ITEM 1. BUSINESS
The Company supplies LED light bulbs and light fixtures to the commercial, industrial and consumer/retail markets. All of our products are tested and listed by UL Underwriters Laboratories (UL) or Electrical Testing Laboratories (ETL). Additionally, all products supplied are tested and in compliance with industry standards such as those set up by Energy Star, and the Illuminating Engineering Society of North America (IESNA).
On May 30, 2013, the Company had entered into a Non-Exclusive Distributor Agreement with Polybrite International, Inc. (“Polybrite”) pursuant to which the Company is a non-exclusive distributor of Polybrite’s LED products. The agreement provides that the Company may purchase Polybrite’s LED products on most favored nation’s terms. The term of the agreement is for five years, subject to any early termination. On May 30, 2013, the Company had also entered into a Sales Representative Agreement with Polybrite pursuant to which the Company was appointed as a non-exclusive sales representative of Polybrite’s LED products. The agreement provides that the Company may make introductions, solicit sales, and make referrals for purchases of Polybrite’s LED products and receive commission compensation upon the completion of such sales. The term of the agreement is for eight years, subject to either party’s right to terminate earlier. PolyBrite is an innovative global lighting technology company that develops state of the art LED lighting systems. PolyBrite’s proprietary technology is intended to bring the energy, environmental and economic advantages of LED technology to the marketplace. PolyBrite engineers and manufactures solid-state lighting products, creating lamps and lighting systems under its Borealis Lighting brand, lighted/safety pet products under PolyBrite Lighted Pet Products brand and industrial/commercial safety products under PolyBrite Lighted Safety Products brand. Additional information regarding PolyBrite may be found on their company website at www.polybrite.com. The summary of the Sales Representative Agreement and Distributor Agreement is qualified in its entirety by reference to the Sales Representative Agreement which is filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on June 10, 2013.
On October 12, 2013, the Company had entered into an Agreement and amendment (the “Agreement”) with Goeken Group Corp. and its wholly-owned subsidiary, PolyBrite International, Inc. (“PolyBrite”) pursuant to which the Company and PolyBrite agreed to work together to secure funding for PolyBrite, retain the management consulting services, and complete a transaction in which PolyBrite will become a publicly traded company through an acquisition with the Company. The Company and PolyBrite initially anticipated the completion of the acquisition transaction would occur on or before March 31, 2014. However, the completion of the transactions described in the Agreement did not occur by December 31, 2014. The Company and Polybrite extended the term of the Agreement by amendments through October 31, 2014. The Company and Polybrite did not complete the acquisition transaction and the Agreement as amended had expired as of October 31, 2014. A Standstill Agreement between the Parties dated November 17, 2014 provided that the Company could not complete any acquisition that would prevent the Company from completing a public company transaction of Polybrite between November 17, 2014 and March 1, 2015. As that date has passed, there is currently no agreement between the Company and Polybrite regarding a transaction of this nature, and no discussions are currently ongoing in that regard between the Company and Polybrite. Polybrite remains a key supplier of LED products for distribution to our customers regarding sales anticipated for 2016 and beyond.
The Industry and Overall Market
LED lamps and fixtures are more efficient than traditional sources of illumination. Their useful life is significantly longer as well and they use anywhere from 85 to 90% less energy than traditional lighting sources such as incandescent, halogen, and metal halide.
LED products are solid-state and dimmable which makes them ideal for commercial applications. LED bulbs lasting longer and are more energy efficient than traditional bulbs and they also operate at lower temperatures than conventional lighting products. This combination of attributes along with low operating costs, delivers a significant savings as well as strong ROI’s (returns on investments) to customers that choose to use them. The market is growing rapidly due to the technological advances, improvement in pricing and growing acceptance in the commercial, industrial and residential markets.
Our main sales efforts are to sell the electrical distribution trade and to commercial enterprises. We also have made and intend to make ongoing sales presentations to federal, state and local government agencies for the purchase of LED lighting products.
Product Offering
Our product offering includes the following:
·
Street Lighting
·
Parking Lot Lighting
·
Warehouse Lighting (High Bays)
·
Light Bulbs (A 19 Series)
·
Chandelier Bulbs
·
Flood and Spot Lights
·
Accent Lights
·
LED Tubes (replaces fluorescent bulbs)
·
Panel Lighting
History
The LED Lighting Company is a Delaware corporation which was incorporated in July 19, 2010. Prior to June 1, 2013, it was a non-operational shell company named “Fun World Media, Inc.” On June 1, 2013, the Company commenced operations under its current business plan of selling and distributing LED lighting bulbs and fixtures.
Production and Logistics
The production and shipping of the products sold by the Company are arranged by the manufacturer from whom the Company purchases the LED products. To date, the bulk of the LED products sold by the Company have been purchased from Polybrite who has arranged all manufacturing and shipping of the products. Other LED products sold by the Company were sourced from other suppliers.
Competition
We face competition from companies such as GE, Phillips, Cree and Revolution Lighting. These companies have significant capital resources, distribution channels and entrenched customer accounts.
Our Employees
We have no full time contracted positions and one part-time contracted position as of the date of this Annual Report.
Backlog
We do not have any order backlog as of the date of this Annual Report.
Seasonality
We do not expect that our business will experience significant seasonality.
Available Information
Our annual and quarterly reports, along with all other reports and amendments filed with or furnished to the SEC are available on the SEC maintained Internet site that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The address of that site is www.sec.gov. In addition the SEC maintains a Public Reference Room where you can obtain these materials, which is located at 100 F Street, N.E., Washington, D.C. 20549. To obtain more information on the operation of the Public Reference Room call the SEC at 1-800-SEC-0330.
Change of Control
Effective December 14, 2015, the Company entered into a Loan Agreement with Mainas Development Corporation (“MDC”) pursuant to which MDC agreed to loan the Company up to $130,000. The Loan Document provides that the loan shall accrue interest at the rate of 7% per annum and is due on December 14, 2016. The Company issued MDC 13,000,000 shares of Company common stock in consideration of extending the loan to the Company. MDC is an entity owned and controlled by George Mainas who, prior to the issuance of the shares to MDC, owned greater than 10% of the outstanding shares of the Company.
The Company had 13,157,195 shares of common stock outstanding immediately prior to the issuance of shares to MDC on December 14, 2015. As a result of the issuance of shares to MDC, the shareholders of the Company which existed prior to the closings own approximately 50.3% of the outstanding common stock of the Company, and MDC owns 49.7%. Taking into account the 1,526,726 shares owned by George Mainas prior to issuance of shares to MDC, George Mainas now controls 55.5% of the outstanding common stock of the Company, which constitutes a change of control of the Company.
ITEM 1A.
ITEM 1A.
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this Annual Report, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. You should read the section entitled "Special Notes Regarding Forward-Looking Statements" for a discussion of what types of statements are forward-looking statements as well as the significance of such statements in the context of this report.
Risks Related To Our Business
We have a very limited operating history. Prior to June 1, 2013, our Company was a “shell” company with no or nominal operations. The Company recently became funded and commenced operations. The Company does not currently have significant operating revenues and has a very limited operating history. Because the Company has a limited operating history, we do not have any historical financial data upon which to base planned operations. Our historical financial information is not a reliable indicator of future performance or prospects.
The segments of the LED industry in which we operate are highly competitive and increased competition could reduce our sales and profitability. We compete in different markets within the LED lighting industry on the basis of the quality of our products, customer service, price and distribution. All of our markets are highly competitive. Our competitors vary in size and many have greater financial and marketing resources than we do. While we believe that our Company offers unique advantages, if we cannot maintain quality and pricing that are comparable to other LED products and other lighting products we may not be able to develop, or may lose, market share.
Our business and financial performance may be adversely affected by downturns in the target markets that we serve or reduced demand for the types of products we sell. Demand for our products is often affected by general economic conditions as well as product-use trends in our target markets. These changes may result in decreased demand for our products. The occurrence of these conditions is beyond our ability to control and, when they occur, they may have a significant impact on our sales and results of operations. Our products are typically higher priced than non-LED lighting products. The inability or unwillingness of our customers to pay a premium for our products due to general economic conditions or a downturn in the economy may have a significant adverse impact on our sales and results of operations.
Changes within the lighting industry may adversely affect our financial performance. Changes in the identity, ownership structure and strategic goals of our competitors and the emergence of new competitors in our target markets may harm our financial performance. New competitors may include foreign-based companies and commodity-based domestic producers who could enter our specialty markets if they are unable to compete in their traditional markets. Additionally, consolidation within our industry could unite other producers with distribution channels through which we intend to sell our products, thereby limiting access to our target markets.
Any interruption in delivery from our suppliers will impair our ability to distribute our products and generate revenues. We are dependent on third party manufacturers for the production and supply of our products. We have no manufacturing facilities and we rely on these third parties to provide us with an adequate and reliable supply of products on a timely basis. Any interruption in the distribution from our suppliers could affect our ability to distribute our products. Additionally, these suppliers are located outside of the United States in the Peoples’ Republic of China (PRC). Any legislation or consumer preferences in the United States or other countries requiring products which are made in the United States or such other countries may have a material adverse impact on our sales and results of operations.
If the third party manufactures who supply our products were to suffer a catastrophic loss, unforeseen or recurring operational problems at any of their facilities, we could suffer significant product shortages, sales declines and/or cost increases. The facilities which make the lighting products we distribute as well as their distribution warehouses could suffer catastrophic loss due to fire, flood, terrorism, mechanical failure or other natural or human caused events, or other unforeseen interruptions in production or delivery. If any of these facilities were to experience a catastrophic loss, it could disrupt our supply of products for sale, delay or reduce shipments and reduce our revenues. These expenses and losses are not covered by property or business interruption insurance. Even if covered by insurance, our inability to deliver our products to customers, even on a short-term basis, may cause us to lose market share on a more permanent basis.
If we are not able to compete effectively against companies with greater resources, our prospects for future success will be jeopardized. The lighting industry is highly competitive. In the lighting markets in which we plan to sell our LED lighting solutions, our products will compete with lighting products utilizing traditional lighting technology provided by larger and better-established lighting operators. We expect competition to intensify in the future. Many of our competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing, technical and other resources. Our competitors may acquire or be acquired by, receive investments from or enter into other commercial relationships with, larger, well established and well-financed competitors. Therefore, some of our competitors with other revenue sources may be able to devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing policies, and devote substantially more resources to product development. It is difficult to effectively compete with companies that have these resources so we cannot assure that we will ever become a significant company in the industry.
If our lighting products do not gain wider market acceptance, prospects for our growth and profitability may be limited. We face competition from both traditional lighting technologies, such as incandescent, florescent and neon lighting, and from competitors engaged in providing LED lighting products. Traditional lighting technologies have the advantage of a long history of market acceptance and familiarity as compared to our LED lighting solutions. Potential customers for our LED products may be reluctant to adopt these as alternatives to traditional lighting technologies because of their higher initial cost to achieve comparable light output, although our LED lighting products tend to be more energy efficient and require less maintenance. Our success will depend upon both the increased acceptance of our LED products as an alternative to traditional lighting technologies and the development of higher lumen producing products to meet traditional lighting applications. Obstacles to adoption of LED lighting in the general lighting market include the high initial cost of high brightness white LEDs and the need for further advances in brightness, color characteristics, efficiency and the predicted life of the LEDs before they require replacement. Our future results are dependent upon sales growth in the commercial, hospitality, institutional, retail and sign markets. If acceptance of our lighting products in general does not continue to grow, then opportunities to increase our revenue and operate profitably may be limited.
We will depend on independent sales representatives for a substantial portion of our revenue and sales, and the failure to successfully manage our relationships with these third-parties, or the termination of these relationships, could cause our revenue to decline and harm our business. We intend to establish a network of independent sales representatives to sell certain products. We may not be able to negotiate acceptable relationships in the future and cannot predict whether current or future relationships will be successful. These relationships have not yet been formalized in a detailed contract, and may be subject to termination at any time. The agreements that are formalized in a contract are generally short-term, not exclusive, and can be cancelled by these sales channels without significant financial consequence. We cannot control how these sales channels perform and cannot be certain that we or end-users will be satisfied by their performance. If we cannot establish these sales channels or if they do not perform once established, there could be a significant impact on our revenue and profits.
Our products could contain defects or they may be installed or operated incorrectly, which could reduce sales of those products or result in claims against us. Defects may be found in the products we will distribute. This could result in, among other things, a delay in the recognition or loss of revenue, loss of market share or failure to achieve market acceptance. The occurrence of these problems could result in the delay or loss of market acceptance of our lighting products and would likely harm our business. Defects, integration issues or other performance problems in our lighting products could result in personal injury or financial or other damages to end-users or could damage market acceptance of our products. Our customers and end-users could also seek damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend.
The reduction or elimination of incentives to adopt LED lighting could cause the growth in demand for our products to slow, which could materially and adversely affect our revenues, profits and margins. We believe the near-term growth of the LED market will be accelerated by government policies in certain countries that either directly promote the use of LEDs or discourage the use of some traditional lighting technologies. Currently, the upfront cost of LED lighting exceeds the upfront cost for some traditional lighting technologies that provide similar lumen output in many applications. However, some governments have used policy initiatives to accelerate the development and adoption of LED lighting and other non-traditional lighting technologies that are seen as more environmentally friendly compared to some traditional lighting technologies. Reductions in, or the elimination of, government investment and favorable energy policies could result in decreased demand for the products we distribute and decrease our revenues, profits and margins. Additionally, if our products fail to qualify for any financial incentives or rebates provided by governmental agencies or utilities for which our competitors’ products qualify, such programs may diminish or eliminate our ability to compete by offering products at lower prices than our competitors.
The failure to obtain certifications or compliance would harm our business. The products we intend to distribute are required to comply with certain legal requirements governing the materials in those products. If the products do not comply with these legal requirements, our revenue might be materially harmed.
Financial Risks
If we cannot return to and sustain profitable operations, we will need to raise additional capital to continue our operations, which may not be available on commercially reasonable terms, or at all, and which may dilute your investment. We have only nominal revenues as of the date of this Annual Report. Achieving and sustaining profitability will require us to achieve revenues and manage our product, operating and administrative expenses. We cannot guarantee that we will be successful in achieving revenues or profitability. If we are unable to generate sufficient revenues to pay our expenses and our existing sources of cash and cash flows are otherwise insufficient to fund our activities, we will need to raise additional funds to continue our operations. We do not have any arrangements in place for additional funds. If needed, those funds may not be available on favorable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we are unsuccessful in achieving revenues or profitability, and we cannot obtain additional funds on commercially reasonable terms or at all, we may be required to curtail significantly or cease our operations, which could result in the loss of all of your investment in our stock.
Our financial statements have been prepared assuming that the Company will continue as a going concern. We have generated losses to date and have limited working capital. These factors raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from this uncertainty. The report of our independent registered public accounting firm included an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern in their audit report included herein. If we cannot generate the required revenues and gross margin to achieve profitability or obtain additional capital on acceptable terms, we will need to substantially revise our business plan or cease operations and an investor could suffer the loss of a significant portion or all of his investment in our Company.
As we transition from a Company with insignificant revenues to what we hope will be a Company generating substantial revenues, we may not be able to manage our growth effectively, which could adversely affect our operations and financial performance. The ability to manage and operate our business as we execute our growth strategy will require effective planning. Significant rapid growth could strain our internal resources, leading to a lower quality of customer service, reporting problems and delays in meeting important deadlines resulting in loss of market share and other problems that could adversely affect our financial performance. Our efforts to grow could place a significant strain on our personnel, management systems, infrastructure and other resources. If we do not manage our growth effectively, our operations could be adversely affected, resulting in slower growth and a failure to achieve or sustain profitability.
We do not expect to pay dividends for the foreseeable future, and we may never pay dividends and, consequently, the only opportunity for investors to achieve a return on their investment is if a trading market develops and investors are able to sell their shares for a profit or if our business is sold at a price that enables investors to recognize a profit. We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends for the foreseeable future. Our payment of any future dividends will be at the discretion of our Board of Directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. In addition, our ability to pay dividends on our common stock may be limited by state law. Accordingly, we cannot assure investors any return on their investment, other than in connection with a sale of their shares or a sale of our business. At the present time there is a limited trading market for our shares. Therefore, holders of our securities may be unable to sell them. We cannot assure investors that an active trading market will develop or that any third party will offer to purchase our business on acceptable terms and at a price that would enable our investors to recognize a profit.
Corporate and Other Risks
Limitations on director and officer liability and indemnification of our Company’s officers and directors by us may discourage stockholders from bringing suit against an officer or director. Our Company’s certificate of incorporation and bylaws provide, with certain exceptions as permitted by governing state law, that a director or officer shall not be personally liable to us or our stockholders for breach of fiduciary duty as a director, except for acts or omissions which involve intentional misconduct, fraud or knowing violation of law, or unlawful payments of dividends. These provisions may discourage stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on our behalf against a director.
We are responsible for the indemnification of our officers and directors. Should our officers and/or directors require us to contribute to their defense, we may be required to spend significant amounts of our capital. Our certificate of incorporation and bylaws also provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of our Company. This indemnification policy could result in substantial expenditures, which we may be unable to recoup. If these expenditures are significant, or involve issues which result in significant liability for our key personnel, we may be unable to continue operating as a going concern.
Our executive officers, directors and insider stockholders beneficially own or control a substantial portion of our outstanding common stock, which may limit your ability and the ability of our other stockholders, whether acting alone or together, to propose or direct the management or overall direction of our Company. Additionally, this concentration of ownership could discourage or prevent a potential takeover of our Company that might otherwise result in an investor receiving a premium over the market price for his shares. A substantial portion of our outstanding shares of common stock is beneficially owned and controlled by a group of insiders, including our directors and executive officers. Accordingly, any of our existing outside principal stockholders together with our directors, executive officers and insider shareholders would have the power to control the election of our directors and the approval of actions for which the approval of our stockholders is required. If you acquire shares of our common stock, you may have no effective voice in the management of our Company. Such concentrated control of our Company may adversely affect the price of our common stock. Our principal stockholders may be able to control matters requiring approval by our stockholders, including the election of directors, mergers or other business combinations. Such concentrated control may also make it difficult for our stockholders to receive a premium for their shares of our common stock in the event we merge with a third party or enter into different transactions which require stockholder approval. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.
Certain provisions of our Certificate of Incorporation may make it more difficult for a third party to effect a change-of-control. Our certificate of incorporation authorizes the Board of Directors to issue up to 20,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors without further action by the stockholders. These terms may include preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of such common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of the Board of Directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our common stock.
We are dependent for our success on a few key individuals. Our inability to retain appropriately experienced officers and consultants would impede our business plan and growth strategies, which would have a negative impact on our business and the value of your investment. Our success depends on the skills, experience and performance of key members of our management team. Each of those individuals may voluntarily terminate his relationship with the Company at any time. Were we to lose one or more of these key individuals, we would be forced to expend significant time and money in the pursuit of a replacement, which would result in both a delay in the implementation of our business plan and the diversion of limited working capital. We do not maintain a key man insurance policy on any of our executive officers.
Capital Market Risks
Our common stock is not traded, so you may be unable to sell your shares to raise money or otherwise desire to liquidate your shares. There is no trading activity in our stock as of the date of this Current Report. We cannot give you any assurance that an active public trading market for our common stock will develop or be sustained. Even if we can begin trading on the OTC Markets or OTC Bulletin Board, the trading volume may be very limited by the fact that many major institutional investment funds, including mutual funds, as well as individual investors follow a policy of not investing in OTC stocks and certain major brokerage firms restrict their brokers from recommending OTC stocks because they are considered speculative, volatile, thinly traded and the market price of the common stock may not accurately reflect the underlying value of our Company. If we begin trading, the market price of our common stock could be subject to wide fluctuations in response to quarterly variations in our revenues and operating expenses, announcements of new products or services by us, significant sales of our common stock, including “short” sales, the operating and stock price performance of other companies that investors may deem comparable to us, and news reports relating to trends in our markets or general economic conditions.
The application of the “penny stock” rules to our common stock could limit the trading and liquidity of the common stock, adversely affect the market price of our common stock and increase your transaction costs to sell those shares. If our common stock begins trading, as long as the trading price of our common stock is below $5 per share, the open-market trading of our common stock will be subject to the “penny stock” rules, unless we otherwise qualify for an exemption from the “penny stock” definition. The “penny stock” rules impose additional sales practice requirements on certain broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). These regulations, if they apply, require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations may have the effect of limiting the trading activity of our common stock, reducing the liquidity of an investment in our common stock and increasing the transaction costs for sales and purchases of our common stock as compared to other securities. The stock market in general and the market prices for penny stock companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance. Stockholders should be aware that, according to Securities and Exchange Commission (“SEC”) Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include 1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; 2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; 3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; 4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and 5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. The occurrence of these patterns or practices could increase the volatility of our share price.
We may not be able to attract the attention of major brokerage firms, which could have a material adverse impact on the market value of our common stock. Security analysts of major brokerage firms may not provide coverage of our common stock since there is no incentive to brokerage firms to recommend the purchase of our common stock. The absence of such coverage limits the likelihood that an active market will develop for our common stock. It will also likely make it more difficult to attract new investors at times when we require additional capital.
We may be unable to list our common stock on NASDAQ or on any securities exchange. Although we may apply to list our common stock on NASDAQ or the American Stock Exchange in the future, we cannot assure you that we will be able to meet the initial listing standards, including the minimum per share price and minimum capitalization requirements, or that we will be able to maintain a listing of our common stock on either of those or any other trading venue. If our common stock begins trading, until such time as we would qualify for listing on NASDAQ, the American Stock Exchange or another trading venue, our common stock would trade on OTC Markets or OTC Bulletin Board or another over-the-counter quotation system where an investor may find it more difficult to dispose of shares or obtain accurate quotations as to the market value of our common stock. In addition, rules promulgated by the SEC impose various practice requirements on broker-dealers who sell securities that fail to meet certain criteria set forth in those rules to persons other than established customers and accredited investors. Consequently, if our common stock begins trading, these rules may deter broker-dealers from recommending or selling our common stock, which may further affect the liquidity of our common stock. It would also make it more difficult for us to raise additional capital.
If our common stock begins trading, future sales of our equity securities could put downward selling pressure on our securities, and adversely affect the stock price. There is a risk that this downward pressure may make it impossible for an investor to sell his or her securities at any reasonable price, if at all. Future sales of substantial amounts of our equity securities in the public market, or the perception that such sales could occur, could put downward selling pressure on our securities, and adversely affect the market price of our common stock.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
Our corporate offices are located at 2090 Novato Boulevard, Novato, California 94947, where we are using office and warehouse space owned by one of our shareholders.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None, as of the date of this Annual Report.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is not currently trading and has not traded in the past. We therefore have no historical trading or price information for our common stock.
Holders
As of April 14, 2016, there are approximately 34 shareholders of record of our common stock. Our transfer agent is Action Stock Transfer Corp. located at 2469 E. Fort Union Blvd, Suite 214, Salt Lake City, Utah 84121 and its phone number is (801) 274-1088.
Dividends
We have never paid cash dividends on our common stock. We intend to keep future earnings, if any, to finance the expansion of our business, and we do not anticipate that any cash dividends will be paid in the foreseeable future. Our future payment of dividends will depend on our earnings, capital requirements, expansion plans, financial condition and other relevant factors that our board of directors may deem relevant. Our retained earnings deficit currently limits our ability to pay dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
On May 28, 2013, our Board of Directors adopted the LED Lighting Company 2013 Stock Option/Stock Issuance Plan (the “Plan”). On May 28, 2013, our stockholders approved the Plan. The exercise of any options issued under the Plan, and the issuance of any shares under the Plan, is subject to the Plan being approved by the vote of a majority of our shareholders. The Plan is intended to promote the interests of our Company by “providing eligible person with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation.” The Plan is divided into two separate equity programs: 1) a stock option grant program; and 2) a stock issuance program. The maximum number of shares available to be issued under the Plan is currently 1,500,000 shares, subject to adjustments for any stock splits, stock dividends or other specified adjustments which may take place in the future.
The Plan is administered by our Company’s Board of Directors. Persons eligible to participate in the Plan are: 1) employees; 2) non-employee members of our Company’s Board of Directors; and 3) consultants and other independent advisors who provide services to our Company. All grants under the Plan are intended to comply with the requirements under Internal Revenue Code Section 409A and activities under the Plan will be administered accordingly. Options granted under the Plan are evidenced by agreement between the recipient and our Company, subject to the following general provisions: 1) the exercise price shall not be less than 100% of the fair market value per share of our Company’s common stock on the date of grant (110% in the case of 10% or greater shareholders); and 2) the term of stock options shall be limited to a maximum of ten years. A complete description of the Plan is included as an exhibit to our Current Report on Form 8-K filed with the SEC on June 4, 2013.
Equity Compensation Plan Information
The table below sets forth information as of December 31, 2015 with respect to compensation plans under which our common stock is authorized for issuance. Three hundred thousand options issued in 2013 expired in 2015, thus no options are currently outstanding under the Equity Compensation Plan.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company we are not required to provide the information required by this item.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." below. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed in this report. See "Forward-Looking Statements," above.
Overview and Financial Condition
Results of Operations
Fiscal Year Ended December 31, 2015 Compared to Fiscal Year Ended December 31, 2014
We had $30,000 in revenues during the year ending December 31, 2015; we had $69,600 in revenue in 2014.
Receivables were $0 and $84,000 as of December 31, 2015 and 2014, respectively. Accounts receivable of $30,000 that was outstanding from a customer in Mexico were written off, although the Company believes it will be able to realize the value of this asset. An advance of $70,000 and fees of $14,000 earned related to the December 2013 Purchase Order Financing and Distribution Agreement that was entered into with Polybrite was written off, although the Company believes it will be able to realize the value of this asset. Prepaid expenses of $36,738 advanced to Polybrite that was outstanding as of December 31, 2015 were written off, although the Company believes it will be able to realize the value of this asset.
Total loss in fiscal 2015 was $1,647,133. Losses from operations were $289,648, of which $150,738 result from write-offs of $30,000 in accounts receivable, $84,000 in loan receivable, and $36,738 in prepaid credit. An additional $87,850 in expenses was incurred in compensating consultants, predominantly through issuance of stock. Additional operating expenses amounted to $66,060. Fifteen thousand dollars ($15,000) in cost of goods sold were incurred in sourcing goods from Integrated Systems Technology, a company principally owned by Gary Rockis, a related party. This payable was converted to equity in August 2015, and thus had no cash effect on the Company. An additional $1,357,485 in noncash expenses were incurred, of which $1,300,000 represents the impact of issuing shares as the cost of securing a line of credit for Company operations. Aside from the cost of the line of credit, interest expenses of the Company of $53,585 and $37,885 in 2015 and 2014, respectively, consisted primarily of the amortization of a beneficial conversion feature associated with convertible notes issued by the Company in 2014 and 2013. These interest expenses incurred no cash obligation on the Company and the accrued liability associated with the interest on these notes, as well as other notes payable, was converted to equity in August 2015.
Total loss in fiscal 2014 was $1,851,239 which consisted primarily of $1,575,887 in non-cash charges related to consulting services provided to the Company paid for in shares and stock based compensation. In 2014, cash expenses were $331,065, of which $64,672 consisted of cost of goods sold. Operating expenses paid in cash decreased significantly compared to fiscal 2014 due to streamlining management and operations, and confining sales activity to active accounts the Company holds in the LED distribution business.
We had a net loss of $1,647,133 in fiscal 2015 compared to a net loss of $1,851,239 in fiscal 2014. The decrease in the net loss was primarily due to the decreased marketing, general and administrative activity in 2015 discussed above.
Liquidity and Capital Resources
We have primarily financed our operations through the sale of unregistered equity, warrants and convertible notes payable. As of December 31, 2015, our Company had no assets. We had total liabilities of $29,936 and therefore a stockholders’ deficit totaling $29,396 as of December 31, 2015.
Net cash used in operating activities in fiscal 2015 was $53,663. The net cash used by operating activities was related to activities associated with maintaining our position with certain customers less the amount of those activities that could be paid for in issuance of shares.
On August 4, 2015, the Company reduced debt outstanding as of that date by $393,857 by converting outstanding debt in that amount to equity at a price per share of $0.10.
Net cash provided by financing activities in 2015 was $26,471. The net cash provided by financing activities was primarily attributable to cash advances to the Company in the third and fourth quarters of 2015 by Mainas Development Corporation, which became a shareholder on December 14, 2015, through a share issuance.
Based on our need to raise additional funds to implement our business plans for the next twelve months, we have included a discussion concerning the presentation of our financial statements on a going concern basis in the notes to our financial statements and our independent public accountants have included a similar discussion in their opinion on our financial statements through December 31, 2015. We will be required in the near future to issue debt or sell our Company’s equity securities in order to raise additional cash, although there are no arrangements in place for any such financing at this time. We cannot provide any assurances as to whether we will be able to secure the necessary financing, or the terms of any such financing transaction if one were to occur. The failure to secure such financing could severely curtail our plans for future growth or in more severe scenarios, the continued operations of our Company.
Capital Expenditures
Our current plans do not call for our Company to expend significant amounts for capital expenditures for the foreseeable future beyond relatively insignificant expenditures for office furniture and information technology related equipment as we add employees to our Company.
Critical Accounting Policies Involving Management Estimates and Assumptions
Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include those related to the allowance for doubtful accounts; valuation of inventories; valuation of goodwill, intangible assets and property and equipment; valuation of stock based compensation expense, the valuation of warrants and conversion features; and other contingencies. On an on-going basis, we evaluate our estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions.
The following is a discussion of certain of the accounting policies that require management to make estimates and assumptions where the impact of those estimates and assumptions may have a substantial impact on our financial position and results of operations.
Income Taxes:
We account for income taxes using the asset and liability method, which recognizes deferred tax assets and liabilities, determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established to reduce deferred tax assets when, based on available objective evidence, it is more likely than not that the benefit of such assets will not be realized. In addition, FASB guidance requires us to recognize in the consolidated financial statements only those tax positions determined to be more likely than not of being sustained.
Derivative Financial Instruments
We do not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.
We review the terms of convertible debt and equity instruments it issues to determine whether there are embedded derivative instruments, including embedded conversion options that are required to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the convertible instrument contains more than one embedded derivative instrument, including conversion options, that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. In connection with sales of convertible debt and equity instruments, we may issue freestanding warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity.
Bifurcated embedded derivatives are initially recorded at fair value and then revalued at each reporting date with changes in fair value reported as non-operating income or expense. When the convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, total proceeds allocated to the convertible host instruments are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, usually resulting in those instruments being recorded at a discount from their face amount.
The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense, using the effective interest method.
Stock Based Compensation:
We measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized in the Consolidated Statement of Operations over the period during which the employee is required to provide service in exchange for the award - the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments is estimated using option-pricing models adjusted for the unique characteristics of those instruments.
Recent Accounting Pronouncements
See “Note 1 - Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" of Part II of this report.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of the year ended December 31, 2015, nor do we have any as of the date of this Annual Report.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company we are not required to provide the information required by this item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are included beginning on page of this report:
Page
Report of Independent Registered Public Accounting Firms
Balance Sheets as of December 31, 2015 and 2014
Statements of Operations for the years ended December 31, 2015 and 2014
Statement of Changes in Stockholders' Deficit for the years ended December 31, 2015 and 2014
Statements of Cash Flows for the years ended December 31, 2015 and 2014
Notes to Financial Statements
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
Our principal executive officer (who is also our principal financial officer) conducted an evaluation of our disclosure controls and procedures, as such terms are defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of December 31, 2015.
Management's Annual Report on Internal Controls over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal 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 our evaluation under that framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2015.
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 temporary rules of the SEC that permit the company to provide only management's report in this annual report.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Controls over Financial Reporting.
No changes were made in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name and age of our current director and executive officer, and the principal position held by him:
Name
Age
Position
Kevin Kearney
Chief Executive Officer, Chief Financial Officer, President, Secretary, and Director
Kevin Kearney has been the Chief Executive Officer, Chief Financial Officer, President, Secretary and a Director of the Company since May 28, 2013. Mr. Kearney is also the President of Kearney & O’Banion, Inc., which he founded in 1980. Kearney & O’Banion specializes in commercial properties in San Francisco and the surrounding Bay area and has generated revenues in excess of $180 million. Mr. Kearney is responsible for marketing and sales efforts, developing and presenting proposals with cost estimates, contract negotiations, pre-construction consulting, and design and project management services. Since 2001, Mr. Kearney has also been a member of the Board of Directors of Promia, Inc., an established development firm and software provider for cyber security. Promia specializes in providing solutions designed to support highly secure, reliable, scalable and interoperable business applications for large corporations, and its customers include the U.S. Navy, National Security Agency as well as a number of Fortune 500 companies. Mr. Kearney received his MFA, Magna Cum Laude, from the University of California, Davis.
Terms of Office
The Company’s directors are appointed for a one-year term to hold office until the next annual general meeting of the Company’s shareholders or until removed from office in accordance with the Company’s bylaws and the provisions of the Delaware Corporations Code. The Company’s directors hold office after the expiration of his or her term until his or her successor is elected and qualified, or until he or she resigns or is removed in accordance with the Company’s bylaws and the provisions of the Delaware Corporations Code. The Company’s officers are appointed by the Company’s Board of Directors and hold office until removed by the Board.
Committees of the Board
We do not currently have standing nominating or compensation committees, or committees performing similar functions. Due to the size of our board, our Board of Directors believes that it is not necessary to have standing nominating or compensation committees at this time because the functions of such committees are adequately performed by our Board of Directors. We do not have a nominating or compensation committee charter as we do not currently have such committees. We do not have a policy for electing members to the board. Our current director is not an independent director as defined in the NASD listing standards.
It is anticipated that as the Company grows that the Board of Directors will be expanded and form separate compensation and nominating committees, and appoint members to an audit committee that will include an audit committee financial expert.
Audit Committee
Our Board of Directors has not established a separate audit committee within the meaning of Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our Board of Directors currently performs the services of an audit committee. Our current director cannot be considered an “audit committee financial expert.” We will need to attract an individual with the qualification of an audit committee expert to our Audit Committee. At this time, we have not identified such an individual.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers, and shareholders holding more than 10% of our outstanding Common Stock to file with the SEC initial reports of ownership and reports of changes in beneficial ownership of our Common Stock. Executive officers, directors, and persons who own more than 10% of our Common Stock are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file.
Based solely upon a review of forms as filed with the SEC during our most recent fiscal year ended December 31, 2015, with the exception of Andrew Molasky, none of our executive officers and directors, and persons who own more than 10% of our Common Stock timely filed the reports required pursuant to Section 16(a) of the Exchange Act.
Nominations to the Board of Directors
Our directors take a critical role in guiding our strategic direction and oversee the management of the Company. Board candidates are considered based upon various criteria, such as their broad-based business and professional skills and experiences, a global business and social perspective, concern for the long-term interests of the shareholders, diversity, and personal integrity and judgment. In addition, directors must have time available to devote to Board activities and to enhance their knowledge in the growing business. Accordingly, we seek to attract and retain highly qualified directors who have sufficient time to attend to their substantial duties and responsibilities to the Company. In carrying out its responsibilities, the Board will consider candidates suggested by shareholders. If a shareholder wishes to formally place a candidate’s name in nomination, however, he or she must do so in accordance with the provisions of the Company’s Bylaws. Suggestions for candidates to be evaluated by the proposed directors must be sent to the Board of Directors, c/o LED Lighting Company, to the address set forth on the cover page of this Annual Report.
Board Leadership Structure and Role on Risk Oversight
Mr. Kevin Kearney currently serves as the Company’s principal executive officer and chairman. The Company determined this leadership structure was appropriate for the Company due to our small size and limited operations and resources. The Board of Directors will continue to evaluate the Company’s leadership structure and modify as appropriate based on the size, resources and operations of the Company.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between our board of directors and the board of directors or compensation committee of any other company, nor has any interlocking relationship existed in the past.
Director Qualifications
In evaluating director nominees, our Company considers the following factors:
·
The appropriate size of the Board;
·
Our needs with respect to the particular talents and experience of our directors;
·
The knowledge, skills and experience of nominees;
·
Experience with accounting rules and practices; and
·
The nominees’ other commitments.
Our Company’s goal is to assemble a Board of Directors that brings our Company a variety of perspectives and skills derived from high quality business, professional and personal experience. Other than the foregoing, there are no stated minimum criteria for director nominees.
Mr. Kearney, in addition to his role as a director, is our Company’s Chief Executive Officer. We feel that the senior member of our management team is the appropriate person to lead our Board of Directors. Mr. Kearney has public company experience, as well as experience in building businesses and experience in the real estate and building industries, both of which represent target markets for the Company.
Family Relationships
Not applicable as we have a sole officer and director.
Code of Ethics
Effective as of June 26, 2013, our board of directors adopted a Code of Business Conduct and Ethics that applies to, among other persons, our president or chief executive officer as well as the individuals performing the functions of our chief financial officer, corporate secretary and controller. As adopted, our Code of Business Conduct and Ethics sets forth written standards that are designed to deter wrongdoing and to promote:
·
honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
·
full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission and in other public communications made by us;
·
the prompt internal reporting of violations of the Code of Business Conduct and Ethics to an appropriate person or persons identified in the Code of Business Conduct and Ethics; and
·
accountability for adherence to the Code of Business Conduct and Ethics.
Our Code of Business Conduct and Ethics requires, among other things, that all of our personnel be afforded full access to our president or chief executive officer with respect to any matter which may arise relating to the Code of Business Conduct and Ethics. Further, all of our personnel are to be afforded full access to our board of directors if any such matter involves an alleged breach of the Code of Business Conduct and Ethics by our president or chief executive officer.
In addition, our Code of Business Conduct and Ethics emphasizes that all employees, and particularly managers and/or supervisors, have a responsibility for maintaining financial integrity within our company, consistent with generally accepted accounting principles, and federal, provincial and state securities laws. Any employee who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to his or her immediate supervisor or to our president or chief executive officer. If the incident involves an alleged breach of the Code of Business Conduct and Ethics by our president or chief executive officer, the incident must be reported to any member of our board of directors or use of a confidential and anonymous hotline phone number. Any failure to report such inappropriate or irregular conduct of others is to be treated as a severe disciplinary matter. It is against our company policy to retaliate against any individual who reports in good faith the violation or potential violation of our Code of Business Conduct and Ethics by another. Our Code of Business Conduct and Ethics is available, free of charge, to any stockholder upon written request to our Corporate Secretary at LED Lighting Company, at the address on the cover page of this Annual Report. A copy of our Code of Business Conduct and Ethics is also attached as an exhibit to our Current Report on Form 8-K filed with the SEC on July 3, 2013.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our current directors or executive officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past ten years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our discussion below in "Transactions with Related Persons; Promoters and Certain Control Persons; Director Independence," none of our current directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons for services rendered in all capacities during fiscal 2015. Compensation to Directors and officers was not paid in 2015.
Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards
($)
Non-equity
Incentive Comp
($)
Change in
Pension
Value and
Non-Qual.
Deferred
Compens.
Earnings
($)
All Other
Comp
Total
($)
Kevin Kearney
80,000(1)
-
50,000
-
-
-
-
50,000
Chief Executive Officer/Chief Financial Officer/Director since May 28, 2013.
-
-
-
-
-
-
-
-
(1)
Effective October 17, 2013, LED Lighting Company entered into an Employment Agreement with Kevin Kearney. The Employment Agreement had provided for a term of one year with potential for extension with annual compensation of $120,000. The Company did not pay any salary to Mr. Kearney but accrued $50,000 related to this agreement that was recorded under other current liabilities as of December 31, 2013. In August 2014, the employment agreement was terminated. Mr. Kearney had received $30,000 in cash compensation during 2014 and received the remainder [$100,000, taking into account the $50,000 liability from 2013 and incremental accrual in 2014] in the form of shares in the Company priced at $1.00. The last price at which shares were sold to an investor was $0.75. Mr. Kearney received no cash compensation in 2015.
Employment and Consulting Agreements
Effective August 4, 2015, the Company agreed to issue to a Company consultant 500,000 shares of restricted common stock as compensation for services provided to the Company. The issuance of shares were made in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company’s reliance upon Section 4(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there was only one recipient; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individual and the Company; and (f) the recipient of the securities was an accredited investor.
Grants of Stock Awards
During 2015, there were no grants of plan-based awards to our named executive officers.
Option Exercises and Stock Vested
During the 2015, there were no option exercises or vesting of stock awards to our named executive officers.
Outstanding Equity Awards at Fiscal Year End
None.
Compensation of Directors
During the 2015 no member of our Board of Directors received any compensation for his services as a director.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 30, 2015, information with respect to the securities holdings of (i) our officers and directors, and (ii) all persons which, pursuant to filings with the SEC and our stock transfer records, we have reason to believe may be deemed the beneficial owner of more than five percent (5%) of the Common Stock. The securities "beneficially owned" by an individual are determined in accordance with the definition of "beneficial ownership" set forth in the regulations promulgated under the Exchange Act and, accordingly, may include securities owned by or for, among others, the spouse and/or minor children of an individual and any other relative who resides in the same home as such individual, as well as other securities as to which the individual has or shares voting or investment power or which each person has the right to acquire within 60 days through the exercise of options or otherwise. Beneficial ownership may be disclaimed as to certain of the securities. This table has been prepared based on the number of shares outstanding totaling 26,157,195, adjusted individually to include all warrants held by such individual which are exercisable within 60 days of April 14, 2016 as shown below.
Name and Address of Beneficial Owner(1)
Amount and Nature of Beneficial Ownership
Percentage of Class Beneficially Owned(2)
Officers and Directors
Kevin Kearney
1,164,608(3)
4.5%
All directors and executive officers as a group (1 person)
1,164,608(3)
4.5%
5% or Greater Stockholders
Mainas Development Corporation
2090 Novato Blvd
Novato, CA 94947
13,000,000
49.7%
Lovitt & Hannan, Inc. 401K FBO J. Thomas Hannan
900 Front Street, Suite 300
San Francisco, California 94111
1,820,137(4)
6.8%
George Mainas
2090 Novato Blvd.
Novato, California 94947
2,026,726(5)
7.7%
Steven J. Davis
1042 N. El Camino Real, B261
Encinitas, California 92024
1,500,000(5)
5.7%
Gary J. Rockis
555 Edgewater Drive
Morris, IL 60540
1,599,542(6)
6.1%
Andrew Molasky
100 North City Parkway, Suite 1700
Las Vegas, NV 89106
4,025,713(7)
14.7%
(1)
Unless otherwise noted, the address is c/o LED Lighting Company, 2090 Novato Blvd., Novato, CA 94947.
(2)
Percentage of class beneficially owned is calculated by dividing the amount and nature of beneficial ownership (which includes all shares which may be issued to each beneficial owner under warrants and convertible instruments which are exercisable within 60 days of April 14, 2016) by the total shares of common stock outstanding as of April 14, 2016 and all shares which may be issued to that beneficial owner under warrants and convertible instruments which are exercisable within 60 days of April 14, 2016.
(3)
Includes warrants to purchase up to 250,000 shares of common stock at $1.00 per share which are exercisable within 60 days after April 14, 2016.
(4)
Includes warrants to purchase up to 500,000 shares of common stock at $1.00 per share which are exercisable within 60 days after April 14, 2016.
(5)
Includes warrants to purchase up to 250,000 shares of common stock at $1.00 per share which are exercisable within 60 days after April 14, 2016.
(6)
Includes warrants to purchase up to 360,000 shares of common stock at $1.00 per share which are exercisable within 60 days after April 14, 2016.
(7)
Includes warrants to purchase up to 1,255,925 shares of common stock at $1.00 per share which are exercisable within 60 days after April 14, 2016.
Change of Control
Effective December 14, 2015, the Company entered into a Loan Agreement with Mainas Development Corporation (“MDC”) pursuant to which MDC agreed to loan the Company up to $130,000. The Loan Document provides that the loan shall accrue interest at the rate of 7% per annum and is due on December 14, 2016. The Company issued MDC 13,000,000 shares of Company common stock in consideration of extending the loan to the Company. MDC is an entity owned and controlled by George Mainas who, prior to the issuance of the shares to MDC, owned greater than 10% of the outstanding shares of the Company.
The Company had 13,157,195 shares of common stock outstanding immediately prior to the issuance of shares to MDC on December 14, 2015. As a result of the issuance of shares to MDC, the shareholders of the Company which existed prior to the closings own approximately 50.3% of the outstanding common stock of the Company, and MDC owns 49.7%. Taking into account the 1,526,726 shares owned by George Mainas prior to issuance of shares to MDC, George Mainas now controls 55.5% of the outstanding common stock of the Company, which constitutes a change of control of the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The following includes a summary of any transaction occurring since January 1, 2013, or any proposed transaction, in which any related person had or will have a direct or indirect material interest (other than compensation described under "Executive Compensation" above). We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm's-length transactions.
·
On May 28, 2013, the Company entered into a Share Cancellation Agreement with Joseph Merhi pursuant to which he agreed to cancel 18,500,000 of his shares of Company common stock resulting in him owning 1,000,000 shares of Company common stock. On May 28, 2013, Mr. Merhi also resigned all of his officer positions with the Company. Mr. Merhi was a director of the Company until October 17, 2013. Mr. Merhi was a control person of the Company prior to May 28, 2013.
·
On May 28, 2013, the Company entered into a Consulting Agreement with George Mainas pursuant to which the Company agreed to pay $140,000 in exchange for certain consulting services to the Company. Mr. Mainas is a beneficial owner of 5% or more of the Company’s securities.
·
On October 17, 2013, the Company entered into an Employment Agreement with Kevin Kearney, its Chief Executive Officer, Chief Financial Officer, President and Secretary. The Employment Agreement provides for a term of one year; annual compensation of $120,000; and the issuance of 500,000 shares of Company common stock.
·
Effective October 17, 2013, the Company entered into a Consulting Agreement with George Mainas, a shareholder. The Consulting Agreement provided for a term of one year; monthly compensation of $10,000; and the issuance of 500,000 shares of Company common stock. The foregoing is only a brief description of the material terms of the Consulting Agreement, and does not purport to be a complete description of the rights and obligations of the parties thereunder and such descriptions are qualified in their entirety by reference to the agreement which is filed as an exhibit to the Company’s Current Report on Form 8K filed with the SEC on October 17, 2013. On September 3, 2014, the Consulting Agreement was terminated and a settlement reached with Mr. Mainas under which accrued compensation ($110,000, with $50,000 having accrued during 2013 and $60,000 accruing during 2014) would be paid to Mr. Mainas in the form of common shares priced at $1.00.
·
Effective October 17, 2013, the Company entered into a Consulting Agreement with Thomas Hannan, a shareholder. The Consulting Agreement provided for a term of one year; monthly compensation of $5,000; and the issuance of 500,000 shares of Company common stock. The foregoing is only a brief description of the material terms of the Consulting Agreement, and does not purport to be a complete description of the rights and obligations of the parties thereunder and such descriptions are qualified in their entirety by reference to the agreement which is filed as an exhibit to the Company’s Current Report on Form 8K filed with the SEC on October 17, 2013. On September 3, 2014, the Consulting Agreement was terminated and a settlement reached with Mr. Hannan under which accrued compensation ($50,000, with $10,000 having accrued during 2013 and $40,000 accruing during 2014) would be paid to Mr. Hannan in the form of common shares priced at $1.00.
·
Effective and vested on July 1, 2014, the Company entered into a consulting agreement with Andrew Molasky for his provision of certain business consulting services to the Company. The consulting agreement provides for the Company’s issuance of 1,255,295 shares of Company common stock to Mr. Molasky in consideration for his services. The shares were valued using the price per share used in the most recent equity sale transaction of $0.75 for a total value of $941,471 which was recorded as consulting fees.
·
Effective August 25, 2014, the Company entered into Debt Conversion Agreements with George Mainas, J. Thomas Hannan and Kevin Kearney pursuant to which each individual agreed to convert all amounts of compensation accrued and payable to such person under the terms of their respective consulting or employment agreement as of August 31, 2014 into shares of Company common stock at $1.00 per share. The Debt Conversion Agreements resulted in the conversion of an aggregate of $260,000 into 260,000 shares of Company common stock. Mr. Mainas and Mr. Hannan also agreed that their consulting agreements would be terminated as of August 31, 2014, and Mr. Kearney agreed that no future compensation will be owed to him by the Company under his employment agreement as of August 31, 2014. The foregoing is only a brief description of the material terms of the Debt Conversion Agreements, and does not purport to be a complete description of the rights and obligations of the parties under those agreements.
·
Effective August 4, 2015, the Company agreed to convert a total of $393,857 in outstanding debt and trade payables owed to 8 Company shareholders at a price of $0.10 per share into a total of 3,938,566 shares of restricted common stock (the “2015 Debt Conversion”). Related party participants in the 2015 Debt Conversion included Kevin Kearney (64,608 shares), Thomas Hannan (270,137 shares), Steven Davis (500,000 shares), Gary Rockis (539,542 shares), Andrew Molasky (1,515,123 shares) and George Mainas (916,726 shares).
·
Effective December 14, 2015, LED Lighting Company (the “Company”) entered into a Loan Agreement (the “Loan Document”) with Mainas Development Corporation (“MDC”) pursuant to which MDC agreed to loan the Company up to $130,000. The Loan Document provides that the loan shall accrue interest at the rate of 7% per annum and is due on December 14, 2016. The Company issued MDC 13,000,000 shares of Company common stock in consideration of extending the loan to the Company. MDC is an entity owned and controlled by George Mainas who owns greater than 10% of the outstanding shares of the Company.
Review, approval or ratification of transactions with related persons
We do not have any other special committee, policy or procedure related to the review, approval or ratification of related party transactions.
Director Independence
The Board has determined that our sole director is not independent as the term "independent" is defined by the rules of NASDAQ Rule 5605.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
(1) Audit Fees
The aggregate fees billed for professional services rendered by the principal accountants for the audit of the registrant's annual financial statements and review of financial statements included in the registrant's Form 10-K or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the fiscal year ended December 31, 2015 were $26,000.
(2) Audit-Related Fees
There were no fees billed during the two years ended December 31, 2015 for assurance and related services by the principal accountants that are reasonably related to the performance of the audit or review of the registrant's financial statements and are not reported under item (1).
(3) Tax Fees
No aggregate fees were billed for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning for the fiscal year ended December 31, 2015.
(4) All Other Fees
No aggregate fees were billed for professional services provided by the principal accountant, other than the services reported in items (1) through (3) for the two years ended December 31, 2015.
(5) Audit Committee
The Company’s Board of Directors, which serves as the Company’s Audit Committee, has approved the principal accountant's performance of services for the audit of the registrant's financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the fiscal year ended December 31, 2015. Audit-related fees, tax fees, and all other fees, if any, were approved by the Board of Directors performing the functions of the Audit Committee.
(6) Work Performance by others
The percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees was less than 50 percent.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this Report:
(1) Financial Statements-all consolidated financial statements of the Company as set forth under Item 8, beginning on page of this Report.
(2) Financial Statement Schedules - As a smaller reporting company we are not required to provide the information required by this item.
(3) Exhibits
No.
Description
3.1
Certificate of Formation of the Company dated July 19, 2010 (1)
3.1.1
Certificate of Amendment to Certificate of Formation dated May 28, 2013 (2)
3.2
Bylaws of the Company (1)
10.1
Share Cancellation Agreement dated May 28, 2013 (2)
10.2
Consulting Agreement with George Mainas dated May 28, 2013 (2)
10.3
Consulting Agreement with Mark Wolff dated June 1, 2013 (2)
10.4
Form of Warrant Agreement with Mark Wolff dated June 1, 2013 (2)
10.5
Form of Subscription Agreement (2)
10.6
2013 Equity Incentive Plan (2)
10.7
Non-Exclusive Distributor Agreement with Polybrite International, Inc. dated May 30, 2013 (3)
10.8
Sales Representative Agreement with Polybrite International, Inc. dated May 30, 2013 (3)
10.9
Employment Agreement dated October 17, 2013 with Kevin Kearney (4)
10.10
Amendment to Consulting Agreement dated October 17, 2013 with George Mainas (4)
10.11
Consulting Agreement dated December 9, 2013 with J. Thomas Hannan (5)
10.12
Consulting Agreement dated July 1, 2014 with Andrew Molasky (7)
10.13
Warrant Agreement dated July 1, 2014 with Andrew Molasky (7)
10.14
Debt Conversion Agreement dated August 25, 2014 with George Mainas (8)
10.15
Debt Conversion Agreement dated August 25, 2014 with J. Thomas Hannan (8)
10.16
Debt Conversion Agreement dated August 25, 2014 with Kevin Kearney (8)
10.17
Loan Agreement dated November 6, 2014 with Andrew Molasky (9)
10.18
Convertible Promissory Note dated November 6, 2014 with Andrew Molasky (9)
10.19
Settlement Agreement and Mutual Release with Mark Wolff (9)
10.20
Warrant Agreement with Mark Wolff (9)
10.21
Consulting Agreement dated March 17, 2014 with Gary Rockis*
10.22
Debt Conversion Agreement dated August 4, 2015 (10)
10.23
Share Issuance Agreement with Mainas Development Corporation dated December 14, 2015 (11)
14.1
Code of Ethics(6)
List of Subsidiaries*
23.1
Consent of Independent Registered Public Accounting Firm*
Power of Attorney*
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, by the Chief Executive Officer and Chief Financial Officer
Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer and Chief Financial Officer
* Filed herewith
(1)
Incorporated by reference to the Company’s Form 10 filed with the SEC on October 7, 2010.
(2)
Incorporated by reference to the Company’s Form 8-K filed with the SEC on June 4, 2013.
(3)
Incorporated by reference to the Company’s Form 8-K filed with the SEC on June 10, 2013.
(4)
Incorporated by reference to the Company’s Form 8-K filed with the SEC on October 23, 2013.
(5)
Incorporated by reference to the Company’s Form 8-K filed with the SEC on December 16, 2013.
(6)
Incorporated by reference to the Company’s Form 8-K filed with the SEC on July 3, 2013.
(7)
Incorporated by reference to the Company’s Form 8-K filed with the SEC on July 3, 2014.
(8)
Incorporated by reference to the Company’s Form 8-K filed with the SEC on August 27, 2014.
(9)
Incorporated by reference to the Company’s Form 8-K filed with the SEC on November 12, 2014.
(10)
Incorporated by reference to the Company’s Form 8-K filed with the SEC on August 10, 2015.
(11)
Incorporated by reference to the Company’s Form 8-K filed with the SEC on February 8, 2016.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature
Title
Date
/s/ KEVIN KEARNEY
Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) and Director
April 14, 2016
Kevin Kearney
LED LIGHTING COMPANY
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2015 and 2014
Statements of Operations for the years ended December 31, 2015 and 2014
Statement of Changes in Stockholders' Deficit for the years ended December 31, 2015 and 2014
Statements of Cash Flows for the years ended December 31, 2015 and 2014
Notes to Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
LED Lighting Company
We have audited the accompanying balance sheets of LED Lighting Company (the "Company") as of December 31, 2015 and 2014, and the related statement of operations, changes in stockholders’ deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). 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 was not required to have, nor were we engaged to perform, an audit 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 Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 the Company as of December 31, 2015 and 2014 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.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 1, the Company has had minimal revenues and has an accumulated deficit of $4,300,246. These conditions, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management's plans concerning these matters are also described in the Note 1, which include the raising of additional equity financing. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Anton & Chia, LLP
Newport Beach, California
April 14, 2016
The accompanying notes are an integral part of these financial statements.
LED Lighting Company
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
LED Lighting Company
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
The accompanying notes are an integral part of these financial statements.
LED Lighting Company
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
LED LIGHTING COMPANY
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2015 and 2014
1. OVERVIEW
Nature of Operations
LED LIGHTING COMPANY ("the Company"), formerly known as Fun Media World, Inc., was incorporated under the name of Pinewood Acquisition Corporation under the laws of the State of Delaware on July 19, 2010 and was originally formed to engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisitions.
On May 28, 2013, the Company’s board of directors and stockholders approved an amendment to the Company’s Certificate of Formation to change its corporate name to “LED Lighting Company”, and the amendment was filed with the Secretary of State of the State of Delaware on May 30, 2013. On May 28, 2013, new officers and directors were appointed and elected and the prior officers and directors resigned, resulting in the change of control of the Company.
The LED Lighting Company plans to supply LED (light-emitting diode) light bulbs and light fixtures to the commercial, industrial and consumer/retail markets. All of our products are tested and listed by UL Underwriters Laboratories (UL) or Electrical Testing Laboratories (ETL). Additionally, all products to be supplied will be tested and in compliance with industry standards such as those set up by Energy Star, and the Illuminating Engineering Society of North America (IESNA).
Effective as of October 12, 2013, the Company entered into an Agreement and amendment (the “Agreement”) with Goeken Group Corp. and its wholly-owned subsidiary, PolyBrite, pursuant to which the Company and PolyBrite agreed to work together to secure funding for PolyBrite, retain the management consulting services of the Catalyst Acquisition Group LLC, and complete a transaction in which PolyBrite will become a publicly traded company through an acquisition with the Company. The Company and PolyBrite initially anticipated that the completion of the acquisition transaction would occur on or before March 31, 2014. However, the completion of the transactions described in the Agreement did not occur by March 31, 2014. The Company and Polybrite extended the term of the Agreement by amendments through October 31, 2014. The Company and Polybrite did not complete the acquisition transaction and the Agreement as amended has expired as of October 31, 2014. A Standstill Agreement between the Parties dated November 17, 2014 provided that the Company could not complete any acquisition that would prevent the Company from completing a public company transaction of Polybrite between November 17, 2014 and March 1, 2015. As that date has passed, there is currently no agreement between the Company and Polybrite regarding a transaction of this nature, and no discussions are currently ongoing in that regard between the Company and Polybrite.
Going Concern
The Company has sustained operating losses and an accumulated deficit of $4,300,246 since inception of the Company on July 19, 2010 through December 31, 2015. In 2015 the Company incurred a loss of $1,647,133. The Company's continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations, which it has not been able to accomplish to date, and/or obtain additional financing from its stockholders and/or other third parties.
These financial statements have been prepared on a going concern basis, which implies the Company will continue to meet its obligations and continue its operations for the next fiscal year. The continuation of the Company as a going concern is dependent upon financial support from its stockholders, the ability of the Company to obtain necessary equity financing to continue operations, successfully locating and negotiate with a business entity for the combination of that target company with the Company.
The management of the Company plans to use their personal funds or seek equity or debt financing to pay all expenses incurred by the Company in 2016. There is no assurance that the Company will ever be profitable. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies presented below is designed to assist in understanding the Company’s financial statements. Such financial statements and accompanying notes are the representations of the Company’s management, who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) in all material respects, and have been consistently applied in preparing the accompanying financial statements.
Use of Estimates
In preparing these financial statements in conformity with GAAP, management is required to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates and assumptions included in our consolidated financial statements relate to the valuation of long-lived assets, accruals for potential liabilities, and valuation assumptions related to equity instruments and share based payments.
Fair Value Measurements
ASC 820, “Fair Value Measurements”, requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, inputs other than level one that are either directly or indirectly observable such as quoted prices for identical or similar assets or liabilities on markets that are not active; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company had no assets or liabilities required to be recorded at fair value on a recurring basis as of December 31, 2015.
Cash and Cash Equivalents
The Company considers all highly-liquid investments with maturities of three months or less when purchased to be cash equivalents. The Company had no cash equivalents as of December 31, 2015.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. The Company places its cash with high quality banking institutions. From time to time, the Company may maintain cash balances at certain institutions in excess of the Federal Deposit Insurance Corporation limit.
Revenue Recognition
The Company recognizes revenue in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) No. 605, “Revenue Recognition”. In all cases, revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured.
Income Taxes
Under ASC 740, "Income Taxes", deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when it is more likely than not that some or all of the deferred tax assets will not be realized. As of December 31, 2015, there were no deferred taxes.
Share Based Compensation
The Company applies ASC 718, Share-Based Compensation to account for its service providers’ share-based payments. Common stock of the Company was given to service providers to retain their assistance in becoming a U.S. public company, assistance with public company regulations, investors’ communications and public relations with broker-dealers, market makers and other professional services.
In accordance with ASC 718, the Company determines whether a share payment should be classified and accounted for as a liability award or equity award. All grants of share-based payments to service providers classified as equity awards are recognized in the financial statements based on their grant date fair values which are calculated using historical pricing. The Company has elected to recognize compensation expense based on the criteria that the stock awards vest immediately on the issuance date. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent period if actual forfeitures differ from initial estimates. There were no forfeitures of share based compensation.
Net Loss Per Share
Under the provisions of ASC 260, “Earnings per Share,” basic loss per common share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the income of the Company, subject to anti-dilution limitations. The common stock equivalents have not been included as they are anti-dilutive. As of December 31, 2015, there were warrants outstanding for the purchase of 5,418,629 shares of common stock which could potentially dilute future earnings per share. As of December 31, 2014, there were stock options outstanding for the purchase of 300,000 common shares, warrants for the purchase of 5,418,629 common shares, and rights to convert debt into 1,090,000 shares which could potentially dilute future earnings per share.
Recent Accounting Pronouncements
Adopted
On July 18, 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. Topic 740 does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The objective of the amendments in this update is to eliminate that diversity in practice. The Company adopted this ASU as of January 1, 2014. This ASU did not have an effect on our financial statements.
On June 10, 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-10, Development Stage Entities (Topic 915) - Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation, which eliminates the concept of a development stage entity (DSE) its entirety from current accounting guidance. We have elected early adoption of this standard, which eliminates the designation of DSEs and the requirement to disclose results of operations and cash flows since inception.
Not Adopted
ASU 2014-09 affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles-Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU. For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted.
The FASB has issued Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under Generally Accepted Accounting Principles (GAAP), financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. Financial reporting under this presumption is commonly referred to as the going concern basis of accounting. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The amendments are effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company did not elect for early adoption.
In January 2015, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2015-01 Income Statement-Extraordinary and Unusual Items. This Update eliminates from GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement-Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. Paragraph 225-20-45-2 contains the following criteria that must both be met for extraordinary classification:
1. Unusual nature. The underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account the environment in which the entity operates.
2. Infrequency of occurrence. The underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates.
If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. The Company did not elect for early adoption.
In July 2015, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2015-11 Simplifying the Measurement of Inventory. Topic 330, Inventory, currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. An entity should measure inventory within the scope of this Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments in this Update more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company did not elect for early adoption.
We have evaluated the recent accounting pronouncements through the date of issuance of the report and believe that none of them will have a material effect on our financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force and the United States Securities and Exchange Commission) did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
3. ACCOUNTS RECEIVABLE AND LOAN RECEIVABLES
Accounts receivables amounting to $30,000 as of December 31, 2015 were written off on that date. The account receivable was for a sale made in March 2015 to a Mexican customer, GEPSA. Loan receivables amounting to $84,000 as of December 31, 2015 were written off on that date. The Company remains hopeful that through ongoing negotiations it will recover the full value of these receivables. The loan receivable assets were $84,000 as of December 31, 2014. This loan receivable consisted of an advance of $70,000 made to Polybrite, a supplier, and fees of $14,000 due from Polybrite related to the December 2013 Purchase Order Financing and Distribution Agreement that was entered into with Polybrite. Prepaid credit to Polybrite amounting to $36,738 as of December 31, 2015 was written off on that date. The Company remains hopeful that through ongoing negotiations it will recover the full value of this prepaid credit item.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following as of December 31, 2015 and 2014:
Effective August 4, 2015, the Company and the creditors holding more than 97% of accounts payable due from the Company agreed to convert these payables to equity at a price of $0.10 per share, totaling $174,778. This resulted in the issuance of a total of 1,747,775 shares of restricted common stock to these creditors.
As of December 31, 2015, Mainas Development Corporation, a shareholder, had advanced to the Company $26,434 under a Loan Agreement.
5. CONVERTIBLE PROMISSORY NOTES, RELATED PARTY
Effective November 7, 2013, the Company entered into two Secured Convertible Promissory Notes with two investors, one a related party, in the aggregate amount of $15,000. The notes accrue interest at 10% per annum and are due and payable in one year. The note holders had the right to convert all principal and interest outstanding under the notes into shares of Company common stock at the conversion price of $0.10 per share, and receive, upon conversion, an equal number of warrants to purchase shares of Company common stock at a $1.00 exercise price for a term of 3 years, with cashless exercise provision. The two Convertible Notes matured on November 7, 2014 and from that date forward were payable on the demand of the Note Holder.
In July 2014, the Company entered into three Convertible Promissory Notes with related party investors, and one with a Director, in the aggregate amount of $20,000. The notes accrued interest at 10% per annum and were due and payable in one year. The note holders had the right to convert all principal and interest outstanding under the notes into shares of Company common stock at the conversion price of $0.10 per share.
In August 2014, the Company entered into two Convertible Promissory Notes with investors in the Company, both related parties, in the aggregate amount of $9,000. The notes accrued interest at 10% per annum and were due and payable in one year. The note holders had the right to convert all principal and interest outstanding under the notes into shares of Company common stock at the conversion price of $0.10 per share.
In October 2014, the Company entered into two Convertible Promissory Notes with related party investors in the Company, and one with a Director, in the aggregate amount of $15,000. The notes accrued interest at 10% per annum and were due and payable in one year. The note holders had the right to convert all principal and interest outstanding under the notes into shares of Company common stock at the conversion price of $0.10 per share.
In November 2014, the Company issued a $50,000 Convertible Promissory Note with a related party investor in the Company. The note accrued interest at 10% per annum and was due March 1, 2015. The note holders had the right to convert all principal and interest outstanding under the notes into shares of Company common stock at the conversion price of $0.10 per share. The note matured March 1, 2015. From that date forward, the Note was payable on the demand of the Note Holder.
With regard to the $94,000 in notes issued in 2014, the Company recorded beneficial conversion features on the date of issuance that in the aggregate equals $81,468. This was recorded as a debt discount that is amortized over the term of the notes. During the year 2014, amortization of debt discounts amounted to $32,500. During the year 2015, amortization of debt discounts amounted to a further $45,898. These amortizations, in accord with GAAP, are recorded as interest expense. Upon conversion (see below), the remaining $3,069 discount to face value was added back to principal value.
Effective August 4, 2015, the Company and all the holders of convertible securities agreed to convert to equity at a price of $0.10 per share all outstanding convertible notes, totaling $109,000 in principal and $8,917 in accrued interest. This resulted in the issuance of a total of 1,179,174 shares of restricted common stock to these holders of these convertible notes.
A summary table of Convertible Notes issued by the Company is presented below.
Principal
BCF
Amort. Of
Prin. Balance
Accrued
Total Balance
Convertible Notes
Value
Discount
Discount
12/31/2015
Interest
12/31/2015
2013 10% Convertible Notes
$15,000
-
-
-
3,218
-
2014 10% Convertible Notes
$94,000
(81,468)
81,468
-
5,699
-
Total
$109,000
(81,468)
81,468
-
8,917
-
6. NOTES PAYABLE, RELATED PARTY
In December 2013, the Company issued an unsecured and non-interest bearing note payable for an amount of $70,000. The note payable was due on demand.
In April 2014, the Company issued an unsecured, 10% bearing note payable to Andrew Molasky, a related party, for services rendered as a consultant in the amount of $20,000. The note payable was due on demand.
In July 2014, the Company issued an unsecured and non-interest bearing note payable to Gary Rockis, a related party, for services rendered as a consultant in the amount of $8,438. The note payable was due on demand.
Effective August 4, 2015, the Company and all the holders of related party notes set forth above agreed to convert to equity at a price of $0.10 per share all outstanding notes payable, totaling $98,438 in principal and $2,724 in accrued interest. This resulted in the issuance of a total of 1,011,617 shares of restricted common stock to these noteholders.
7. STOCK BASED COMPENSATION
Generally, all forms of share-based payments, including stock option grants, restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on the estimated number of awards that are ultimately expected to vest. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The expenses resulting from share-based payments are recorded in operating expenses in the statement of operations.
Stock Options
On May 28, 2013, the Company’s board of directors and stockholders approved the adoption of the LED Lighting Company 2013 Equity Incentive Plan (the “2013 Plan”). The 2013 Plan is intended to aid the Company in recruiting and retaining key employees, directors or consultants and to motivate them by providing incentives through the granting of awards of stock options or other stock based awards. The 2013 Plan is administered by the board of directors. Directors, officers, employees and consultants of the Company and its affiliates are eligible to participate under the 2013 Plan. A total of 1,500,000 shares of common stock have been reserved for awards under the 2013 Plan.
Effective October 17, 2013, the Company granted 100,000 options to purchase Common Stock under its 2013 Equity Incentive Plan to each of three consultants for services provided to the Company. The options had an exercise price of $1.00 per share and would be exercised for a period of two years from the date of grant, and have therefore expired as of October 17, 2015.
A summary of option activity under the Plan as of December 31, 2014 and changes during 2015 is presented below:
Warrants
On various dates in 2013 and in connection with subscription agreements, the Company issued three-year warrants to purchase up to 3,350,000 shares of common stock at an exercise price of $1.00 per share. Since the warrants were issued in connection with a private placement and sale of Company’s common stock, there was no accounting impact related to the issuance of warrants on the accompanying financial statements.
On various dates in 2014 and in connection with the subscription agreements, the Company issued three-year warrants to purchase up to 363,333 shares of common stock at an exercise price of $1.00 per share. Since the warrants were issued in connection with a private placement and sale of Company’s common stock, there were no accounting impact related to the issuance of warrants on the accompanying financial statements Additionally, the associated warrants were valued using the Black-Scholes-Merton valuation model with the following assumptions: risk free interest rates of 0.14%, dividend yield of 0%, volatility factors of the expected market price of similar common stock of 45%, and an expected life of 1 year. The aggregate fair value of the warrants is $31,541.
Effective June 1, 2013, the Company entered into a Consulting Agreement with Mark Wolff pursuant to which the Company has agreed to issue Mr. Wolff a Warrant to purchase up to 500,000 shares of Company common stock at an exercise price of $1.00 per share, vesting in 12 monthly increments starting on July 1, 2013 and terminating in 3 years. The Consulting Agreement was terminated as of August 1, 2013 and the vesting of the warrants terminated as of that date. These warrants were valued using the Black-Scholes-Merton valuation model with the following assumptions: risk free interest rates of 0.14%, dividend yield of 0%, volatility factors of the expected market price of similar common stock of 103%, and an expected life of 1 year. The warrants had an aggregate fair value of $668. The Company recorded stock based compensation of $334 during the year ended December 31, 2013 related to these warrants. Due to the termination of the Agreement and settlement between the parties, no compensation was incurred in relation to these warrants in 2014 and in 2015.
Effective and vested on July 1, 2014, the Company entered into a consulting agreement with Andrew Molasky, a related party, for his provision of certain business consulting services to the Company. The consulting agreement provides for the Company’s issuance of 1,255,295 shares of Company common stock to Mr. Molasky in consideration for his services. The shares were valued using the price per share used in the most recent equity sale transaction of $0.75 for a total value of $941,471 which was recorded as consulting fees. In connection with the consulting agreement, the Company also issued a common stock purchase warrant to Mr. Molasky pursuant to which he may purchase up to 1,255,295 shares of Company common stock at $1.00 per share for up to three years. The warrants were valued on the date of issuance using the Black-Scholes valuation model at $85,991 under the following assumptions: risk free interest rates of 0.10%, dividend yield of 0%, volatility factors of the expected market price of similar common stock of 48%, and an expected life of 1 year and were recorded as stock based compensation as of December 31, 2014.
Effective September 25, 2014, the Company issued a Warrant to Purchase Common Stock as stock based compensation to Mark Blackwell for services rendered, pursuant to which the Company agreed to issue him the right to purchase 300,000 shares of Company common stock for $1.00 per share for a period of 3 years. These warrants were valued using the Black-Scholes-Merton valuation model with the following assumptions: risk free interest rates of 0.09%, dividend yield of 0%, volatility factors of the expected market price of similar common stock of 71%, and an expected life of 1 year. The warrants were valued on the date of issuance using the Black-Scholes valuation model at $41,018.
Effective October 22, 2014, the Company entered into a Settlement Agreement and Mutual Release and Warrant Agreement (the “Settlement Documents”) with Mark Wolff pursuant to which the Company agreed to issue Mr. Wolff 50,000 shares of Company common stock and a warrant to purchase up to 150,000 shares of Company common stock for $1.00 per share for a period of 2 years, and Mr. Wolff agreed to settle and release any and all claims pursuant to the previously entered into consulting agreement and warrant dated June 1, 2013 between Mr. Wolff and the Company. The foregoing is only a brief description of the material terms of the Settlement Documents, and does not purport to be a complete description of the rights and obligations of the parties under those agreements. These warrants were valued using the Black-Scholes-Merton valuation model with the following assumptions: risk free interest rates of 0.11%, dividend yield of 0%, volatility factors of the expected market price of similar common stock of 78%, and an expected life of 1 year. The warrants were valued on the date of issuance using the Black-Scholes valuation model at $23,581.
As the exercise price of the warrants issued exceeded the price at which shares have been issued by the Company, the warrants have no intrinsic value.
A summary of warrant activity as of December 31, 2015 and changes during the year then ended is presented below:
8. STOCKHOLDERS’ DEFICIT
The Company is authorized to issue 100,000,000 shares of common stock and 20,000,000 shares of preferred stock.
On July 19, 2010, the Company issued 20,000,000 common shares to its sole director and officer for $2,000 in cash.
On May 27, 2011, the Company redeemed from its then two shareholders an aggregate of 19,500,000 of its 20,000,000 shares of outstanding stock at a redemption price of $0.0001 per share for an aggregate redemption price of $1,950.
On June 1, 2011, the Company issued 19,500,000 shares of common stock to new unrelated third party investors in order to evoke a change in ownership.
On March 2, 2012, Mr. Yanshi (Steven) Chen, the owner of 17,000,000 shares of the Company’s common stock, and DEP Group (a BVI corporation), the owner of 2,500,000 shares of the Company's common stock, transferred all such shares aggregating 19,500,000 shares of the outstanding 20,000,000 shares (97.5%) of the Company's common stock to Joseph Merhi for an aggregate purchase price of $95,000.
On May 28, 2013, the Company entered into a Share Cancellation Agreement with the then 3 existing stockholders of the Company pursuant to which the stockholders agreed to collectively cancel 18,900,000 of their issued and outstanding shares resulting in 1,100,000 shares issued and outstanding among the 3 stockholders. One of the 3 existing stockholders is Joseph Merhi, who is also a director of the Company.
On May 28, 2013, the Company entered into subscription agreement with its outside legal counsel pursuant to which the Company agreed to issue a total of 250,000 shares of common stock at $0.10 per share, and three-year warrants to purchase up to 250,000 shares of common stock at $1.00 per share, to settle legal service expenses amounted to $25,000. The Company also entered subscription agreement with an accredited investor pursuant to which the Company issued a total of 250,000 shares of common stock at $0.10 per share, and three-year warrants to purchase up to 250,000 shares of common stock at $1.00 per share, to settle expenses that investor paid on behalf of the Company.
During the period from May 28, 2013 to December 31, 2013, the Company entered into subscription agreements with 13 accredited investors pursuant to which the Company agreed to issue a total of 2,850,000 shares of common stock at $0.10 per share, and three-year warrants to purchase up to 2,850,000 shares of common stock at $1.00 per share, in exchange for cash proceeds totaling $285,000.
Effective October 17, 2013, the Company issued 500,000 shares of Company common stock to each of Kevin Kearney, George Mainas and Steven J. Davis, the Company’s legal counsel, in consideration for services provided to the Company without payment of cash compensation, and for their efforts in negotiating and securing the agreement with Goeken Group Corp. and PolyBrite International, Inc. The issuance of shares was made in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company’s reliance upon Section 4(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there were only a limited number of recipients; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individuals and the Company; and (f) the recipients of the shares were all accredited investors.
On December 10, 2013, the Company entered into a Consulting Agreement with J. Thomas Hannan providing for certain consulting services from him in consideration for a monthly consulting fee of $5,000 dollars and the issuance of 500,000 shares of Company common stock.
Between January 17, 2014 and June 30, 2014 the Company agreed to issue to 6 accredited investors a total of 363,333 shares of Common Stock and 363,333 warrants to purchase shares of Common Stock at an exercise price of $1.00 with a 3 year term, resulting in proceeds to the Company of $235,000.
On March 17, 2014, the Company entered into a consulting agreement with Gary Rockis, a related party, for certain sales and business related consulting services in consideration for the issuance of 300,000 shares of Company common stock. The shares were valued at $225,000 using the price per share used in the most recent equity sale transaction of $0.75. On June 12, 2014, and in connection with Gary Rockis consulting agreement mentioned above, the Company issued additional 40,000 shares of Company common stock as a bonus payment. The shares were valued at $30,000 using the price per share used in the most recent equity sale transaction of $0.75.
Effective and vested on July 1, 2014, the Company entered into a consulting agreement with Andrew Molasky, a related party, for his provision of certain business consulting services to the Company. The consulting agreement provides for the Company’s issuance of 1,255,295 shares of Company common stock to Mr. Molasky in consideration for his services. The shares were valued using the price per share used in the most recent equity sale transaction of $0.75 for a total value of $941,471 which was recorded as consulting fees. In connection with the consulting agreement, the Company also issued a common stock purchase warrant to Mr. Molasky pursuant to which he may purchase up to 1,255,295 shares of Company common stock at $1.00 per share for up to three years. The warrants were valued on the date of issuance using the Black-Scholes valuation model at $85,991 and were recorded as stock based compensation.
Effective August 25, 2014, the Company entered into Debt Conversion Agreements with related parties George Mainas, J. Thomas Hannan and Kevin Kearney pursuant to which each individual agreed to convert all amounts of compensation accrued and payable to such person under the terms of their respective consulting or employment agreement as of August 31, 2014 into shares of Company common stock at $1.00 per share. The Debt Conversion Agreements resulted in the conversion of an aggregate of $260,000 into 260,000 shares of Company common stock. Mr. Mainas and Mr. Hannan also agreed that their consulting agreements would be terminated as of August 31, 2014, and Mr. Kearney agreed that no future compensation will be owed to him by the Company under his employment agreement as of August 31, 2014. The foregoing is only a brief description of the material terms of the Debt Conversion Agreements, and does not purport to be a complete description of the rights and obligations of the parties under those agreements.
On September 25, 2014, the Company issued to Mark Blackwell, an individual who had provided consulting services to the Company under a Consulting Agreement dated April 1, 2014, a Warrant to Purchase Common Stock. Exercise of the Warrant would allow Mr. Blackwell to purchase up to 300,000 shares of Company common stock for $1.00 per share for a period of 2 years from the date of issuance of the Warrant. The Fair Market Value of the warrants was determined to be $41,018.
Effective October 22, 2014, the Company entered into a Settlement Agreement and Mutual Release and Warrant Agreement (the “Settlement Documents”) with Mark Wolff pursuant to which the Company agreed to issue Mr. Wolff 50,000 shares of Company common stock and a warrant to purchase up to 150,000 shares of Company common stock for $1.00 per share for a period of 2 years, and Mr. Wolff agreed to settle and release any and all claims pursuant to the previously entered into consulting agreement and warrant dated June 1, 2013 between Mr. Wolff and the Company. The Fair Market Value of the warrants was determined to be $23,581.
Effective August 4, 2015, the Company agreed to convert a total of $393,857 in outstanding debt and trade payables owed to 8 Company shareholders into a total of 3,938,566 shares of restricted common stock. The issuance of shares was made in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company’s reliance upon Section 4(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities were isolated private transactions by us which did not involve a public offering; (b) there was only 8 recipients and all recipients are Company shareholders; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individuals and the Company; and (f) the recipients of the securities are all accredited investors.
Effective August 4, 2015, the Company agreed to issue to a Company consultant 500,000 shares of restricted common stock as compensation for services provided to the Company. The issuance of shares were made in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company’s reliance upon Section 4(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there was only one recipient; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individual and the Company; and (f) the recipient of the securities was an accredited investor.
Effective December 14, 2015, the Company entered into a Loan Agreement (the “Loan Document”) with Mainas Development Corporation (“MDC”) pursuant to which MDC agreed to loan the Company up to $130,000. The Loan Document provides that the loan shall accrue interest at the rate of 7% per annum and is due on December 14, 2016. The Company issued MDC 13,000,000 shares of Company common stock in consideration of extending the loan to the Company. MDC is an entity owned and controlled by George Mainas who owns greater than 10% of the outstanding shares of the Company. The foregoing is only a brief description of the material terms of the Loan Document, and does not purport to be a complete description of the rights and obligations of the parties under that agreement, and such description is qualified in its entirety by reference to the agreement which is filed as an exhibit to this Current Report.
9. INCOME TAXES
Our provisions for income taxes for the years ended December 31, 2015 and 2014, respectively, were as follows (using our blended effective Federal and State income tax rate of 35.0%):
Deferred tax assets at December 31, 2015 and 2014 consisted of the following:
Internal Revenue Code Section 382 and similar California rules place a limitation on the amount of taxable income that can be offset in a single year by net operating loss carryforwards (“NOL”) after a change in control (generally greater than a 50% change in ownership). Transactions such as planned future sales of our common stock may be included in determining such a change in control. These factors give rise to uncertainty as to whether the net deferred tax assets are realizable. We have approximately $1,505,000 in NOL at December 31, 2015 that will begin to expire in 2029 for federal and state purposes and could be limited for use under IRC Section 382. We have recorded a valuation allowance against the entire net deferred tax asset balance due because we believe there exists a substantial doubt that we will be able to realize the benefits due to our lack of a history of earnings and due to possible limitations under IRC Section 382. A reconciliation of the expected tax benefit computed at the U.S. federal and state statutory income tax rates to our tax benefit for the years ended December 31, 2015 and 2014 is as follows:
We file income tax returns in the U.S. with varying statutes of limitations. Our policy is to recognize interest expense and penalties related to income tax matters as a component of our provision for income taxes. There were no accrued interest and penalties associated with uncertain tax positions as of December 31, 2015 and 2014. We have no unrecognized tax benefits and thus no interest or penalties included in the financial statements.
10. SUBSEQUENT EVENT
On March 18, 2016, Integrated Systems Technology, Inc., a party related to the Company through its owner Gary Rockis, advanced $30,000 to the Company. IST and its principal owner Gary Rockis collectively own 1,289,542 shares in the Company, 4.93% of the total.