Rent expense was $242,484 and $218,997 for the years ended December 31, 2017 and 2016, respectively.
Capital Leases
The Company leases equipment under capital lease agreements. As of December 31, 2017, the outstanding balance was $9,665 and due in 2018.
Technology License Agreement
The Company entered into a Technology License Agreement with a third-party vendor for consulting services. Under the agreement, the Company will pay the vendor a minimum consulting amount of $100,000 per year, plus a royalty of 7% of all net sales of the vendor’s products above $1,428,571 per calendar year. For each of the years ended December 31, 2017 and 2016, $100,000 was recorded as research and development expense under the agreement on the consolidated Statements of Operations related to the minimum annual fee. For each of years ended December 31 2017 and 2016, $45,595 and $41,490 related to the royalty was recorded as cost of goods sold on the Consolidated Statements of Operations. A total of $190,713 and $165,553 was owed under the amended agreement at December 31, 2017 and 2016, respectively.
Employment Agreements
Agreement with Chief Executive Officer
On January 6, 2017, the company extended an offer to Dennis G. Forchic to become Chief Executive Officer. Mr. Forchic accepted the offer and contracts were executed on March 27, 2017. As part of the Employment Agreement, the Company issued a total of 5,411,765 shares valued at $2,760,000. In addition, Mr. Forchic purchased an additional 784,314 shares valued at $400,000 for a consideration of $100,000. The fair value of the shares on the date of grant over consideration received was $300,000, which was recorded as stock compensation expense, (See Note 13).
Agreement with Chief Compliance Officer, Secretary
On December 27, 2017, the Company entered into a four year employment agreement with Stanley L. Teeple as the Company’s Chief Compliance Officer. As part of the Employment Agreement, Mr. Teeple was granted 1,000,000 million shares of the Company’s common stock of which 250,000 shares vested on the signing of the employment agreement and 250,000 shares vest annually on the anniversary of the employment agreement. The fair value of the shares on the date of grant was $1,710,000, of which $427,500 was recorded as stock-based compensation during the year ended December 31, 2017 and $1,282,000 is being amortized ratably over the three year employment agreement period. |
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Income Taxes |
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| Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Taxes |
NOTE 12 – INCOME TAXES
At December 31, 2017, the Company had available Federal and state net operating loss carryforwards to reduce future taxable income. The amounts available were approximately $3,400,000 for Federal and state purposes. The carryforwards expire in various amounts through 2035. Given the Company’s history of net operating losses, management has determined that it is more likely than not that the Company will not be able to realize the tax benefit of the carryforwards. Accordingly, the Company has not recognized a deferred tax asset for this benefit.
Effective January 1, 2007, the Company adopted FASB guidelines that address the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. This guidance also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as of December 31, 2017 and 2016, the Company did not have a liability for unrecognized tax benefits, and no adjustment was required at adoption.
The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2017, and 2016, the Company has not accrued interest or penalties related to uncertain tax positions. Additionally, tax years 2014 through 2017 remain open to examination by the major taxing jurisdictions to which the Company is subject.
Upon the attainment of taxable income by the Company, management will assess the likelihood of realizing the tax benefit associated with the use of the carryforwards and will recognize the appropriate deferred tax asset at that time.
The Company’s effective income tax rate differs from the amount computed by applying the federal statutory income tax rate to loss before income taxes as follows:
The components of deferred taxes consist of the following at December 31, 2017 and 2016:
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Subsequent Events |
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| Subsequent Events [Abstract] | |||||||||||||
| Subsequent Events |
NOTE 13 – SUBSEQUENT EVENTS
On February 5, 2018, the Company terminated its employment agreement with Mr. Dennis G. Forchic, its Chief Executive Officer and a member of the Company’s Board of Directors.
In accordance with the severance terms of his Employment Agreement: (i) all 3,000,000 Options previously granted to Mr. Forchic were terminated as they had not vested; (ii) the Company will pay Mr. Forchic at the annual rate of $162,000 per annum, from February 5, 2018 through the fourth anniversary date of the Employment Agreement; and, (iii) the Company will reimburse Mr. Forchic for each month until the fourth anniversary of January 6, 2017, an amount equal to 50% of Employee’s health care coverage, to the extent such coverage was in place as at February 5, 2018.
On February 14, 2018, the Company entered into a three year employment agreement with Tiffany Davis as its Chief Operating Officer. Ms. Davis is to receive an annual salary of $150,000 and is entitled to receive 1,000,000 shares of the Company’s common stock of which 250,000 shares immediately vested on the signing of the employment agreement and 250,000 shares vest each year on the anniversary date of the employment agreement. Prior to the date of employment with the Company, Ms. Davis was a consultant to the Company.
In February 2018, the Company received proceeds of $1,068,000 from the issuance of 821,538 shares of common stock, at $1.30 per share, as part of a Regulation D offering.
Subsequent to December 31, 2017, and through the date the financial statements were available to be issued, the Company issued 1,306,360 shares of its common stock from the conversion of warrants, at $1.10 per share, resulting in proceeds of $1,437,000, and 368,550 shares of common stock on the conversion of 351 shares of Series-A preferred shares.
Subsequent to December 31, 2017, and through the date the financial statements were available to be issued, the Company issued 1,270,000 shares of its common stock as payment for the receipt of outside professional services.
New Facility Lease
The Company provided notice to vacate its existing facility in Southern California and signed a five-year lease, effective May 1, 2018, to relocate to a 17,640 square foot facility at 853 East Sandhill Avenue, Carson, CA 90746.
Closure of East Coast Facility
On May 7, 2018 the Company signed a sublease with Atlas Company for subletting its east coast facility in East Hackensack, NJ. The decision to close the east coast operations was a consolidation move to better serve the customer base with all shipments coming out of the west coast facility in Carson, CA. With this move, the serviceability and supply chain fulfillment has eliminated multiple shipping destinations out of China, and split shipment to customers from both east and west in the USA. The sublease has been executed and provides a zero out-of-pocket cost to the Company for the remainder of the lease.
Standby Equity Distribution Agreement
On April 16, 2018, the Company entered into a Standby Equity Distribution Agreement (“SEDA”) with YA II PN, LTD. (the “SEDA Investor”), a Cayman Islands exempted company. The SEDA establishes what is sometimes termed an equity line of credit or an equity draw-down facility. The $25,000,000 facility may be drawn-down upon by the Company in installments, the maximum amount of each of which is limited to $1,000,000. For each share of common stock purchased under the SEDA, the SEDA Investor will pay 90% of the lowest volume weighted average price (“VWAP”) of the Company’s shares during the five trading days following our draw-down notice to the SEDA Investor . The VWAP that will be used in the calculation will be that reported by Bloomberg, LLC, a third-party reporting service. In general, the VWAP represents the sum of the value of all the sales of our common stock for a given day (the total shares sold in each trade times the sales price per share of the common stock for that trade), divided by the total number of shares sold on that day.
In connection with the SEDA, the Company has issued to the SEDA Investor, a five-year Commitment Fee Warrant (the “Fee Warrant”) to purchase 1,000,000 shares of the Company’s common stock at $0.01 per share.
The Company has agreed to prepare and file a registration statement under the Securities Act of 1933, as amended, that includes the shares of common stock issuable pursuant to the Standby Equity Distribution Agreement, the shares of common stock issuable pursuant to Fee Warrants. The Company cannot sell shares of common stock to the SEDA Investor under the Standby Equity Distribution Agreement until such registration statement is declared effective by the Securities and Exchange Commission.
Convertible Debenture Termination
Subsequent to December 31, 2017, Yorkville Advisors Global, LP (“YPL”) (see Note 7), notified the Company in writing that it elected to convert all remaining outstanding principal and interest accrued and otherwise payable under the Debenture, which included the conversion of $1,750,000 of principal and $38,082 of interest. Upon the Conversion of the Debenture, the Company issued an aggregate of 1,788,082 shares of its Common Stock to the Investor. Upon the Conversion, the Debenture and the Security Agreement were both terminated in accordance with their respective terms effective as of April 18, 2018, and all security interest and liens under the Security Agreement were released and terminated.
Series A Preferred Stock Conversion
On April 24, 2018, the Company received a Notice of Conversion from the Series A-Investor (see Note 8), pursuant to which the Series-A Investor elected to convert all of the remaining outstanding Series-A into common shares of the Company. Upon the conversion of the balance of the Series-A, the Company issued 52,500 shares. Upon the conversion by the Series-A Investor, no Series-A were outstanding.
Option Agreement for Arizona Property
On April 19, 2018, Solis Tek Inc., (the “Company”) entered into an Option Agreement (the “Option”) with MSCP, LLC, a non-affiliated Arizona limited liability company (the “Lessor”), pursuant to which, a wholly owned subsidiary of the Company, (the “Company Subsidiary”), was granted an option to enter into a certain Lease Agreement (the “Lease”) for the real property, including the structure and all improvements, identified in the Option (the “Premises”). The Premises consists of 70,000 square feet of space and is to be used for the sole purpose of providing services related to the management, administration and operation of a cultivation and processing facility (“Facility”) on behalf of an Arizona limited liability company operating as a nonprofit organization (“Arizona Licensee”) which has been allocated a Medical Marijuana Dispensary Registration Certificate by the Arizona Department of Health Services (“AZDHS”). The activities within the Facility shall be limited to the cultivation, processing, production and packaging of medical marijuana (“MMJ”) and manufactured and derivative products which contain medical marijuana (collectively “MMJ Products”), with no right to sell or dispense any such plants or products. The Lease is for a 5-year initial term (the “Term”) with an option to renew for an additional 5 year term. The base rent for the initial year of the Term is $101,500 per month with additional pro-rata net-lease charges.
As consideration for the Option, the Company paid to Lessor, $160,000.00 (the “Deposit”). If the Company’s Subsidiary executes the Lease by May 19, 2018, the Deposit shall be treated as a security deposit and rent advance and governed in accordance with the terms and conditions of the Lease, and the Company will become a guarantor of the Company Subsidiary’s obligations under the Lease, on behalf of Arizona Licensee. If the Lease is not executed by the Company Subsidiary, the Deposit shall be deemed non-refundable.
Purchase of YLK Partners NV, LLC from Related Parties
On May 10, 2018, the Company entered into an Acquisition Agreement with the members, which in the aggregate, own 100% of the membership interests (the “Sellers”) in YLK Partners NV, LLC, a Nevada limited liability company (“YLK”). Pursuant to the Acquisition Agreement, in consideration of the Company acquiring all of the outstanding membership interests of YLK, the Company issued to the Sellers, a total of 5,000,000 warrants (the “Warrants”) to purchase 5,000,000 common shares, at an exercise price of $0.01 per share. The Warrants are estimated to be valued at approximately $5,500,000 and are exercisable until May 9, 2023.
The Sellers were
(a) LK Ventures, LLC a Nevada limited liability company and a related party. One half of the membership interests of LK Ventures, LLC is owned by Alan Lien, Chief Executive Officer, President and a director of the Company, and the remaining one half is owned by a non-affiliated party. LK Ventures LLC received 2,250,000 Warrants under the Acquisition Agreement for the 45% membership interests held in YLK.
(b) MDM Cultivation LLC, a Delaware limited liability company and a related party. The members of MDM Cultivation are affiliates of YA II PN, Ltd. and, D-Beta One EQ, Ltd., which presently hold (i) 2,258,382 shares of Solis Tek’s common stock, (ii) warrants to purchase 11,200,000 shares of the Company’s common stock and (iii) a Secured Promissory Note issued by Solis Tek in the original principal amount of $1.5 million. In addition, YA II PN, Ltd. and the Company are parties to that Standby Equity Distribution Agreement pursuant to which YA II PN, Ltd. has agreed to purchase up to $25.0 million of the Company’s common stock, subject to the terms and conditions thereof. MDM Cultivation owned 45% of the outstanding membership interests of YLK. MDM Cultivation was issued 2,250,000 Warrants under the Acquisition Agreement. As affiliates of MDM Cultivation, YA II PN, Ltd. and D-Beta One EQ, Ltd. will be deemed to be the beneficial owners of the 2,250,000 Warrants in addition to the other shares and warrants presently held by them.
(c) Future Farm Technologies Inc of Vancouver British Columbia, Canada. Future Farm Technologies, Inc. was issued 500,000 Warrants under the Acquisition Agreement for the 10% membership interests held in YLK.
Cultivation Management Services Agreement
On January 5, 2018, a wholly owned subsidiary of YLK (the “YLK Subsidiary”) entered into a Cultivation Management Services Agreement (the “Management Agreement”) with an Arizona Licensee. The Arizona Licensee is authorized to operate a medical marijuana dispensary, one (1) onsite Facility and one (1) offsite Facility, to produce, sell and dispense medical marijuana and manufactured and derivative products which contain marijuana pursuant to Title 9; Chapter 17 of the Arizona Department of Health Services Medical Marijuana Program, (the “AZDHS Rules”) and A.R.S. § 36-2801 et seq., as amended from time to time (the “Act”) (collectively referred to herein as the “AMMA”). Pursuant to the Management Agreement, YLK Subsidiary will provide the management services for the offsite Facility, on behalf of the Arizona Licensee.
As consideration for the exclusive right of YLK Subsidiary to manage Arizona Licensee’s Facility, pursuant to the Management Agreement; (i) YLK Subsidiary paid $750,000 to the Arizona Licensee; (ii) agreed to pay an additional $250,000 within 10 days after receipt of the AZDHS Approval to Operate (“ATO”) the Facility; and (iii) agreed to pay a total of $600,000, payable in 44 equal monthly installments commencing on April 1, 2019.
The term of the Management Agreement is 5 years. The YLK Subsidiary has the option to extend the term for an additional 5 years with the payment of $1,000,000.00 at the commencement of the additional term and a total of $1,000,000.00 payable in equal monthly installments over the extended term of the Management Agreement.
The Management Agreement provides, among other things, that:
YLK Subsidiary as an independent contractor, act as the manager (“Manager”) of the Facility, on behalf of and in conjunction with Arizona Licensee, and shall be responsible for the acquisition, design, planning, zoning, entitlement, development and construction of a Facility, and for the preparation, submission and acquisition of the ATO for the Facility from AZDHS as its authorized offsite Facility, including payment of all costs, fees, and expenses incurred in the acquisition of all authorizations, permits, certificates and approvals, including acquiring the ATO from AZDHS.
Manager shall be responsible for implementation of the Facility’s Business Plan, Security Policies and Procedures, Inventory and Quality Control Policies and Procedures, and any other policies and procedures or any amendments thereto, subject to approval and as adopted by Arizona Licensee for the Facility, in accordance with the AMMA and applicable rules and regulations. As compensation for rendering the services and the ongoing successful operation of the Facility, Arizona Licensee shall pay to Manager, certain management fees agreed to by the Parties.
Manager shall be responsible for taking any action necessary to comply with any change whatsoever in the AMMA and any applicable law, rule, statute, or regulation related to the development, operation, or management of the Facility that comes into being, occurs, accrues, becomes effective, or otherwise becomes applicable after the Effective Date.
Manager shall implement all actions necessary to ensure the quality, safety and security of the Facility and the MMJ and MMJ Products at the Facility, including providing product testing at industry standards for all products grown or developed for Arizona Licensee at the Facility. Manager shall also be responsible for all costs and expenses related to the testing of MMJ and MMJ Products cultivated and produced at the Facility to ensure effectiveness, quality and safety in compliance with the AMMA and all other state and local rules, regulations, requirements and laws. In the event Arizona Licensee reasonably requires the additional testing of MMJ and MMJ Products at the Facility, beyond what is required therein, Arizona Licensee agrees to bear the responsibility of any costs, fees and expenses incurred as a result of such additional testing.
Unregistered Sales of Equity Securities.
On May 10, 2018, the Company entered in to a Securities Purchase Agreement with YA PN II, LLC, pursuant to which the Company sold and issued the following:
In connection with the Securities Purchase Agreement, the Company executed: (i) a Registration Rights Agreement pursuant to which we are required to file a registration statement (the “Registration Statement”) with the SEC for the resale of certain of the Shares and Warrant Shares; (ii) A Global Guaranty Agreement pursuant to which the Company and all of the Company’s subsidiaries, guaranteed the repayment of the Note; and a Security Agreement pursuant to which the Company and all of its subsidiaries pledged all of their assets as collateral for the repayment of the Note. |
Summary of Significant Accounting Policies (Policies) |
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| Accounting Policies [Abstract] | ||||||||||||||||
| Basis of Consolidation |
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries Solis Tek East Corporation (“STE”), an entity incorporated under the laws of the State of New Jersey and GrowPro Solutions, Inc. (“GrowPro”), and entity incorporated under the laws of the State of California. Intercompany transactions and balances have been eliminated in consolidation. |
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| Loss Per Share Calculations |
Loss per Share Calculations
Basic earnings per share are computed by dividing net loss available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
Options to acquire 3,000,000 shares of common stock and 2,101,000 shares to be issued upon conversion of our convertible notes and preferred stock have been excluded from the calculation of weighted average common shares outstanding at December 31, 2017 as their effect would have been anti-dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the years ended December 31, 2016, as the Company had no outstanding equity instruments other than its outstanding common shares. |
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| Use of Estimates |
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in valuing our allowances for doubtful accounts, reserves for inventory obsolescence, valuing equity instruments issued for services and valuation allowance for deferred tax assets, among others. Actual results could differ from these estimates. |
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| Segment Reporting |
Segment Reporting
The Company operates in one segment for the manufacture and distribution of our products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying consolidated financial statements. |
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| Revenue Recognition |
Revenue Recognition
The Company recognizes revenue upon shipment of the Company’s products to its customers, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured. Title to the Company’s products primarily is transferred to the customer once the product is shipped from the Company’s warehouses. Products are not shipped until there is a written agreement with the customer with a specified payment arrangement. Any discounts that are offered are done as a reduction of the invoiced amount at the time of billing. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as customer deposits.
The Company does not offer a general right of return on any of its sales and considers all sales as final. The Company generally provides a three-year warranty on its ballasts. However, the Company does not maintain a warranty reserve as the Company is able to chargeback its vendors for all warranty claims. As of December 31, 2017, and December 31, 2016, the Company recorded a reserve for returned product in the amount of $114,119 and $45,410, respectively, which reduced the accounts receivable balances as of those periods. |
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| Accounts Receivable |
Accounts Receivable
The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding.
The allowance for doubtful accounts and returns is established through a provision reducing the carrying value of receivables. At December 31, 2017, and December 31, 2016, the allowance for doubtful accounts and returns was $396,499 and $359,395, respectively. |
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| Inventories |
Inventories
Inventories are stated at the lower of cost or market. Cost is computed on a first-in, first-out basis. The Company’s inventories consist almost entirely of finished goods as of December 31, 2017 and 2016.
The Company provides inventory reserves based on excess and obsolete inventories determined primarily by future demand forecasts. The write down amount is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. At December 31, 2017 and December 31, 2016, the reserve for excess and obsolete inventory was $112,339 and $101,305, respectively. |
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| Inventories under Warranty Claims |
Inventories under warranty claims
In the ordinary course of business, the Company receives product returns from its customers. The product returns are almost entirely ballasts. Since its inception, the Company has purchased its ballasts from two Chinese manufacturers and one of them (formally a related party entity, see Note 4) offers a three-year warranty on certain of its products. Through December 31, 2017, that manufacturer was not able to repair the Company’s ballasts, as the Company could not return the products to the manufacturer’s facility due to Chinese customs reasons. As such, the vendor issued the Company a credit memo for the entire amount of their returned product, totaling $740,927 and $453,778 in 2017 and 2016, respectively. The Company is planning to send the products to a free trade zone in Hong Kong or to another location in China, to repair, or replace, the defective products. As the manufacturer has issued the Company a credit for the entire defective product, the Company has not recorded a reserve on any of those products in its ending inventory. |
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| Property and Equipment |
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The Company has determined the estimated useful lives of its property and equipment, as follows:
Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the related accounts and the resulting gain or loss is reflected in the statements of operations. |
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| Research and Development |
Research and Development
Research and development costs are expensed in the period incurred. The costs primarily consist of personnel and supplies. |
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| Shipping and Handling Costs |
Shipping and handling costs
The Company’s shipping and handling costs relating to inbound freight are reported as cost of goods sold in the consolidated Statements of Operations, while shipping and handling costs relating to outbound freight are reported as selling, general and administrative expenses in the consolidated Statements of Operations. The Company classifies amounts billed to customers for shipping fees as revenues. |
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| Income Taxes |
Income Taxes
Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized. The Company has recorded a valuation allowance against its deferred tax assets as of December 31, 2017 and 2016.
The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50 percent likely of being realized upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that the Company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes. |
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| Concentration Risks |
Concentration Risks
The Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits. At December 31, 2017 and 2016, the Company had cash deposits that exceeded the federally insured limit of $250,000. The Company believes that no significant concentration of credit risk exists with respect to these cash balances because of its assessment of the creditworthiness and financial viability of the financial institution.
The Company operates in markets that are highly competitive and rapidly changing. Significant technological changes, shifting customer needs, the emergence of competitive products or services with new capabilities, and other factors could negatively impact the Company’s operating results. State and federal government laws could have a material adverse impact on the Company’s future revenues and results of operations.
The Company’s products require specific components that currently are available from a limited number of sources. The Company purchases some of its key products and components from single vendors. During the years ended December 31, 2017 and 2016, its ballasts, lamps and reflectors, which comprised the clear majority of the Company’s purchases during those periods, were each only purchased from one separate vendor. The ballast vendor is a former related party (see Note 4).
The Company performs a regular review of customer activity and associated credit risks and does not require collateral or other arrangements. There were no customers that accounted for more than 10% of the Company’s revenue for the years ended December 31, 2017 and 2016. Shipments to customers outside the United States comprised 2.2% and 1% for the years ended December 31, 2017 and 2016, respectively.
As of December 31, 2017, four customers accounted for 17.1%, 14.8%, 14.5% and 14.3% of the Company’s trade accounts receivable balance, and as of December 31, 2016, one customer accounted for 18% of the Company’s trade accounts receivable balance. |
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| Fair Value Measurements |
Fair Value measurements
The Company determines the fair value of its assets and liabilities based on the exchange price in U.S. dollars 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. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:
The carrying amounts of financial instruments such as cash, accounts receivable, inventories, and accounts payable and accrued liabilities, approximate the related fair values due to the short-term maturities of these instruments.
The fair value of the derivative liabilities of $7,415,000 at December 31, 2017, were valued using Level 2 inputs.
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. |
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| Recently Issued Accounting Pronouncements |
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures, but does not believe there will be a material effect, if any.
In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. 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 Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.
In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” (“ASU 2017-11”). ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered, and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The guidance in ASU 2017-11 can be applied using a full or modified retrospective approach. The Company is currently evaluating the impact of the adoption of ASU 2017-11 on the Company’s financial statement presentation or disclosures.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements. |
Summary of Significant Accounting Policies (Tables) |
12 Months Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2017 | ||||||||||||||||
| Accounting Policies [Abstract] | ||||||||||||||||
| Schedule of Estimated Useful Lives of Property and Equipment |
The Company has determined the estimated useful lives of its property and equipment, as follows:
|
Property and Equipment (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Property and Equipment |
Property and equipment consists of the following at December 31, 2017 and 2016:
|
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Notes Payable to Related Parties (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Notes Payable to Related Parties |
Notes payable to related parties consists of the following at December 31, 2017 and 2016:
|
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Loans Payable (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Loans Payable |
Loans payable consist of the following as of December 31, 2017 and December 31, 2016:
|
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| Schedule of Principal Payments Due on Long-Term Debt |
Principal payments due on long-term debt as of December 31, 2017 for each of the next five years are as follows:
|
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Convertible Note Payable (Tables) |
12 Months Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2017 | |||||||||||||||||||||
| Debt Disclosure [Abstract] | |||||||||||||||||||||
| Schedule of Convertible Notes Payable |
Convertible note payable consist of the following as of December 31, 2017:
|
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| Schedule of Principal Payment of Long-term Debt |
The following table presents scheduled principal payments on our long-term debt as of December 31, 2017:
|
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Series-A Convertible Preferred Stock and Warrants (Tables) |
12 Months Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2017 | |||||||||||||||||||||
| Equity [Abstract] | |||||||||||||||||||||
| Schedule of Series-A Convertible Preferred Shares Subscription Agreement |
Series-A Convertible Preferred Shares Subscription Agreement consisted of the following as of December 31, 2017:
|
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Derivative Liability (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative Instruments and Hedging Activities Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Derivative Liability Weighted Average Assumption |
As of December 31, 2017, the derivative liabilities were valued using a probability weighted average Monte Carlo pricing model with the following assumptions:
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Shareholders' Equity (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Stock Options Activity |
A summary of stock options for the year ended December 31, 2017 is as follows:
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| Schedule of Estimated Fair Value of Weighted Average Assumption |
The fair value of each option on the date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
|
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| Schedule of Options Outstanding and Exercisable |
Information relating to outstanding stock options at December 31, 2017, summarized by exercise price, is as follows:
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Commitments (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2017 | ||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||
| Minimum Annual Rental Commitments Under Non-cancelable Leases |
Minimum annual rental commitments under non-cancelable leases are as follows:
|
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Income Taxes (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Federal Statutory Income Tax Rate to Income Loss Before Income Taxes |
The Company’s effective income tax rate differs from the amount computed by applying the federal statutory income tax rate to loss before income taxes as follows:
|
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| Schedule of Components of Deferred Taxes |
The components of deferred taxes consist of the following at December 31, 2017 and 2016:
|
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Basis of Presentation (Details Narrative) - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Net Loss | $ 14,021,728 | $ 538,710 | |
| Cash in operations | 2,060,576 | (580,634) | |
| Stockholders' deficit | 6,326,189 | (1,404,891) | $ (1,832,601) |
| Cash on hand | 967,943 | $ 275,783 | $ 106,316 |
| January 2018 Through June 2018 [Member] | |||
| Additional value raised through sale of debt and equity securities | $ 4,505,000 | ||
Summary of Significant Accounting Policies - Schedule of Estimated Useful Lives of Property and Equipment (Details) |
12 Months Ended |
|---|---|
Dec. 31, 2017 | |
| Machinery and Equipment [Member] | |
| Estimated useful lives of property and equipment | 5 years |
| Computer Equipment [Member] | |
| Estimated useful lives of property and equipment | 3 years |
| Furniture and Fixtures [Member] | |
| Estimated useful lives of property and equipment | 7 years |
Property and Equipment (Details Narrative) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| Property, Plant and Equipment [Abstract] | ||
| Depreciation and amortization expense | $ 69,893 | $ 70,950 |
| Property and equipment include assets acquired under capital leases | $ 64,632 | $ 64,632 |
Property and Equipment - Schedule of Property and Equipment (Details) - USD ($) |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Property and equipment, gross | $ 351,605 | $ 348,405 |
| Less: accumulated depreciation and amortization | (213,362) | (143,469) |
| Property and equipment, net | 138,243 | 204,936 |
| Machinery and Equipment [Member] | ||
| Property and equipment, gross | 234,706 | 231,506 |
| Computer Equipment [Member] | ||
| Property and equipment, gross | 12,448 | 12,448 |
| Furniture and Fixtures [Member] | ||
| Property and equipment, gross | 97,451 | 97,451 |
| Leasehold Improvements [Member] | ||
| Property and equipment, gross | $ 7,000 | $ 7,000 |
Related Party Transactions (Details Narrative) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| Related Party Transactions [Abstract] | ||
| Purchases from related party | $ 3,805,248 | $ 3,119,000 |
| Company owed former related party | 381,457 | 1,083,764 |
| Advanced deposit payments | 735,730 | |
| Due to shareholders | 146,534 | 134,086 |
| Short term loan | 3,297 | 3,297 |
| Notes payable to related parties | 65,222 | 68,471 |
| Unpaid compensation | $ 29,580 | $ 62,319 |
Notes Payable to Related Parties (Details Narrative) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| Interest expense on notes to related parties | $ 109,863 | $ 56,626 |
| Accrued interest | 146,534 | 68,471 |
| Related Parties [Member] | ||
| Interest expense on notes to related parties | $ 7,200 | $ 17,124 |
Notes Payable to Related Parties - Schedule of Notes Payable to Related Parties (Details) - USD ($) |
Dec. 31, 2017 |
Dec. 31, 2016 |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Note payable, net | $ 1,145,000 | $ 865,000 | |||||||||
| Less: current portion | (1,145,000) | (265,000) | |||||||||
| Non-current portion | 600,000 | ||||||||||
| Notes Payable to Officers/Shareholders [Member] | |||||||||||
| Note payable, net | [1] | 195,000 | 195,000 | ||||||||
| Notes Payable to Officers/Shareholders 1 [Member] | |||||||||||
| Note payable, net | [2] | 600,000 | 600,000 | ||||||||
| Notes Payable to Related Parties [Member] | |||||||||||
| Note payable, net | [3] | 300,000 | |||||||||
| Notes Payable to Related Parties 1 [Member] | |||||||||||
| Note payable, net | [4] | $ 50,000 | $ 70,000 | ||||||||
| |||||||||||
Notes Payable to Related Parties - Schedule of Notes Payable to Related Parties (Details) (Parenthetical) - USD ($) |
1 Months Ended | 12 Months Ended | |||
|---|---|---|---|---|---|
May 31, 2016 |
Dec. 31, 2017 |
Feb. 28, 2017 |
Dec. 31, 2016 |
Jul. 01, 2012 |
|
| Note payable | $ 1,145,000 | $ 865,000 | |||
| Interest rate on notes | 8.00% | ||||
| Note payable, current | 65,222 | 68,471 | |||
| Due to related parties | 381,457 | 1,083,764 | |||
| Officers and Shareholders [Member] | |||||
| Note payable | $ 195,000 | $ 300,000 | 195,000 | $ 200,000 | |
| Interest rate on notes | 14.00% | ||||
| Percentage of accrued interest | 10.00% | ||||
| Debt instruments maturity | Dec. 31, 2016 | ||||
| Note payable, current | $ 600,000 | 600,000 | |||
| Due to related parties | 50,000 | $ 70,000 | |||
| Officers [Member] | |||||
| Purchases from related party | $ 300,000 | ||||
| Percentage of accrued interest | 8.00% | ||||
| Debt instruments maturity | May 31, 2018 | ||||
| Shareholders [Member] | |||||
| Purchases from related party | $ 300,000 | ||||
| Percentage of accrued interest | 8.00% | ||||
| Debt instruments maturity | May 31, 2018 | ||||
| Officers and Shareholders 1 [Member] | |||||
| Note payable, current | $ 300,000 |
Loans Payable (Details Narrative) - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Debt repayment | $ 8,262 | $ 487,458 | |
| Due to related parties | 381,457 | 1,083,764 | |
| Loan Agreement to Purchase an Automobile [Member] | |||
| Loan principal amount | $ 44,093 | ||
| Line of credit expiration date | Nov. 30, 2021 | ||
| Debt repayment | $ 747 | ||
| Due to related parties | $ 25,957 | $ 34,220 | |
Loans Payable - Schedule of Loans Payable (Details) - USD ($) |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Less: current portion | $ (8,476) | $ (8,262) |
| Non-current portion | 17,481 | 25,958 |
| Automobile Loans [Member] | ||
| Loan Payable | $ 25,957 | $ 34,220 |
Loans Payable - Schedule of Principal Payments Due on Long-Term Debt (Details) |
Dec. 31, 2017
USD ($)
|
|---|---|
| Debt Disclosure [Abstract] | |
| 2018 | $ 8,476 |
| 2019 | 7,542 |
| Thereafter | 9,939 |
| Total | $ 25,957 |
Convertible Note Payable (Details Narrative) |
12 Months Ended | |||
|---|---|---|---|---|
|
Nov. 08, 2017
USD ($)
Integer
$ / shares
shares
|
Dec. 31, 2017
USD ($)
|
Oct. 31, 2017
$ / shares
shares
|
Jul. 01, 2012 |
|
| Interest rate | 8.00% | |||
| Debt instrument description | The Fixed Conversion Price, or (ii) a 20% discount to the lowest daily VWAP of the Common Stock during the 10 trading days prior to the payment date (or any combination of cash and stock). The Company will not be required to make a monthly installment payment if the 10-day lowest VWAP is at or above 125% of the then effective Conversion Price. YPL will have the option to defer any monthly installment payment to the maturity date at its sole discretion. The stock component of each monthly installment payment will be limited to 300% of the average daily dollar traded value over the previous 10 trading days. The Company may redeem in cash amounts owed under the Note prior to the maturity date by providing YPL with 10 business days advance note provided that the common stock is trading below the conversion price at the time of the redemption note. The Company shall pay the Redemption Premium equal to the percentage of the principal amount being redeemed as follows: 10% for first 180 days following the closing, 15% for day 181 to 360 following the closing; and 20% for day 361 to the maturity date. | |||
| Warrants to purchase number of shares | shares | 1,936 | |||
| Warrants price per shares | $ / shares | $ 1.25 | |||
| Derivative fair value of derivative | $ 902,358 | |||
| Amortization of debt discount | 194,444 | |||
| Un amortization of debt discount | 1,555,556 | |||
| In Case of Default [Member] | ||||
| Interest rate | 15.00% | |||
| Yorkville Advisors Global LP [Member] | ||||
| Secured convertible debenture face amount | $ 1,750,000 | $ 1,750,000 | ||
| Interest rate | 5.00% | |||
| Debt instrument duration period | 18 months | |||
| Conversion price per share | $ / shares | $ 1.00 | |||
| Debt instrument description | The Note Conversion Price is convertible into common stock of the Company at $1.00 per share (the “Conversion Price”). The Conversion Price may be adjusted by YPL on the earlier of (a) the 90-day anniversary of the closing with effectiveness of a registration statement or (b) the 180-day anniversary of the closing to a 20% discount to the lowest daily Volume Weighted Average Price (VWAP) over the prior 10 trading days, if lower than $1.00 per share (“Ownership Cap”). Subject to the Ownership Cap, the Note will automatically convert if the Company’s stock has traded 250% above the Conversion Price for a period of 20 consecutive trading days provided that the shares can be sold pursuant to an effective registration statement or Rule 144 without any limitations, and the Company’s common stock has an average daily trading value of $350,000 per day for a period of 20 consecutive trading days. | |||
| Debt instrument consecutive trading days | Integer | 10 | |||
| Conversion percentage | 250.00% | |||
| Average daily trading value | $ 350,000 | |||
| Warrant term | 5 years | |||
| Warrants to purchase number of shares | shares | 1,137,500 | |||
| Warrants price per shares | $ / shares | $ 1.10 | |||
| Aggregate funding fee | 5.00% | |||
| Due diligence and structuring fee | $ 15,000 | |||
| Amount netted after fee and expenses | 1,647,500 | |||
| Interest expenses | 102,500 | |||
| Derivative fair value of derivative | 3,767,724 | |||
| Amortization of debt discount | 2,017,724 | |||
| Yorkville Advisors Global LP [Member] | Maximum [Member] | ||||
| Fair value of derivative liability | 1,750,000 | |||
| Yorkville Advisors Global LP [Member] | Installments [Member] | September 1 2018 [Member] | ||||
| Repayment of debt | $ 250,000 |
Convertible Note Payable - Schedule of Convertible Notes Payable (Details) - USD ($) |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Debt Disclosure [Abstract] | ||
| Convertible note payable, gross | $ 1,750,000 | |
| Less debt discount | (1,555,556) | |
| Convertible note payable, net | $ 194,444 |
Convertible Note Payable - Schedule of Principal Payment of Long-term Debt (Details) |
Dec. 31, 2017
USD ($)
|
|---|---|
| Debt Disclosure [Abstract] | |
| 2018 | $ 1,250,000 |
| 2019 | 500,000 |
| Total | $ 1,750,000 |
Series-A Convertible Preferred Stock and Warrants - Schedule of Series-A Convertible Preferred Shares Subscription Agreement (Details) - USD ($) |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Discount relating to fair value of conversion feature and warrants granted upon issuance | $ 351,000 | |
| Preferred stock | ||
| 5% Series-A Convertible Preferred Shares [Member] | ||
| 5% Series-A preferred stock, $0.0001 par value, 351,000 shares issued and outstanding | 351,000 | |
| Discount relating to fair value of conversion feature and warrants granted upon issuance | (351,000) | |
| Preferred stock |
Series-A Convertible Preferred Stock and Warrants - Schedule of Series-A Convertible Preferred Shares Subscription Agreement (Details) (Parenthetical) - $ / shares |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Preferred stock, shares issued | ||
| Preferred stock, shares outstanding | ||
| 5% Series-A Convertible Preferred Shares [Member] | ||
| Preferred stock, par value | $ 0.0001 | |
| Preferred stock, shares issued | 351,000 | |
| Preferred stock, shares outstanding | 351,000 |
Derivative Liability (Details Narrative) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| Derivative Instruments and Hedging Activities Disclosure [Abstract] | ||
| Change in fair value of derivative liability | $ (2,545,918) | |
| Derivative liabilities | $ 4,869,082 | |
Shareholders' Equity - Schedule of Estimated Fair Value of Weighted Average Assumption (Details) |
12 Months Ended |
|---|---|
Dec. 31, 2017 | |
| Equity [Abstract] | |
| Risk free rate of return | 1.92% |
| Option lives in years | 6 years |
| Annual volatility of stock price | 198.03% |
| Dividend yield | 0.00% |
Shareholders' Equity - Schedule of Options Outstanding and Exercisable (Details) - $ / shares |
12 Months Ended | |
|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| Equity [Abstract] | ||
| Outstanding Weighted Average Exercise Price | $ 0.60 | |
| Outstanding Shares | 3,000,000 | |
| Outstanding Life (Years) | 5 years | |
| Options Outstanding Exercise Price Per Share | $ 0.60 | |
| Exercisable Shares | ||
| Exercisable Weighted Average Exercise Price |
Commitments - Minimum Annual Rental Commitments Under Non-cancelable Leases (Details) |
Dec. 31, 2017
USD ($)
|
|---|---|
| Commitments and Contingencies Disclosure [Abstract] | |
| 2018 | $ 243,000 |
| 2019 | 180,000 |
| 2020 | 180,000 |
| 2021 | 180,000 |
| 2022 and thereafter | 360,000 |
| Total | $ 1,143,000 |
Income Taxes (Details Narrative) |
12 Months Ended |
|---|---|
|
Dec. 31, 2017
USD ($)
| |
| Income Tax Disclosure [Abstract] | |
| Federal operating loss carryforwards | $ 3,400,000 |
| State operating loss carryforwards | $ 3,400,000 |
| Operating loss carryforwards expiration date | 2035 |
Income Taxes - Schedule of Federal Statutory Income Tax Rate to Income Loss Before Income Taxes (Details) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| Income Tax Disclosure [Abstract] | ||
| Income tax benefit at federal statutory rate | (34.00%) | (34.00%) |
| State income tax benefit, net of federal benefit | (6.00%) | (6.00%) |
| Change in valuation allowance | 40.00% | 40.00% |
| Income taxes at effective tax rate | 0.00% | 0.00% |
Income Taxes - Schedule of Components of Deferred Taxes (Details) - USD ($) |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Income Tax Disclosure [Abstract] | ||
| Inventory reserves | $ 11,000 | $ 41,000 |
| Allowance for doubtful accounts and returns | 38,000 | 143,000 |
| Impairment of note receivable | 40,000 | |
| Other accrued expenses | 91,000 | |
| Depreciation | (70,000) | (55,000) |
| Net operating loss carryforwards | 930,000 | 295,000 |
| Less: Valuation allowance | (909,000) | (555,000) |
| Net deferred tax assets |