ITEM 1. BUSINESS
Invisa, Inc. is a Nevada corporation that manufactures and sells a line of SmartGate® brand safety sensors used in or with parking gates to protect life and property. Parking gates are motorized barriers used to control the flow of vehicular traffic in areas such as parking facilities, vehicle storage facilities, tollbooths, and metered entry points for highways. Our SmartGate sensors are based on presence sensing technology that we call InvisaShield. While we believe that our InvisaShield technology may have additional applications for safety products, to date substantially all of our revenue has been derived from the sale of SmartGate sensors used in parking gates.
We acquired the InvisaShield™ presence-sensing technology in 2004. Presence sensing is the repeatable detection of people and conductive objects within a certain perimeter of the sensor. InvisaShield technology detects objects at a distance of typically less than one meter. Invisa currently owns the patent and patent applications, as well as the sole rights to the InvisaShield technology in all markets worldwide.
Our offices are located at 1800 2nd Street, Suite 965, Sarasota, FL 34236, telephone (941) 870-3950.
Our SmartGate™ Product
Many products use presence-sensing technology; however, we believe that our InvisaShield technology is particularly suited to safety sensors for use in the parking gate market. In 2012 and 2013, all of our revenues were derived from the sale of SmartGate safety sensors used with powered parking gates. These gates typically have a power-operated barrier arm made of metal, wood or PVC. This arm moves vertically between an open and a closed position. Our device places an invisible presence-sensing field around the potentially dangerous barrier arm to detect people and vehicles in its path. Our device signals the powered gate to trigger a predetermined response, such as stopping and reversing the barrier arm. The retail price for our SmartGate™ sensors allow us to realize an acceptable gross profit margin, however, we continue to look for ways to decrease our cost of goods and increase our distribution to improve our profit margins.
Marketing and Sales
We sell our safety products to manufacturers, dealers and end-users. As part of our current sales efforts, we have attended trade shows and have continued our relationships with our customer list which comprises manufacturers, dealers and end users. We also receive unsolicited orders either by telephone, fax or internet. In addition, we have sought relationships with architectural engineering firms and municipalities that are implementing projects requiring parking barrier gates, such as municipal parking lots and airport reconstruction. Although we do not maintain a full-time sales force, we do engage outside sales consultants.
In 2013, Electro Automation, Ltd. was our largest customer comprising 27% of our sales. In 2012, Ultimate Systems Solutions, LLC was our largest customer comprising 24% of our sales.
Technology
InvisaShield technology uses electronic circuitry that emits, controls, and monitors changes in an invisible energy field. The field is based, in part, upon low energy radio waves oscillating within a controlled frequency range. The field that is monitored can be varied in sensitivity from a distance of approximately one meter to a centimeter or less, depending upon the selected application. Circuitry constantly checks the field to test for the presence of people, vehicles or other conductive objects (objects that conduct electricity) that would disturb the monitored field.
We believe that the InvisaShield technology is a novel and proprietary way to provide presence sensing. At the core of the technology is the ability to project a field or zone capable of detecting most conductive objects that enter the field. The field is projected from a metallic substance, referred to as an antenna, which may consist of wire, self-adhesive metallic tape or other metallic items. The technology allows flexibility in designing and locating the antenna. This may offer unique opportunities to place presence-sensing fields where they can be used more efficiently or effectively. This adaptability may permit the InvisaShield technology to perform non-contact presence-sensing tasks not currently possible with competing technologies and/or it may perform presence-sensing tasks similar to those performed by competing technologies, but in a more efficient, effective, and reliable manner.
InvisaShield technology does not depend upon lenses, beams or reflectors, which may require replacement, cleaning and aligning. Its operating environment, including electronic noise, mechanical noise, temperature, dust, frost, snow, ice or other operating conditions, generally does not disrupt the non-intrusive, non-contact presence-sensing capability of our technology.
We have, in the past, sought to develop additional products based on our InvisaShield technology. We have developed pre-production prototypes of safety products for various power doors such as slide-gates, commercial overhead doors, powered industrial doors (which are used in commercial, manufacturing and industrial facilities) and residential garage doors and pre-production prototypes of security products various applications in museums, retail and industrial. We have indefinitely delayed such development projects.
Competing Technologies - The presence-sensing business is highly competitive, consisting of numerous manufacturers of presence-sensing products based on various technologies, including infrared, ultrasonic, laser, microwave, and similar technologies. For the most part, these technologies have been in use for a number of years and, in many cases, may not be proprietary. Our competitors provide a variety of presence-sensing and other safety and security alternatives such as motion detectors, CCTV-based movement detection systems, infrared and visible light beam detectors, light curtains, on/off switching mats and pads, tape switches, contact edges, as well as others.
In the safety and/or security sectors we compete with many companies, including MillerEdge, Stanley, Optex, Napco, Pelco, and DMP, along with other large and well-established firms such as Honeywell, Tyco, General Electric, Bosch, and Siemens. Many of our competitors have substantially greater development, technical, marketing, sales and financial capabilities than we have. As a result of these factors, competitors and potential competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements and/or to devote greater resources to the development, promotion and sale of their products and services than we can.
Trademarks - We have a trademark on the trade name “SmartGate” which we use in our safety products category. We have filed trademark applications for the following: “Invisa”, “InvisaShield” and the tagline “Safe. Secure. No Question.” We believe that our patent and trademark position will be useful in our efforts to protect our perceived competitive advantages.
Materials and Manufacturing
All components and parts are modified or manufactured to our specifications by third parties or are otherwise generally available as off-the-shelf materials. Our products have a number of components including proprietary electronic circuitry manufactured to our specifications by third party manufacturers and a standard power supply available in the marketplace. The antenna is standard wire, tape or other metallic materials, which can generally be purchased in bulk. Whenever possible, we use fixed price manufacturing for our electronic circuitry, placing the responsibility for component supply on the manufacturer. We believe that there are multiple manufacturers and suppliers for each component and that adequate components and materials will be available to support our business plan. We perform some final assembly and predetermined quality control procedures in our facility using contractors, including contract piece work in connection with the assembly when needed. All shipping is done directly from our facility.
Government Regulation
The Federal Communications Commission regulates the use of radio frequency or “RF”, such as that used by our safety products. We currently have FCC Certification for our product. We will endeavor to continue satisfying all requirements of the FCC to maintain our FCC Certification.
On March 1, 2001, Underwriters Laboratory (UL) implemented a new safety standard for the powered gate, door and window industry. This rule, UL-325, while not a governmental regulation, is considered an indication of reasonable safety for powered gates, doors and windows, and is a requirement for UL certification for certain powered gate, door and window operators. Gate and operator manufacturers that rely upon UL certification or consider UL certification important for components most likely will require that our products be UL certified before incorporating our products as original equipment. We do not have a UL certification and the absence of UL certification for our products may represent a sales or marketing barrier in certain market categories and to certain customers.
Our products have also earned the Conformité Européenne marking (also known as CE mark) which is a mandatory conformity mark placed on many products used in the single market in the European Economic Area. The CE mark certifies that a product has met EU consumer safety, health or environmental requirements. This marking is mandatory for sales of products in approximately 27 European countries but is usually preferred by customers whether or not required in their respective countries.
In addition to gaining the CE mark, our products are now RoHS compliant and have been since late 2008. The directive on the restriction of the use of certain hazardous substances in electrical and electronic equipment 2002/95/EC; commonly referred to as the Restriction of Hazardous Substances Directive or RoHS) was adopted in February 2003 by the European Union and took effect in July 2006. This directive restricts the use of six hazardous materials (lead, mercury, cadmium, hexavalent chromium, polybrominated biphenyls and polybrominated diphenyl ether), in the manufacture of various types of electronic and electrical equipment. By complying with the RoHS directive, our customers are assured that our products are free of these hazardous substances.
Warranty
Our safety products are sold with a 90-day limited warranty against manufactures parts and defects. We have had no significant claims expensed under the warranty in 2012 or 2013.
Employees
We have no full time employees. Our Chief Executive Officer, who is also our Chief Financial Officer, serves in both capacities on a part-time consulting basis. We support our operations by using consultants and third party contract piece workers as required.
Research and Development
We are not conducting any research and development with respect to our technology at this time. Therefore, during the years ended December 31, 2012 and 2013 we incurred no research and development expenses.
ITEM 1A.
ITEM 1A. RISK FACTORS
You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our common stock. If any of these risks or uncertainties occurs, our business, financial condition or operating results could be materially harmed. In that case, the trading price of our common stock could decline and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we may face. We have historically incurred losses and losses are expected to continue in the future, which means that we may not be able to continue operations unless we obtain additional funding.
We continue to incur losses.
In the year ended December 31, 2013, we sustained a net loss of $357,855. Absent a dramatic increase in our market share or demand for our products, future losses are expected to continue. Accordingly, we will experience significant liquidity and cash flow problems if we are not successful in increasing our sales and lowering costs. No assurances can be given that we will be successful in reaching or maintaining profitable operations. Our ability to generate revenue and achieve profitability depends upon our ability to manufacture and sell our products in sufficient volume to cover our fixed and variable costs of operations.
We will need to continue financing our operations through third party sources or we may be unable to fund our operations, promote our products or develop our technology.
In recent years, our operations have relied almost entirely on external financing to fund our operations and in 2013 sales revenues satisfied approximately only 17% of our costs and expenses. During 2012 and 2013, we funded our operations with funds borrowed under short-term and long-term notes which, for the most part, were secured with the Company’s assets. We anticipate, based on our current proposed plans and assumptions relating to our operations, that the line of credit established by our Senior Lender will provide adequate funding to continue to operate our business through December 31, 2014. Unless our sales increase significantly, we will need to raise additional capital to fund our operating expenses beyond December 31, 2014. We cannot assure you that financing, whether from external sources or related parties, will be available if needed or on favorable terms beyond December 31, 2014. If additional financing is not available when required or is not available on acceptable terms, we may be unable to support our secured debt, fund our operations and planned growth, take advantage of business opportunities or respond to competitive market pressures, any of which could have a material adverse effect on our long-term business plan.
Our financing requirements could result in dilution to existing stockholders.
Additional financings could dilute the ownership interests of our stockholders. Further, we may not be able to secure such additional financing on terms acceptable to us, if at all. We have the authority to issue additional shares of common stock, as well as additional classes or series of ownership interests or debt obligations that may be convertible into any one or more classes or series of ownership interests. We are authorized to issue 95,000,000 shares of common stock and 5,000,000 shares of preferred stock. Such securities may be issued without the approval or other consent of our stockholders.
Our revenues have been declining.
We anticipate that we will encounter difficulties and risks relating to our sales revenues, which include, but are not limited to, the introduction of new products, the ability to hire full time personnel, access to required capital, management issues, increasing our manufacturing capacity, and other similar aspects of operations which are important to our business operations.
We will be required to compete with larger, more established, and better financed companies.
There are a number of well-established companies that are well known in the security and life-safety markets. Such companies include Honeywell, Tyco, General Electric, Bosch, Siemens and others. Accordingly, we are subject to the difficult challenge of introducing and commercializing our new technology and products in a strong competitive environment. Additionally, our technology and products based thereon will have to compete with other technologies such as passive infrared and various types of motion detection that are well known and well accepted.
We continue to experience uncertainty and risks related to market acceptance.
We continue our efforts to expand the market for our safety sensor product, to gain broader market acceptance and to demonstrate competitive advantages. Our success is dependent, to a large degree, upon our ability to successfully market our technology and its perceived competitive advantages. Accordingly, our prospects must be considered in light of the risks, expenses and difficulties frequently encountered in connection with the operation of a small business in a highly competitive industry, characterized by frequent new product introductions. We anticipate that we will continue to be disadvantaged by our limited revenues as they will inhibit our ability to expand our marketing and sales efforts in the domestic and international marketplace.
The limits of our of product liability insurance coverage may affect our business.
We may be exposed to potential product liability claims by consumers. Although we maintain product liability insurance, there can be no assurance that such insurance will be sufficient to cover all possible liabilities to which we may be exposed. Any product liability claim, even one that was not in excess of our insurance coverage or one that is meritless and/or unsuccessful, could adversely affect our cash available for other purposes, such as research and development. In addition, the existence of a product liability claim could affect the market price of our common stock. Also, certain vendors may require minimum product liability insurance coverage as a condition precedent to purchasing or accepting products for retail distribution. Product liability insurance coverage includes various deductibles, limitations and exclusions from coverage, and in any event might not fully cover any potential claims. Failure to satisfy such insurance requirements could impede our ability or our distributors or licensees ability to achieve broad retail distribution of our proposed products, which could have a material adverse effect on us.
We may not be able to effectively protect our intellectual property rights, the foundation of our business, which could harm our business by making it easier for our competitors to duplicate our services.
We regard certain aspects of our products, processes, services and technology as proprietary. We have taken steps to protect them with patents, copyrights, trademarks, restrictions on disclosure and other methods. Despite these precautions, we cannot be certain that third parties will not infringe or misappropriate our proprietary rights or that third parties will not independently develop similar products, services and technology. Any infringement, misappropriation or independent development could cause us to cease operations.
We have issued patents and have filed patent applications with respect to various aspects of our technology. The pending patent applications may not be issued to us, and if issued, may not protect our intellectual property from competition, which could seek to design around or invalidate these patents. Our failure to adequately protect our proprietary rights in our products, services and technology could harm our business by making it easier for our competitors to duplicate our services. We may have to resort to litigation to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others, or defend ourselves from claims of infringement, invalidity or unenforceability. Litigation may be expensive and divert resources even if we win. This could adversely affect our business, financial condition and operating results such that it could cause us to reduce or cease operations.
Other parties may assert that our technology infringes on their Intellectual property rights, which could divert management time and resources and possibly force our Company to redesign our technology.
Technology-based companies, such as ours, have the potential to be involved in litigation related to allegations of patent infringement. Although we have no knowledge of any such claims, from time to time, third parties may assert patent, copyright and other intellectual property rights to technologies that are important to us. While there currently are no outstanding infringement claims pending by or against us, we cannot assure you that third parties will not assert infringement claims against us in the future, that assertion by such parties will not result in costly litigation, or that they will not prevail in any such litigation. In addition, we cannot assure you that we will be able to license any valid and infringed patents from third parties on commercially reasonable terms or, alternatively, be able to redesign products on a cost-effective basis to avoid infringement. Any infringement claim or other litigation against or by us could have a material adverse effect on us and could cause us to reduce or cease operations.
We may not be able to keep up with rapid technological changes, which could render our products less competitive or obsolete.
Changes in technology, changes in customer requirements and preferences, introduction of products and services embodying new or different technologies and the emergence of new industry standards and practices could render our existing technology and products less competitive or obsolete. Our future success will depend on our ability to enhance and improve the responsiveness, functionality, accessibility and features of our technology and products. We expect that our marketplace will require extensive technological upgrades and enhancements to accommodate many of the new products and services that we anticipate will be added to our marketplace. We cannot assure you that we will be able to expand and upgrade our technology and systems, or successfully integrate new technologies or systems we develop in the future, to accommodate such increases in a timely manner.
We may not be able to increase sales or if we succeed in increasing sales and revenue, we may not be able to effectively manage the growth necessary to execute our business plan, which could adversely affect the quality of our operations and our costs.
In order to successfully execute our business plan, we must significantly increase our sales and revenue. Additionally, we will need to increase the number of strategic partners, manufacturers, dealers, distributors and customers that use our products. Lack of growth in sales and revenue will require that we continue to access financing which will subject us to the risks attendant thereto. On the other hand, if we succeed in increasing sales and revenue, the resulting growth will place significant strain on our systems and resources. In the event of growth, we may not be able to maintain the quality of our operations, control our costs, continue complying with all applicable regulations and expand our internal management, technical information and accounting systems in order to support our desired growth. We cannot be sure that we will manage our growth effectively, and our failure to do so could cause us to reduce or cease operations.
We are thinly staffed.
We have no full time employees. Our Chief Financial Officer is also serving as our Chief Executive Officer and is available to the Company on a part time consulting basis. We also engage consultants and contract piece workers as necessary. Unless additional employees are hired, the limited size of our staff could restrict the level and/or nature of our business operations.
We have promissory notes payable that are secured by all of our assets and default under these notes could result in the loss of our assets.
In order to fund our operations, we have entered into promissory notes payable that are secured by all of our assets. We currently do not have the available cash or other financing resources to pay the interest or principal there under. Default under these promissory notes could result in the loss of all of our assets and business opportunity. The Senior Lender has liens on all of our assets.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
In February, 2012, we entered into a new lease agreement for our operations to rent approximately 2,000 square feet of office space located at 1800 2nd Street in Sarasota, Florida. Our monthly base rental is $642. We rent the facilities pursuant to a lease which expires on February 28, 2014.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our Common Stock trades on the NASD OTC BB under the symbol INSA.OB. The following table sets forth the range of high and low bids to purchase our Common Stock during the last two fiscal years. Such prices represent quotations between dealers, without dealer markup, markdown, or commissions, and may not represent actual transactions.
As of December 31, 2013 there were 396 stockholders of record of Invisa Common Stock.
On January 14, 2014, the closing bid and closing ask prices for shares of our Common Stock in the over-the-counter market, as reported by NASD.OTC.BB was $0.72 per share.
We believe that there are presently approximately eight (8) market makers for our Common Stock. When stock is traded in the public market, characteristics of depth, liquidity and orderliness of the market may depend upon the existence of market makers as well as the presence of willing buyers and sellers. We do not know if these or other market makers will continue to make a market in our Common Stock. Further, the trading volume in our Common Stock has historically been both sporadic and light.
Currently, the payment by the Company of dividends on its capital stock rests within the sole discretion of its Board of Directors. The payment of dividends will depend upon our earnings, our capital requirements and our financial condition, as well as other relevant factors. The Company has not been required to or declared any cash dividends since its inception, and has no present intention of paying any cash dividends on its capital stock in the foreseeable future. Our policy with regard to the Series B Preferred Stock was to base any dividend paid on a rate that varies with the prime interest rate. The dividend was payable in either stock or cash at the option of the Company. In January 2010, the Company restated its Series B Stock to eliminate any further accrual of dividends and provide that the Company may satisfy its obligation with respect to the accrued but unpaid dividends at that date either (a) in cash, (b) by issuance of additional shares of its Series B Stock or (c) by issuance of Common Stock of the Company.
Transfer Agent
The Transfer Agent for the Common Stock of the Company is Continental Stock Transfer and Trust Company 17 Battery Place, New York, NY 10004.
Recent Sales of Unregistered Securities
In February 2013, 155,000 common shares were granted to a consultant for services. These shares were valued at $0.22 per share (the market price on the date of the grant) and the Company charged $34,100 to operations.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this filing. This discussion and analysis contains forward-looking statements including information about possible or assumed results of our financial conditions, operations, plans, objectives and performance that involve risk, uncertainties and assumptions. The actual results may differ materially from those anticipated in such forward-looking statements. For example, when we indicate that we expect to increase our product sales and potentially establish additional license relationships, these are forward-looking statements. The words expect, anticipate, estimate or similar expressions are also used to indicate forward-looking statements. The cautionary statements made herein should be read as being applicable to all related forward-looking statements in this Annual Report on Form 10-K.
Background of our Company
We manufacture and sell sensors using the Company’s patented InvisaShield™ presence-sensing technology in the safety market. We market our line of safety sensors under the name of SmartGate® brand safety sensors used in or with parking barrier gates to protect life and property. All of our sales revenues are derived from the sale of our SmartGate safety sensors.
We financed our operations in 2012 and 2013 through revenues derived from the sale of our SmartGate® brand safety sensors and short-term and long-term debt financing. We are focusing our efforts on increasing our sales of our products and reducing operating costs, where possible. In December 2012 the company’s Senior Lender agreed to extend the maturity date of the Senior Secured Promissory Notes and the related accrued interest until March 31, 2015, and put in place a line of credit which we believe is sufficient to finance our operations through December 31, 2014. (See Note G - to the accompanying financial statements.)
Year Ended December 31, 2012 Compared to the Year Ended December 31, 2013
Net Sales - During the years ended December 31, 2012 and 2013, product sales totaled $37,956 and $26,819 respectively. We had a gross profit of $17,222 for the year ended December 31, 2012 and gross profit of $15,508 for the year ended December 31, 2013. Gross margin was 45 percent during 2012 and 58 percent during 2013. We attributed the decrease in our sales in 2013 to reductions in sales to significant customers.
Selling, General and Administrative Expenses - During the years 2012 and 2013, selling, general and administrative expenses totaled $237,185 and $307,617, respectively. The increase is attributable principally to Directors and Officers stock awards.
Interest (expense) and other, Net - The interest expense during 2012 of $67,550 and during 2013 of $111,090 relates primarily to financing costs and interest due to certain stockholders under lines of credit to the Company. During 2012 and 2013, the Company wrote off certain debts resulting in the extinguishment gain of $30,147 and $45,044, respectively. (See Note H to the accompanying Financial Statements.)
Net (Loss) and Net (Loss) Per Share applicable to Common Stockholders - The Company’s net income (loss) applicable to Common Stockholders and net income (loss) per share applicable to Common Stockholders increased from a net loss of $257,366 and $(0.02) in 2012 to a net loss of $357,855 and ($0.03) in 2013.
Liquidity and Capital Resources
At December 31, 2013, we had cash and cash equivalents totaling $1,253.
We obtained funding of $170,353, in the form of short-term and long-term debt financing in 2012, and an additional $125,019 in 2013, which together with our cash from sales supported our operations. We have extended the maturity of our short-term debt to March 31, 2015, and have in place a line of credit which we believe is sufficient to finance our operations through December 31, 2014. (See Note G - to accompanying financial statements). In addition, we will explore other business opportunities such as licensing and business combinations as they may arise.
The Company has credit facilities with its Senior Lender totaling $1,235,428 under which $1,224,060 (including accrued interest) has been borrowed at December 31, 2013. The Senior Lender has also established a revolving line of credit to finance operations of the Company totaling $200,000 at December 31, 2013 which is available to the Company. Terms of the Lines of Credit include a due date of March 31, 2015 with interest accruing at ten percent per annum and all of the Company’s assets being pledged as security. (See Note G - to accompanying financial statements.)
The Company had negative working capital at December 31, 2013, totaling $14,209 including $1,253 in cash and cash equivalents. To finance planned operations through at least the next 12 months, we will rely upon our sales revenues and the $200,000 line of credit established by our Senior Lender. We believe that the line of credit facility and our sales revenue will be sufficient to finance our operations through December 31, 2014. However, we will continue to explore other avenues of financing, such as licensing of our product and/or our technology and potential strategic or business relationships or combinations, and to a lesser degree private equity and debt financing.
While we are confident that the current funding and sales revenue available to us will be sufficient to finance our operations through December 31, 2014, it is important to note that additional funding, if needed, may not be available when required or it may not be available on acceptable terms. Should we require additional funding, we may need to reduce or refocus our operations or obtain funds through arrangements that would be less attractive to us or which may require us to relinquish rights to certain or potential markets, either of which could have a material adverse effect on our business, financial condition and results of operations.
Recent Accounting Pronouncements
The Company does not believe that recently issued accounting pronouncements will have a material impact on its financial statements.
Critical Accounting Policies and Estimates
Use of Estimates
In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expense during the reporting period. Actual results could differ from those estimates.
Revenue recognition
In general, the Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.
Product sales under fixed price arrangements are recognized as revenue upon shipment of product (when title transfers to the purchaser) and collectability is assured. Other operating revenues relate to services and are recorded when services are complete.
Equity-Based Compensation
The Company accounts for stock based compensation in accordance with ASC 718 Stock Compensation. This Statement requires that the cost resulting from all share-based transactions be recorded in the financial statements. The Statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement in accounting for share-based payment transactions with employees. The Statement also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from non-employees in share-based payment transactions.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of the Company and the accompanying notes thereto, and the Report of Independent Registered Certified Public Accounting Firm are included as part of this Form 10-K beginning on Page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Acting President, Chief Financial Officer, and Board of Directors, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2013 and concluded that our disclosure controls and procedures were effective as of December 31, 2013.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with United States generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework published in 1992. Based on this assessment, and on those criteria, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2013.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Controls over Financial Reporting
During the quarter ended December 31, 2013, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Company’s Directors are elected at the Annual Meeting of Stockholders and hold office until their successors are elected and qualified. The Company’s officers are appointed annually by the Board of Directors and serve at the pleasure of the Board. There are no family relationships between any of the officers, directors or significant employees of the Company.
The directors, executive officers, and significant employees of the Company at December 31, 2013 are as follows:
EDMUND C. KING has served as our Chief Financial Officer and Director since February 9, 2000. In 2007, Mr. King also began serving as our Chief Executive Officer. Until October 1, 1991, Mr. King was a partner in Ernst & Young, an international accounting and consulting firm. While at Ernst & Young, Mr. King was that firm’s Southern California senior healthcare partner and prior to that directed the Southern California healthcare practice for Arthur Young & Company, one of the predecessor firms of Ernst & Young. During his 30 years with Ernst & Young, Mr. King counseled clients in structuring acquisitions and divestitures; advised on the development of strategic plans; directed the preparation of feasibility studies; assisted with operational and financial restructuring; directed and supervised audits of client financial statements; and provided expert witness testimony and technical SEC consultation. Commencing in 1999, Mr. King became a financial consultant to SmartGate, L.C. that we acquired in February 2000. From January 1992, Mr. King has been a general partner of Trouver, an investment and financial consulting partnership. Mr. King is also a member of the Board of Directors of LTC Properties, Inc., an NYSE listed real estate investment trust. Mr. King is a graduate of Brigham Young University, having served on the National Advisory Council of that school’s Marriott School of Management, and has completed a Harvard University management course sponsored by Ernst & Young. Mr. King also has served as Chairman of the HFMA’s Long-Term Care Committee (Los Angeles Chapter) and is a past member of the National Association of Corporate Directors. He holds a CPA certificate (inactive) in the state of California.
Mr. King was nominated to serve our Board of Directors shortly after our Company was formed. As part of his experience in public accounting and, then, later as a financial advisor, Mr. King was involved in the issues of a newly formed public company and also in the raising of capital in various industries. The Board of Directors believed this background and experience would be a beneficial fit with the Company’s needs and would provide the company with an experienced individual to analyze the Company’s operations.
Ambassador GREGORY J. NEWELL has served as a Director of the Company since June 13, 2002. Ambassador Newell is an international business development strategist and former: U.S. Ambassador; U. S. Assistant Secretary of State; and White House Commissioned Officer, having served under four U.S. Presidents. From 1992 to the present, Ambassador Newell has served as President of International Commerce Development Corporation in Provo, Utah, an international business-consulting firm. From 1989 to 1991, Ambassador Newell served as President and International Development Strategist of Dow, Lohnes & Albertson International, a subsidiary of one of Washington, D.C.’s oldest and largest law firms. Ambassador Newell was U.S. Ambassador to Sweden from 1985 to 1989. Prior to that he was U.S. Assistant Secretary of State for International Organizational Affairs serving as the senior U.S. government official responsible for the formulation and execution of U.S. multilateral foreign policy in 96 international organizations including the United Nations, where he served as senior advisor to the 37th, 38th, 39th and 40th United Nations General Assemblies. He served as Director of Presidential Appointments and Scheduling and Special Assistant to President Ronald Reagan and Staff Assistant to President Gerald R. Ford. Ambassador Newell has also served on the boards of the Landmark Legal Foundation, Sutherland Institute and the Swedish-American Chamber of Commerce.
Ambassador Newell was nominated to serve our Board of Directors at a time when the Company was attempting to expand its market presence. His background includes an emphasis on marketing activities in government as well as private industry. As a result, he provides not only knowledge of product and service marketing but also brings business insight into the governmental regulatory environment.
JOHN E. SCATES, a garage door industry engineer and consultant, was appointed to the Company’s Board of Directors on June 27, 2002. From June 1997 to the present, Mr. Scates has been President and Owner of Scates, Inc., a product design and failure analysis consultancy in Carrollton, Texas. From May 1993 to May 1997, Mr. Scates served as Manager of Research and Development for Windsor Door, Little Rock, Arkansas. From February 1985 to May 1993, Mr. Scates served as Manager of Structures at Overhead Door R & D engineering, Dallas, Texas. Mr. Scates earned a BS Degree in Mechanical Engineering, Summa Cum Laude from Texas A & M University in 1979. Mr. Scates is licensed as a Professional Engineer in Texas, Florida and North Carolina.
Mr. Scates was nominated to serve on our Board of Directors at such time when we were seeking to expand our product offerings. He is knowledgeable of the powered gate industry and brings experience in research and manufacturing.
Significant Employees
At December 31, 2013 we had no full time employees. Our Chief Financial Officer, who also serves as our Chief Executive Officer, is employed on a part-time consulting basis. We support operations by using consultants and contract piece workers as required.
Compensation Committee and Compensation of Directors
Messrs. Newell and Scates serve on the Compensation Committee, which determines the compensation amounts to be paid to our directors, officers and employees.
Report of the Audit Committee
The Audit Committee is composed of two independent directors and operates under a written charter adopted by the Board of Directors. A copy of the Audit Committee Charter (as amended) is filed herewith as exhibit 10.58. As described above, the Audit Committee is responsible for appointing and replacing our independent accountants; reviewing the results and scope of the independent accountants’ audit and the services provided by the independent accountants; reviewing compliance with legal and regulatory requirements; evaluating our audit and internal control functions; and ensuring the integrity of our financial statements. In fulfilling its oversight responsibilities, the Audit Committee reviewed the audited financial statements in the Annual Report with management, including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements.
The Audit Committee reviewed with the independent auditors, who are responsible for expressing an opinion on the conformity of those audited financial statements with generally accepted accounting principles, their judgments as to the quality, not just the acceptability, of our accounting principles, and such other matters as are required to be discussed with the Committee in accordance with the standards of the Public Company Accounting Oversight Board (United States). In addition, the Audit Committee has discussed with the independent auditors the auditors’ independence from management and the Company, including the matters in the written disclosures required by the Independence Standards Board and considered compatibility of non-audit services with the auditors’ independence.
The Audit Committee discussed with our independent auditors the overall scope and plans for their audit. The Committee meets with the independent auditors, with and without management present, to discuss the results of their examination, and the overall quality of our financial reporting. The Audit Committee held four telephonic meetings during 2013.
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to our Board of Directors, and the Board approved, that the audited financial statements be included in our Annual Report on Form 10-K for the 2013 fiscal year for filing with the Securities and Exchange Commission. The Audit Committee and the Board of Directors have also recommended the selection of our independent auditors.
THE AUDIT COMMITTEE
Gregory J. Newell, Chairman
John E. Scates
Board Meetings and Independence
During the year ended December 31, 2013, the Board of Directors of the Company held seven telephonic meetings. Each director attended at least 75% of the aggregate of (1) the total number of meetings of the Board (held during the period for which he has been a director) and (2) the total number of meetings held by all committees of the Board on which he served (during the periods that he served).
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors and executive officers to send reports of their ownership of the equity securities of the Company and of changes in such ownership to the SEC. SEC regulations also require the Company to identify in this Annual Report on Form 10-K any person subject to this requirement who failed to file any such report on a timely basis, including the following: Edmund C. King, John E. Scates and Gregory J Newell.
Code of Ethics
Our board of directors has adopted a Code of Business Conduct and Ethics and Compliance Program which is applicable to Invisa, Inc. and to all our directors, officers and employees, including Invisa, Inc.’s principal executive officer and principal financial officer, principal accounting officer or comptroller, or other persons performing similar functions.
A copy of the Company’s Code of Ethics may be obtained free of charge by making the request to the Company in writing.
Director Compensation
We do not have a formal plan for compensating our directors. During the 2012 fiscal year each of our Directors were granted 35,000 shares of the Company’s common stock for their services in 2012. Mr. King received no salary and no other cash compensation for fiscal years 2012 and 2013. (See Note J to the accompanying Financial Statements.)
Our bylaws provide for us to indemnify our directors and officers to the extent permitted by Nevada law, with respect to actions taken by them on our behalf. We maintain a policy of directors’ and officers’ liability insurance for this purpose.
Compensation Committee Interlocks and Insider Participation
We have no interlocking director relationships. None of our executive officers is a member of the Compensation Committee of any company in which any director or executive officer is a member of our board of directors.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion & Analysis
Overview
This Compensation Discussion and Analysis is intended to describe the material factors underlying the compensation policies and decisions of the Company with regard to compensation paid to our executive officers in 2012 and 2013. The Compensation Committee oversees the Company’s executive compensation in accordance with its Charter and recommends to the Board of Directors compensation for the named executive officers. The Compensation Committee receives input and recommendations when requested from our executive officers.
Mr. Edmund King, our CEO and CFO, does not have a written employment agreement and works on a part-time basis for the Company. Mr. King received no salary or other cash compensation during fiscal 2012 or 2013; however the Company charged $36,000 to operations for the value of his services in each of these years. Ms. Henson (appointed as an Officer in 2011) received cash consulting fees of $49,500 in 2013. In addition, Ms. Henson received Common stock grants totaling 35,000 shares for service in 2012.
Our compensation philosophy for our executive officers has been shaped by our lack of long-term financing and our severe shortage of operating capital. Accordingly, our compensation decisions and particularly our approach to allocating compensation between cash and non-cash elements of the compensation package reflect our goal to preserve cash whenever possible. In making our compensation decisions, we strive to be aware of the level of compensation which is paid to executive officers of various companies that we consider to be comparable to us in size. Our goal is for the compensation paid to our named executive officers to be at or below the fiftieth percentile of the companies that we have identified as being comparable companies.
Base Salaries
Mr. King did not receive any base salary in fiscal 2012 or 2013; however, an amount of $36,000 has been charged to operations and credited to additional paid in capital in each of these years.
Option Grants
No Options were granted in fiscal years 2012 or 2013.
Perquisites
Consistent with our philosophy to preserve cash, we have sought to limit perquisites. Perquisites paid to our named executive officers are discussed as footnotes to the following Summary Compensation Table. Our current policy for paying medical and dental insurance is not to pay insurance premiums. Our policy is not to pay for life insurance, long-term and short-term disability insurances and accidental death and dismemberment insurance. Our policy with regard to unused vacation for our executive group is to pay at the base salary rate for vacation not used during the calendar year of termination.
Change in Control Severance Policy
None.
REPORT OF COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors has reviewed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K and discussed it with the Company’s management. Based on the Compensation Committee’s review and discussions with management, the Compensation Committee recommends to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for fiscal 2013.
THE COMPENSATION COMMITTEE
John E. Scates, Chairman
Gregory J. Newell
DIRECTOR COMPENSATION
FOR THE THREE YEARS ENDED DECEMBER 31, 2013
Employment Agreements with Executives
We have no written employment agreements.
Equity Incentive Plans
We have five stock plans as listed below:
All of the Plans have been approved by the Board of Directors and all, except for the 2006 Plan, have been approved by the Shareholders. All of the plans authorize awards of incentive stock options or non-qualified stock options to employees, directors, and consultants of our company and affiliates. The purposes of the Plans are as follows: to encourage and enable employees, directors, and consultants to acquire a proprietary interest in the growth and performance of our company; to generate an increased incentive for key employees and directors to contribute to our future success and prosperity, thus enhancing the value of our company for the benefit of our stockholders; and to enhance the ability of our company to attract and retain key employees and directors who are essential to progress, growth, and profitability.
The Plans are administered by the Compensation Committee of our Board (the “Administrator”). All members of our Compensation Committee are non-employee directors and outside directors, as defined in the Plans. Subject to the limitations set forth in the Plans, the administrator has the authority to grant options, to determine the purchase price of the shares of our common stock covered by each option, to establish the term of each option, to determine the number of shares of our common stock to be covered by each option, to establish vesting schedules, to designate options as incentive stock options or non-qualified stock options, and to determine the persons to whom grants are to be made.
The Administrator establishes the option exercise price, which in the case of incentive stock options, must be at least the market price (as such term is defined in the Plans) of our common stock on the date of the grant or, with respect to optionees who own at least 10% of the total combined voting power of all classes of our stock (a “10% Stockholder”), 110% of the market price on the date of the grant.
Options granted under the Plans are generally not transferable by the optionee except by will or the laws of descent and distribution, or pursuant to written agreement approved by the administrator relating to any non-qualified stock options in any manner authorized under applicable law. Except as provided in the applicable stock option agreement, options must be exercised within 90 days of termination for any reason other than disability, retirement, or death, within one year of termination by disability or retirement, or by a designated beneficiary within two years of death.
Except as provided to the contrary in the option agreement, options granted under the Plans vest in one-third annual increments, beginning on the grant date of the option. In no event may an incentive stock option be granted more than 10 years from the effective date of the plan or be exercised after either the expiration of 10 years from the grant date, or five years from the grant date in the case of a 10% Stockholder.
Incentive stock options may not vest for the first time with the respect to any optionee in a calendar year with a market price exceeding $100,000. Any option grants that exceed that amount shall be automatically treated as non-statutory stock options.
The Plans may be suspended, terminated, modified, or amended by our board, but no such suspension, termination, modification, or amendment may adversely affect the terms of any option previously granted without the consent of the affected optionee, and any amendment will be subject to stockholder approval to the extent required by applicable law, rules, or regulations.
We, from time to time, grant to our directors, executive officers and employees options to purchase our common stock under the Plans. As of December 31, 2013, Invisa had no options to purchase shares of common stock outstanding or exercisable.
401(k) Savings Plan
We do not have a 401(k) savings plan.
Limitation of Liability and Indemnification of Officers and Directors; Insurance
Our Officers and Directors are indemnified to the fullest extent provided by Nevada law.
We maintain a policy of directors’ and officers’ liability insurance to indemnify our directors and officers with respect to actions taken by them on our behalf.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, or persons controlling our company pursuant to the foregoing provisions, we have been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in such Act and is therefore unenforceable.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth the beneficial ownership of shares of our common stock as of December 31, 2013for:
• each person (or group of affiliated persons) known by us to beneficially own more than 5% of our common stock;
• each of our directors;
• each named executive officer; and
• all of our directors and executive officers as a group.
Information with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of more than 5% of our common stock. Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment power with respect to securities. In computing the number of shares beneficially owned by a person listed below and the percentage ownership of such person, shares of common stock underlying options, warrants or convertible securities held by each such person that are exercisable or convertible within 60 days of December 31, 2013 are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person.
Except as otherwise noted below, and subject to applicable community property laws, the persons named have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
______________
(1) Unless otherwise provided herein all addresses are c/o Invisa, Inc., 1800 2nd Street, Suite 965 Sarasota, FL 34236.
(2) The percentage calculations are based on 14,354,398 shares that were outstanding as of December 31, 2013 plus the respective beneficial shares owned by each stockholder. This number includes 140,000 shares granted to Directors and Officers in February of 2013; however these shares have not yet been issued but are considered beneficially owned as of December 31, 2013. Beneficial ownership is determined in accordance with rules of the Securities and Exchange Commission and includes voting power and/or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or exercisable within 60 days of December 31, 2013 are deemed outstanding for computing the number, and the percentages of outstanding shares beneficially owned by the person holding such options, but are not deemed outstanding for computing the percentage beneficially owned by any other person.
(3) Includes 905,734 shares held in the name of Friday Harbour and 110,215 in Mr. Duffey’s name.
(4) Includes 330,359 shares held in Mr. King’s name, and 1,000 shares held in the name of the King Family Trust.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Other than the compensation discussed herein, we had no items to disclose hereunder for 2013 except Mr. King had loaned $20,124 to the Company during 2007 and an additional $136 in 2008 aggregating $20,260. The loans were not secured and are interest free; they remain outstanding and unpaid at December 31, 2013 and on the date hereof.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
During 2012 and 2013, annual fees approved for the year-end audit and interim reviews aggregated approximately $25,000 per year. In addition, during 2012 and 2013 tax-related fees approved for compliance aggregated, approximately, $2,750 and $2,500 respectively.
The Audit Committee has established its pre-approval policies and procedures, pursuant to which the Audit Committee approved the foregoing audit services, provided by Kingery & Crouse, PA in 2012 and 2013. Consistent with the Audit Committee’s responsibility for engaging the Company’s independent auditors, all audit and permitted non-audit services require pre-approval by the Audit Committee. The full Audit Committee approves proposed services and fee estimates for these services. The Audit Committee chairperson or its designee has been designated by the Audit Committee to approve any services arising during the year that were not pre-approved by the Audit Committee. Services approved by the Audit Committee chairperson are communicated to the full Audit Committee at its next regular meeting and the Audit Committee reviews services and fees for the year at each such meeting.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this annual report on Form 10-K:
______________
Financial Statement Schedules
None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KNOW ALL PERSONS BY THESE PRESENTS , that each of the undersigned hereby constitutes and appoints Edmund C. King as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and on his behalf to sign, execute and file this annual report on Form 10-K and any or all amendments without limitation to this annual report, and to file the same, with all exhibits thereto and any and all documents required to be filed with respect therewith, with the Securities and Exchange Commission or any regulatory authority, granting unto such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith and about the premises in order to effectuate the same as fully to all intents and purposes as he might or could do if personally present, hereby ratifying and confirming all that such attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: January 15, 2014 /s/ Edmund C. King
Edmund C. King, Chief Executive Officer
Dated: January 15, 2014 /s/ Edmund C. King
Edmund C. King, Chief Financial Officer, Director
Dated: January 15, 2014 /s/ Gregory J. Newell
Gregory J. Newell, Director
Dated: January 15, 2014 /s/ John E. Scates
John E. Scates, Director
Report of Independent Registered Certified Public Accounting Firm
Board of Directors and Stockholders
Invisa, Inc.
We have audited the accompanying balance sheets of Invisa, Inc. (the “Company”) as of December 31, 2012 and 2013, and the related statements of operations, stockholders’ deficit, and cash flows for the years then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, audits of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Invisa, Inc. as of December 31, 2012 and 2013, and the 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.
/s/ Kingery & Crouse, PA
Kingery & Crouse, PA
Certified Public Accountants
Tampa, Florida
January 15, 2014
INVISA, INC.
BALANCE SHEETS
See notes to financial statements.
INVISA, INC.
STATEMENTS OF OPERATIONS
See notes to financial statements.
INVISA, INC.
STATEMENTS OF STOCKHOLDERS’ (DEFICIT)
See notes to financial statements.
INVISA, INC.
STATEMENTS OF CASH FLOWS
See notes to financial statements.
INVISA, INC.
STATEMENTS OF CASH FLOWS - CONTINUED
See notes to financial statements.
INVISA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - DESCRIPTION OF ORGANIZATION AND BUSINESS
Invisa, Inc., (the “Company” or “Invisa”) is an enterprise that incorporates safety system technology and products into automated closure devices, such as parking gates, sliding gates, overhead garage doors and commercial overhead doors. Invisa has also demonstrated production-ready prototypes of security products for the museum and other markets. The Company is currently manufacturing and selling powered closure safety devices.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company maintains its cash and cash equivalents at a major commercial bank.
Accounts Receivable
Accounts receivable are due primarily from companies in the gate manufacturing industry primarily located throughout the United States. Credit is extended based on an evaluation of the customers’ financial condition and, generally, collateral is not required. Account balances are evaluated for collectability based on the condition of the customers’ credit including repayment history and trends and relative economic and business conditions. Bad debts have not been significant.
Inventories
The Company’s inventory is stated at the lower of cost or market using an averaging method which approximates the first-in, first-out method. The inventory has been evaluated for obsolescence and whether quantities on hand exceed quantities which can reasonably be expected to be sold in the near term. Obsolete inventory is written off and excess quantities which are not expected to be sold in the near term are either written off or classified as a long-term asset.
Furniture, Fixtures and Equipment
Furniture, fixtures, and equipment are stated at cost and are depreciated on a straight-line basis over their estimated useful lives, principally five years. Leasehold improvements are amortized over the term of the lease or the estimated useful lives, whichever is shorter. Depreciation expense was $0 for 2012 and 2013. At December 31, 2013, all furniture, fixtures and equipment was fully depreciated.
Revenue
In general, the Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.
Product sales under fixed price arrangements are recognized as revenue upon shipment of product (when title transfers to the purchaser) and collectability is assured. Other operating revenues relate to services and are recorded when services are complete.
Shipping costs
Shipping and handling costs are included in cost of sales in the accompanying statements of operations.
Research and Development Costs
Research and development costs consist of direct costs that are associated with the development of the Company’s technology. These costs are expensed as incurred. During the years 2012 and 2013, the Company did not incur research and development expense.
Advertising Costs
The Company’s policy is to expense advertising costs as incurred. These costs were insignificant in 2012 and 2013.
Warranty Costs
The Company warrants its products for ninety days. Estimated warranty costs are recognized in the period product is shipped. However, there have been no significant warranty costs incurred through December 31, 2013. Accordingly, no warranty liability has been recognized for any period presented.
Income Taxes
The Company follows ASC 740 Income Taxes for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax asset to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.
The Company follows ASC 740-10-05 Accounting for Uncertainty in Income Taxes. The Interpretation prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
Financial Instruments
The Company has adopted FASB ASC 820-10-50, “Fair Value Measurements.” This guidance defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:
• Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
• Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
• Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement.
The Company’s financial instruments typically include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, notes payable and due to officer . The carrying amounts of these financial instruments approximate their fair value, due to the short-term nature of these items. The carrying value of the Company’s long-term debt approximates fair value based on the terms, interest rate and conditions of similar debt instruments.
Derivative Financial Instruments
The Company generally does not use derivative financial instruments to hedge exposures to cash-flow risks or market-risk that may affect the fair values of its financial instruments. However, certain other financial instruments, such as warrants and embedded conversion features that are indexed to the Company’s common stock, are classified as liabilities when either (a) the holder possesses rights to net cash settlement or (b) physical or net-share settlement is not within the control of the Company. In such instances, net-cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period.
Income (Loss) per Share
Basic earnings (loss) per share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding. During periods in which the Company incurs losses common stock equivalents, if any, are not considered, as their effect would be anti dilutive.
At December 31, 2012 and 2013 the Preferred stock was convertible into 4,448,545 shares of common stock, which has not been considered in the calculation of diluted loss per share since the effect would be anti-dilutive.
Equity-Based Compensation
The Company accounts for stock based compensation in accordance with ASC 718 Stock Compensation. This Statement requires that the cost resulting from all share-based transactions be recorded in the financial statements. The Statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement in accounting for share-based payment transactions with employees. The Statement also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from non-employees in share-based payment transactions.
Recent Accounting Pronouncements
The Company does not believe that recently issued accounting pronouncements will have a material impact on its financial statements.
NOTE C - COMMON AND PREFERRED STOCK
In September 2004, the Company issued 22,000 shares of Series A Convertible Preferred Stock in the face amount of $2,200,000 for $1,937,000 (net of $263,000 transaction expenses) which was paid in the respective amounts of $1,158,200 and $778,800 at closing.
The Preferred Stock is non-voting, entitled to dividends only when, or if, declared by the Board of Directors and has preference over the Common Stock in the event of the Company’s liquidation. The Preferred Stock is convertible into Common Stock at the option of the holder. The conversion price was equal to 80% of the market price at the time of conversion, subject to a floor of $2.50 per share and a ceiling of $5.85 per share. During 2005, the exercise price was modified to $0.60 per share as an inducement to execute the Series B Convertible Preferred Stock transaction discussed below.
In August 2005, the Company issued 2,000 shares of Series B Convertible Preferred Stock in the face amount of $1,000,000 for $878,000 (net of $122,000 transaction expenses) which was paid in the respective amounts of $378,000 and $500,000 at closing. The Preferred Stock is non-voting and is entitled to receive dividends at an annual rate equal to the lower of the Prime Rate plus 3.5% or 9%. The dividend may either be paid in cash or registered shares of the Company’s Common Stock, subject to certain limitations. The Preferred Stock is convertible into Common Stock at the option of the holder. The conversion price is $0.60 per share par value.
Detachable warrants to acquire up to 500,000 shares of the Company’s Common Stock at $15.00 per share. The warrants expired on August 31, 2010 and were subject to call by the Company upon the Common Stock trading at a price of $3.00, a minimum trading volume of 12,000 shares for 20 consecutive days and the registration statement being effective.
In addition to the transaction costs referred to above, the Company granted warrants to acquire up to 133,334 shares of the Company’s Common Stock at $0.80 per share to a broker. The term of the warrants was three years.
The Series B Preferred Stock and Series A Preferred Stock, as amended, permit the Company, in its discretion, to redeem part or all of the outstanding Preferred A and B Stock at 150% of par value, plus any accrued dividends.
In 2008 the Company also issued 6,205 shares of its Series C Convertible Preferred stock in exchange for 4,785 and 1,000 shares, respectively of its Series A and Series B Convertible Preferred stock. In addition, the Company issued 483 shares of its Series C Preferred stock for settlement of debt. The Series C preferred stock is (i) nonvoting, (ii) entitled to receive dividends, when, and/if declared by the Board of Directors, (iii) senior to the common stock in liquidation and (iv) convertible into common stock at $0.60 per common share at the option of the holder and under certain conditions at the option of the Company.
In January 2010, the Company commenced an exchange offer, which remains open, of Series B Preferred Stockholders to convert their shares into shares of Series C Preferred Stock. In conjunction with the January 2010 offer, the Company has restated its Series B Stock Certificate of Designation to eliminate any further accrual of dividends and provide that the Company may satisfy its obligation with respect to accrued but unpaid dividends either (a) in cash, (b) by issuance of its additional Series B Stock or (c) by issuance of common stock of the Company.
In February 2013, 155,000 shares of Common stock were granted to the three directors and certain consultants and valued at $0.22 per share (the market price at the date of grant) for services rendered. The Company charged the fair value of $34,100 to operations in 2013.
During 2012 and 2013 an officer contributed services with a fair value of $36,000 to the company which was charged to operations during the respective years.
NOTE D - STOCK OPTION AND WARRANT ACTIVITY
The Company has five stock-based compensation plans which provides for the granting of options to purchase the Company’s Common Stock to employees, directors, consultants and advisors. The options granted are subject to a vesting schedule as set forth in each individual option agreement.
No options were granted in 2012 or 2013 and no options are outstanding at December 31, 2013.
NOTE E - COMMITMENT AND CONCENTRATIONS
Operating Leases
In February 2012, the Company’s lease expired and we began occupying a larger space in a building in Sarasota, Florida under a lease with a two-year term expiring February 28, 2014, and annual lease payments of approximately $7,700. Rent expense for the years ended December 31, 2012 and 2013, was $7,315 and $7,912, respectively.
Concentrations
During 2012, three customers comprised approximately 49% of our total sales revenue.
During 2013, three customers comprised approximately 54% of our total sales revenue.
NOTE F - DUE TO STOCKHOLDERS AND OFFICERS
Due to officers consists of the following at December 31, 2012 and 2013:
These advances are due on demand and do not bear interest.
NOTE G - LINES OF CREDIT
The Company’s credit facilities with its senior lender was revised on December 31, 2013, The credit facilities allow for advances up to $1,235,428 that bear interest at 10% and have a first security interest in all of the Company’s assets. Additionally, the credit facilities are secured by a security interest in 37,602,913 shares of the Company’s common stock which are held in reserve by the Company. Because the credit facilities are not in default the shares are not treated as issued and outstanding.
At December 31, 2012, $987,951 was outstanding under these credit facilities. During 2013, $111,090 of interest and $125,019 in advances from the Revolving Line of Credit (see below) were added to the debt bringing the balance to $1,224,060. The Notes are due on March 31, 2015. Interest expense related to these loans was $67,366 and $111,090 during 2012 and 2013, respectively. The accrued interest is due and payable on March 31, 2015.
As mentioned above, on December 31, 2012, the Company established a new Revolving Line of Credit totaling $200,000 with its Senior Lender to finance operations of the Company. This new line bears interest at 10% per annum and is due on March 31, 2015. The line has terms and provisions similar to the notes described above. The line is also secured by a security interest in 5,333,333 shares in the Company’s common stock. During 2013 the Company received advances aggregating $125,019 which was added to the credit facility discussed above.
As of December 31, 2013 the entire $200,000 balance of the line is available to the Company.
NOTE H - GAIN ON DERECOGNITION OF DEBT
During 2012 and 2013 the Company recorded a gain on the derecognition of $30,147 and $45,044, respectively.
The debt was written off pursuant to the expiration of the statute of limitations of the State of Florida.
NOTE I - INCOME TAXES
Deferred taxes are recorded for all the tax effects of existing temporary differences in the Company’s assets and liabilities for income tax and financial reporting purposes. Due to the valuation allowance for deferred tax assets, as noted below, there was no net deferred tax benefit or expense for the years ended December 31, 2012 or 2013.
Reconciliation of the federal statutory income tax rate of 34.0% to the effective income tax rate is as follows at December 31:
ASC guidance requires that a deferred tax asset be reduced by a valuation allowance if, based on the weight of available evidence it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. As a result the Company recorded a valuation allowance with respect to all the Company’s deferred tax assets. The change in the valuation allowance was approximately $30,000 during 2013 and $50,000 during 2012.
The Company has a federal net operating loss carry forward of approximately $17 million as of December 31, 2013, which expires through 2032. Under Section 382 and 383 of the Internal Revenue Code, if an ownership change occurs with respect to a “loss corporation”, as defined, there are annual limitations on the amount of the net operating loss and other deductions, which are available to the Company. The Company has not determined the impact of these limitations at this time. The principal difference between the net operating loss and the accumulated deficit for financial statement purposes results principally from stock based compensation and other non-cash expenses that have not been deducted for tax return purposes.
Since inception, we have been subject to tax by both federal and state taxing authorities. Until the respective statutes of limitations expire, we are subject to income tax audits in the jurisdictions in which we operate. We are subject to U.S. federal tax examinations for fiscal years commencing in 1998 as a result of its NOL carryforward.
NOTE J - SUBSEQUENT EVENTS
In January 2014, 155,000 shares of common stock were granted to the three directors and certain consultants and valued at $0.58 per share (the market price at the date of grant) for services rendered in 2013. The Company charged the fair value of $89,900 to operations in 2013.