UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: December 31, 2014

 

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from________ to ________

 

Commission File No.: 000-54331

 

THE GUITAMMER COMPANY

(Exact name of registrant as specified in its charter)

 

Nevada		61-1650777
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

6117 Maxtown Road, Westerville, OH 43082

(Address of principal executive offices)

 

Registrant’s telephone number, including area code: (614) 898-9370

 

Securities registered pursuant to Section 12(b) of the Exchange Act: None

 

Securities registered pursuant to Section 12(g) of the Exchange Act:

 

Common Stock, Par Value $0.001

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x

 

Indicate by check mark whether the registrant has (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes  x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨  Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2014, was $7,859,274 (computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity as of the last business day of the registrant's most recently completed second fiscal quarter). For purposes of the foregoing calculation only, directors, executive officers, and holders of 10% or more of the issuer’s common capital stock have been deemed affiliates.

 

The number of shares outstanding of the Registrant’s Common Stock as March 13, 2015 was 83,187,998.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

None.

 

 

 

THE GUITAMMER COMPANY

 

Annual Report on Form 10-K

TABLE OF CONTENTS

 

			Page
PART I
Item 1.	Business			3
Item 1A.	Risk Factors			9
Item 1B.	Unresolved Staff Comments			9
Item 2.	Properties			9
Item 3.	Legal Proceedings			9
Item 4.	Mine safety disclosures			9
PART II
Item 5.	Market for our Common Equity and Related Stockholder Matters			10
Item 6.	Selected Financial Data			11
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations			11
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk			17
Item 8.	Financial Statements and Supplementary Data			17
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures			18
Item 9A.	Controls and Procedures			18
Item 9B.	Other Information			19
PART III
Item 10.	Directors, Executive Officers and Corporate Governance			20
Item 11.	Executive Compensation			22
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			30
Item 13.	Certain Relationship and Related Transactions, and Director Independence			31
Item 14.	Principal Accountant Fees and Services			33
PART IV
Item 15.	Exhibits and Financial Statement Schedules			34
Signatures				41

 

2

 

Item 1. Business.

 

Historical Overview

 

The Guitammer Company (“Guitammer-Ohio”) was incorporated in Ohio on March 6, 1990, as a research, development and licensing company and manufacturer and marketer of low frequency audio transducers that allows users to feel low frequency sound (“bass”) like a subwoofer but silent. (See Articles of Incorporation and amendments thereto, Exhibits 3.0 through 3.2 inclusive, incorporated herein by reference.)

 

On May 18, 2011, Guitammer-Ohio caused the formation of a Nevada corporation with the same name (the “Registrant” “Company”, “Guitammer-Nevada”, “we”, “us” and “our”) and entered into a Plan and Agreement of Reorganization with Guitammer-Nevada pursuant to which (i) the shareholders of Guitammer-Ohio would exchange (on a one (1) for thirty-one thousand, two hundred and six (31,206) shares basis) their aggregate 1,602.3 issued and outstanding shares of common stock for an aggregate of 50,001,374 shares of Common Stock, par value $0.001 per share, of Guitammer-Nevada evidencing the same proportional interest in Guitammer-Nevada as they held in Guitammer-Ohio, and (ii) option and warrant holders to purchase an aggregate of 1,397.7 shares of common stock of Guitammer-Ohio would exchange (on a one (1) for thirty-one thousand, two hundred and six (31,206) shares basis) their options and warrants for options and warrants to purchase an aggregate of 43,616,626 shares of Common Stock, par value $0.001 per share, of Guitammer-Nevada in the same proportional interest in Guitammer-Nevada as they held in Guitammer-Ohio (the “Reorganization”). In addition, the Company issued to two lenders warrants to purchase shares of Guitammer-Ohio which because of the Reorganization would be converted into warrants to purchase an aggregate of 225,000 shares of our Common Stock, par value $0.001 per share. In order to save time and expense of creating and issuing new Guitammer-Nevada options and warrants, the Company’s Board of Directors passed a resolution that the outstanding Guitammer-Ohio options and warrants would be and are deemed to be and constitute the Guitammer-Nevada options and warrants (on the said 1 for 31,206 shares basis) to purchase an aggregate of 43,841,626 shares of our Common Stock.

 

The name, Guitammer – pronounced “Git”-“tammer” – comes from the conjunction of the words “guitar” and “hammer”. In January 1991 we finished development of and licensed for sale, our original product, the Hammer Jammer™, a patented guitar accessory. Our initial products (low frequency audio transducers) were developed to solve a problem of our founder, who was a musician and unable to feel the low frequency end of the music he was playing without turning the stage monitors up very loud which interfered with the playing ability of the rest of the musicians. Today our principal product is a low frequency transducer sold under the trademarked brand name ButtKicker® (“ButtKicker”). The ButtKicker enables the user to feel low frequency sound (or bass) in a realistic, powerful and exciting way. However, unlike the overly loud, booming subwoofers with which most people are familiar, the ButtKicker brand products enables the end user to accurately experience – i.e. “feel” – “bass” or low frequency vibrations without creating any sound.

 

ButtKicker brand products are used by around the world by cinemas, home theater and video game enthusiast, by leading musicians and for commercial applications including simulators and industrial applications.

 

In 2007 we began to develop “4D Sports powered by ButtKicker”, originally named “ButtKicker Live!®” , which enables haptic and tactile events to be broadcast in addition to and distinct from a live broadcasts’ audio and video. In March of 2011 the Company was issued US Patent #7,911328 for the “Capture and remote reproduction of haptic events in synchronous association with the video and audio capture and reproduction of these events”. In late 2011 we began marketing this technology to potential customers in the sports, broadcast and distribution business (i.e., cable, DBS, and FTTH companies).

 

3

 

We are focused on increasing the deployment and monetization of our patented broadcast technology, supported by on-going cinema and consumer hardware sales.

 

Broadcast and Consumer Electronics Market Sizes

 

	*	The consumer electronics industry was forecast to be a record $211.3 billion by the Consumer Electronics Association.
	*	Audience includes over 59mm digital cable, 44mm satellite and approximately 7mm FTTH TV subscribers.
	*	ESPN is available in ~ 100 million households and the NBC Sports Network in over 75 million households.
	*	Number of sports and conference specific cable networksare increasing and their penetrationis growing.
	*	“Over-the-Top” Content and “Second Screen” / TV Everywhere is seen to be a $18 Billion marketopportunity.

 

Broadcast Technology – “4D Sports powered by ButtKicker”; ButtKicker Live!®

 

In March of 2011 the Company was issued US Patent #7,911328 for the “Capture and remote reproduction of haptic events in synchronous association with the video and audio capture and reproduction of these events”. In late 2011 we began marketing this technology to potential customers in the sports, broadcast and distribution business (i.e., cable, DBS, and FTTH companies).

 

We believe the benefits, market opportunities and competitive advantages of our broadcast technology include the following:

 

	·	The Company developed the technology; owns the patent for haptic-tactile -“4D”- broadcasting. As such, any future broadcast that includes haptic events - feeling, tactile, motion - will be subject to licensing from the company. This patent is less than four years old.
	·	The Company believes this is analogous to one company owning the patents for HD or 3D TV and being able to secure a license fee from every device – STB, TV, streaming box, end user hardware, etc. – that decodes and utilizes haptic-tactile data.
	·	The ability to monetize value added content, by way of “micro transactions” that literally turn the data feed on or off from a live action sport and allow fans at home to “play as” their favorite player, is a significant revenue opportunity for all the stakeholders involved – the sport, the athletes / teams, the broadcasters, the distribution (cable, FTTH, IPTV) partners and Guitammer.
	·	Licensing the broadcast patent and the hardware installs that are bundled with content in a manner similar to TiVo or Sling box. Cable and satellite TV providers may also offer subscribers a premium bundle that can also provide a recurring revenue stream.
	·	The opportunity to license and/or co-brand products for the end user to other large consumer electronics manufacturers.
	·	Luxury boxes, premium seating area and “fan zones” can be equipped with the Companies broadcast and hardware solutions to provide a more compelling and engaging in-arena and in-stadium fan experience.

 

4

 

We believes that haptic- tactile broadcasting combined with growing trend of “over-the-top” content and the “second screen” viewer experiences, along with the increasing deployment of internet or IPTV broadcasting, will allow it to offer value added opportunities to broadcasters, distributers and sports leagues that enable its viewers to “play as” or “drive as” their favorite or fantasy player as a way to gain and maintain customers. Additionally, we see a large opportunity to generate revenue by being able to charge the end user an additional small fee ~( $0.99) on a per player or driver basis.

 

On January 29, 2015, the Company filed additional US and International patents to help expand its intellectual property in the broadcast markets, (US Application No. 14/609,185 and Application No. PCT/US2015/013558) for “HAPTIC-TACTILE, MOTION OR MOVEMENT SIGNAL CONVERSION SYSTEM AND ASSEMBLY” with Mark Luden as the inventor and assigned to The Guitammer Company.

 

In July of 2013 the Company and the NHRA executed the “Broadcast Technology and Promotional Rights Agreement” between NHRA and The Guitammer Company. The NHRA telecasts were broadcast with an enhanced tactile effect (in “4D powered by ButtKicker” beginning with their September 14th, 2013 telecast and all subsequent 2013 telecasts on ESPN2.) We released “The Making of Tactile Broadcasting” in the fall of 2013 explaining and demonstrating this new broadcast technology available on the Guitammer YouTube channel or directly at http://www.youtube.com/watch?feature=player_embedded&v=RQ3lPbtDt5E . This Agreement ended in January of 2014.

 

On August 29, 2014 the Company, the San Jose Sharks (“Sharks”) NHL hockey team and Comcast SportsNet California (“CSNCA”) executed a “Letter Agreement Regarding Technology Initiative” to integrate Guitammer’s broadcast technology in the SAP Center at San Jose and into the CSNCA’s telecasts of the San Jose Sharks home games at the SAP Center for the 2014/15 NHL season, and to collectively promote and market the enhanced broadcast to the San Jose Sharks and CSNCA viewers. Starting from the first home game on October 11th to present, the CSNCA’s Sharks telecasts have successfully been broadcast in 4D using Guitammer’s technology. Recent favorable reviews of these “4D” broadcasts include this review which aired in the San Jose area in January of 2015: http://wn.ktvu.com/clip/11022053/san-jose-new-technology-for-sharks-fans-watching-from-home.

 

We are actively involved with the Society of Motion Pictures & Television Engineers (SMPTE) working to draft standards for haptic-tactile broadcasting that we believe may assist in wide adoption of haptic-tactile broadcasting using our technology.

 

We are actively pursuing more opportunities and strategic partnerships in the sports and broadcast space to deploy this technology in 2015.

 

Cinema Sales

 

In 2014 we continued to increase our cinema deployment notably with AMC Prime in the US and Lumiere Pavilions in China.

 

In late 2013 AMC Theatres introduced it’s new theater concept: “Prime” - “feel every WOW.” [www.amctheatres.com/amc-prime] and each of these new concept theaters features ButtKicker brand transducers in every seat in the theater auditorium. So far, every seat, more than 1,900 AMC Theatre Prime seats in all 10 of their locations nationwide are outfitted with our products.

 

More than 400,000 people will experience a movie using Guitammer’s “4D” technology in the US in 2014; over 500,000 in China.* (*According to average auditorium attendance per the National Assoc. of Theater Operators multiplied by the total number of deployed “4D powered by ButtKicker” cinema seats.)

 

We continue to increase our focus on cinema sales for the following reasons: It offers a large global market opportunity; and cinema installations can be a profitable cash flow positive means to large scale consumer advertising that we believe are more advantageous to the Company than “Big Box” product placements and in-store demonstrations as cinema sales can result in a two hour product demonstration; i.e., while watching the movie.

 

5

 

Marketing

 

Our marketing efforts in 2014 primarily focused on our efforts with the San Jose Sharks and Comcast SportsNet CA by way of a :30 second commercial that is designed to drive the fan to our direct sales website: www.shakemycouch.com .

 

Our television commercials can be seen at www.shakemycouch.com and all of companies video and commercials can be seen at the Guitammer YouTube channel: https://www.youtube.com/user/Guitammer.

 

Other marketing efforts consist of online promotions with our major partners such as Amazon.com sponsorships of online racing and simulator leagues and teams, and endorsements from well know musicians.

 

ButtKicker brand Consumer Electronics Hardware

 

We sell three (3) main categories of hardware products: 1) ButtKicker brand low frequency audio transducers, 2) audio amplifiers and 3) accessories, with different sizes and configurations based upon the market and use. We sell more than twenty (20) different standalone and all-in-one packaged products. Our products include six (6) different types of ButtKicker brand transducers which provide the vibration or low frequency audio (bass) effects, several models of amplifiers, two wireless options, and the accessories necessary to facilitate the use of our products in our core markets. Our products are sold for use in home theater, cinema, gaming, and by musicians and professional audio technicians.

 

Three of our most popular products are the wireless ButtKicker Kit, the ButtKicker LFE Kit and the ButtKicker Gamer2, which are described in greater detail below.

 

Wireless ButtKicker Kit

 

The wireless ButtKicker Kit is designed for home theater and gaming use. Included in the kit is one ButtKicker Advance low frequency transducer, one ButtKicker Power Amplifier with wireless send and receive units and remote control, one Chair/Couch Mounting Kit, and all the cables and wires necessary to hook the system up to home theater and gaming systems. The mounting kit enables the average consumer to quickly and easily use the ButtKicker with any couch or chair. The entire system easily integrates into existing home theater and gaming systems as well. The wireless ButtKicker Kit currently retails from $199 -$399 depending on various marketing promotions and discounts available from time to time..

 

ButtKicker LFE Kit

 

The ButtKicker LFE Kit is designed for home theater and gaming use. Included in the kit is one ButtKicker LFE low frequency transducer, one ButtKicker 1000 watt power amplifier, one Chair/Couch Mounting Kit, and all the cables and wires necessary to hook the system up to home theater and gaming systems. The mounting kit enables the average consumer to quickly and easily use the ButtKicker with any large three person couch or chair. The entire system easily integrates into existing home theater and gaming systems as well. The ButtKicker LFE Kit currently retails for $599 -$699.

 

ButtKicker Gamer

 

The ButtKicker Gamer2 (the “Gamer”) is designed for gaming and simulator use with video games for use with PC’s, game consoles, and racing and flight simulators. The Gamer enables the user to precisely and powerfully feel gunshots, explosions and special effects of video games as well as the bass beat for music. The Gamer works with all types of computers, all gaming systems and any type of digital music player; including any MP3 player or iPod. It works by simply splitting the audio signal from the PC, game console or iPod into the Gamer’s amplifier. The Gamer easily attaches to the center post of most office type chairs. Included in the kit are one ButtKicker Gamer with integrated chair mounting arm, one ButtKicker Gamer power amplifier and all the cables and wires necessary to hook the system up to PCs, gaming systems and digital music players. A Quick Start Guide and manual are also included with the Gamer. The Gamer is priced at between $129 and $149.

 

6

 

Sales Strategy

 

Our products are sold worldwide through independent manufacturers’ sales representatives, dealers and distributors. Our sales network includes custom home theater, specialty electronics, furniture, musician, professional audio, consumer home theater and electronics dealers.

 

Historically, approximately 20% - 54% of our sales have been outside the United States. Our products have been sold around the world. We have active distributors and dealers in Canada, United Kingdom, France, Germany, Denmark, Holland, Switzerland, Belgium, Israel, Russia, China, Hong Kong, Turkey, Brazil, and Australia / New Zealand.

 

Additionally, we have an agreement with Pearl Drums whereby they sell “Pearl’s Throne Thumper by ButtKicker” to the musician and pro audio markets in the US and Europe and pay us a per unit royalty fee.

 

We have historically not had large amounts of sales through traditional brick and mortar retail stores, but have concentrated more with the large online resellers such as Amazon.com and MusiciansFriend.com and with specialty electronics retailers. Moving forward, however, we may choose to sell lower priced items which appeal more to individual consumers and we may seek to sell at brick and mortar retail stores.

 

Our ButtKicker brand hardware sales strategy is to continue to increase our cinema sales to help build brand awareness so as to increase our consumer hardware sales through all of our distribution channels.

 

Our “4D Sports powered by ButtKicker” broadcast technology sales strategy is to form strategic partnerships with larger companies involved in making broadcast, sports more immersive for fans and partner companies and use our technology in conjunction with their product offerings and marketing efforts to help facilitate those goals. We are in early stage discussions with several of these types of companies. Additionally, we are in discussions directly with other rights holders and broadcast partners to deploy our broadcast technology.

 

Manufacturing

 

We outsource the manufacturing of our products; however, we do perform kitting and light assembly of several products in our Westerville, Ohio facilities. The Company does have a material contracts in place with LFT manufacturing. With our other suppliers we purchase products under agreed upon payment and supply terms that may change from time to time.

 

Some of our products that are sourced in China are assembled by a manufacturing partner in the State of Kentucky. Additionally, some low volume products are sourced locally in Central Ohio. We are focused on reducing our cost of goods sold and sourcing all of our products as finished goods from China. We are heavily dependent upon product purchased from four principal suppliers. Our principal suppliers are Eminence Speaker, LLC (Eminence, KY); Shenzhen Actiway Industrial Co. - Shenzhen Actiway Electronics Co., Ltd. Factory (Shenzhen, China); LFT Manufacturing, LLC (Westerville, Ohio) ( and Sonavox Electronics SIP, Sonavox Canada Inc. (Suzhou, China and Markham, Ontario, Canada). These four suppliers accounted for approximately 93% of Company product purchases in 2014 and 2013. Purchases from Eminence were 31% and 52% respectively of our total product purchases in 2014 and 2013. Purchases from Actiway were 30% and 9% respectively of our total product purchases in 2014 and 2013. Purchases from LFT were 20% and 0% (not a supplier in 2013) respectively of our total product purchases in 2014 and 2013. Purchases from Sonavox were 13% and 32% respectively of our total product purchases in 2014 and 2013. We expect the percentages of Company product purchases from LFT to increase slightly while the percentages of Company product purchases from the other suppliers will decrease slightly for 2015.

 

7

 

Warehousing and Fulfillment

 

We warehouse and ship most of our products from our warehouse in Westerville, Ohio. We also direct-ship products to Asia and Europe from our manufacturing partners in China, which saves us time and transportation and handling costs.

 

Broadcast Technology and Consumer Hardware Competition

 

We are not aware of competing products, technologies or plans to introduce anything to the market that is similar to our broadcast technology for live sports and events and believe we may very well have a “blocking patent” in this space. If this is true then all brands of end user hardware, existing and yet to be developed, as well as broadcasters, distributors and content providers would have to license Guitammer’s broadcast technology in order to make use of it.

 

There are several competitors in the low frequency or tactile transducer market segment (described below), we believe that the ButtKicker brand is the leading brand due to its power, musical accuracy and longevity.

 

Competitive advantages which we believe ButtKicker brand products have are:

 

Lower Range:	ButtKicker transducers have a greater low frequency range than most other device (5 – 200 Hertz (“Hz”)) and have a resonant frequency of 9Hz, well below the range of most of the competition.
Musical Accuracy:	ButtKicker transducers provide a more realistic listening experience possible. ButtKicker transducers have a smooth, musical response without resonant frequency peaks or hot spots.
Power:	ButtKicker transducers have the power to produce more aggressive sound reproduction, at a lower total cost and with more amazement which consumers are demanding.
Affordability:	One ButtKicker transducer can shake a heavy three-person couch and can replace several of the competitors’ units and typically cost one-half to one-fourth of the competitors’ prices.
Consumer Packaging:	ButtKicker brand products are designed for mass market consumer electronics distribution with the appropriate packaging, pricing and all-in-one kit ease of use that the average consumer requires in order to purchase and install.

 

8

 

Intellectual Property

 

We have a registered trademark for the name “ButtKicker” and the name “ButtKicker Live!” In July 1998, Marvin Clamme filed a comprehensive patent for the Low Frequency Vibrator, ButtKicker technology. Subsequently, Mr. Clamme assigned to us all rights, title and interest to the patent in the United States and all foreign countries. In 1999, we were awarded a patent for the technology United States Patent Number 5,973,422. We have since secured patents in Europe, Canada and Japan for this technology.

 

In May 2009, we filed a provisional patent application for our ButtKicker Live! Technology which was assigned to us by Mr. Luden, Mr. Clamme and Mr. McCaw. On March 22, 2011, the United States Patent and Trademark Office issued such patent to the Company under patent number 7,911,328.

 

In September 2010, Marvin Clamme filed a provisional patent application for a new type of low frequency transducer which was assigned to us by Mr. Clamme. “Vibration Transducer and Actuator” Application No. 61,403,033, dated September 6, 2010. A patent application was filed for this invention on October 16, 2012 for both the United States and Europe.

 

On January 29, 2015, we filed International and US patents (US Application No. 14/609,185 and Application No. PCT/US2015/013558) for “HAPTIC-TACTILE, MOTION OR MOVEMENT SIGNAL CONVERSION SYSTEM AND ASSEMBLY” with Mark Luden as the inventor and assigned to The Guitammer Company.

 

Employees

 

We have eight full-time employees as well as several individuals working for us in contracted roles in manufacturing, sourcing, marketing, developing and selling our ButtKicker brand hardware and “4D Sports powered by ButtKicker; ButtKicker Live! Broadcast technology. None of our employees are covered by a collective bargaining agreement. We believe that we have a good relationship with our employees and contractors.

 

Item 1A. Risk Factors.

 

Guitammer is a smaller reporting company, and as such, is not required to provide information pursuant to this item.

 

Item 1B Unresolved Staff Comments.

 

None.

 

Item 2. Properties.

 

We are located at 6117 Maxtown Road, Westerville, Ohio 48032. We lease approximately 15,000 square feet of office and warehouse space for $7,150 per month. The facilities include a loading dock, drive through overhead door, warehouse space, product development areas, showroom, demonstration theater and offices. On September 1, 2009, the Company entered into a four year lease for the rental of the office and warehouse space expiring on August 31, 2013. In July of 2013, the Company entered into a four year extension of the lease for the rental of the office and warehouse space expiring on August 31, 2017. We believe that our current space is adequate to meet our current needs.

 

Item 3. Legal Proceedings.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

9

 

Part II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

The common stock of the Company is traded on the OTC Bulletin Board Market under the symbol GTMM.OB. On March 5, 2015, the last sales price of the Company's common stock was $.1025.

 

On May 27, 2011 the Company filed a General Form for the Registration of Securities on Form 10 to register its common stock, par value $0.001 per share pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended. The Registration became effective sixty days later. The Company secured a market maker, Finance 500 of Irvine, CA, who filed a Form 15(c)-211 with FINRA on behalf of the Company. On October 7, 2011 FINRA approved the Form 15(c)-211 and gave the Company the ticker symbol of “GTMM”. The Company began actively trading on November 17, 2011 on the Over-the-Counter Bulletin Board (“OTCBB”) as GTMM.OB

 

The following table sets forth the high and low bid prices of the Company's common stock for the periods indicated, as reported by the NASDAQ Trading and Market Services:

 

Calendar period		High				Low
2012 First Quarter		$	0.27			$	0.12
2012 Second Quarter		$	0.21			$	0.15
2012 Third Quarter		$	0.20			$	0.14
2012 Fourth Quarter		$	0.35			$	0.08
2013 First Quarter		$	0.20			$	0.12
2013 Second Quarter		$	0.21			$	0.14
2013 Third Quarter		$	0.19			$	0.09
2013 Fourth Quarter		$	0.20			$	.015
2014 First Quarter		$	0.19			$	0.12
2014 Second Quarter		$	0.17			$	0.09
2014 Third Quarter		$	0.16			$	0.02
2014 Fourth Quarter		$	0.16			$	0.03

 

The above quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 

10

 

Dividend Policy

 

The Company has declared no cash dividends on our common stock, and does not expect to pay cash dividends in the near term. We intend to retain future earnings, if any, to provide funds for operations and the continued expansion of our business.

 

There are approximately 84 holders of record of the Company's Common Stock as of December 31, 2014.

 

On February 1, 2012, the Board approved stock option grants in the amount of 600,000 stock options for three of its employees, with an exercise price of $.25 per share with a vesting schedule of 60% on the first anniversary of the grant, 20% on the second anniversary of the grant and the final 20% on the third anniversary of the grant.

 

On November 26, 2012, the Board approved stock option grants of 3,000,000 stock options to the President and CEO of the Company, with an exercise price of $.25 per share with a vesting schedule of 33 and 1/3% of the options on the first anniversary of the grant, 33 and 1/3% of the options on the second anniversary of the grant and the final 33 and 1/3% on the third anniversary of the grant.

 

On December 3, 2014,the Board reduced the exercise price on the 600,000 and 3,000,000 stock options issued on February 1, 2012 and November 26, 2012, respectively, from $.25 to $.075.

 

On December 3, 2014, the Board approved and granted 1,950,000 stock options to five of its employees, with an exercise price of $.075 per share with a vesting schedule of 60% on the first anniversary of the grant, 20% on the second anniversary of the grant and the final 20% on the third anniversary of the grant. On December 3, 2014, the Board approved and granted 1,500,000 stock options to two of the Company’s directors with an exercise price of $.075 per share with a vesting schedule of 25% on the first anniversary of the grant, 25% on the second anniversary of the grant, 25% on the third anniversary of the grant and 25% on the fourth anniversary of the grant. Full vesting is to occur upon a change in ownership of the Company on the stock options.

 

Item 6. Selected Financial Data.

 

Not required for smaller reporting companies.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

 

The following discussion and analysis should be read in conjunction with Guitammer's Audited Consolidated Annual Financial Statements and notes thereto included elsewhere in this Form 10-K (the “Financial Statements”). Except for the historical information contained herein, the discussion in this Form 10-K contains certain forward looking statements that involve risks and uncertainties, such as statements of Guitammer’s plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-K should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-K. These statements include, without limitation, statements concerning the potential operations and results of Guitammer described below. Guitammer's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, without limitation, those factors discussed herein and in Guitammer's Form 10 Registration Statement.

 

11

 

RESULTS OF OPERATIONS

 

Fiscal Year ended December 31, 2014 compared to Fiscal year ended December 31, 2013.

 

All references below to per share and shares of Common Stock of the Company reflect the Reorganization.

 

Results of Operations

 

 During the second half of 2013 and the first quarter of 2014, the Company spent considerable capital resources implementing and commercializing its patented haptic-tactile broadcast technology (“ButtKicker Live!®” /“4D Sports powered by ButtKicker”) for the ESPN2 broadcasts of the National Hot Rod Association (NHRA) and in related activities with other broadcast parties in order to prove that it has the ability to bring the actual feel of live sporting events to sports fans while watching in the comfort of their own home. Because of this, the Company experienced a shortage of available working capital required to fund certain inventory requirements related to its existing consumer products business and this had a corresponding negative effect on revenues for the year. The Company received some cash through the exercise of stock warrants by existing stock holders that lead to improved sales in the 4^th quarter of 2014 increasing by approximately $275,000 over the third quarter of 2014.

 

On August 29, 2014 the Company, the San Jose Sharks (“Sharks”) NHL hockey team and Comcast SportsNet California (“CSNCA”) executed a “Letter Agreement Regarding Technology Initiative” to integrate Guitammer’s broadcast technology in the SAP Center at San Jose and into the CSNCA’s telecasts of the San Jose Sharks home games at the SAP Center for the 2014/15 NHL season, and to collectively promote and market the enhanced broadcast to the San Jose Sharks and CSNCA viewers. Starting from the first home game on October 11^th to present, the CSNCA’s Sharks telecasts have successfully been broadcast in 4D using Guitammer’s technology. The official public launch of this agreement was November 20^th, 2014.

 

Management believes that the continued development and implementation of this broadcast technology will produce the greatest amount of long-term value for its shareholders and will help to enable it to secure the financing needed to purchase adequate levels of all inventory items in future periods while continuing the implementation and commercializing its patented haptic-tactile broadcast technology for live sporting events.

 

Revenue decreased $866,281 or 45.2%, to $1,051,019 for the year ended December 31, 2014, compared to revenue of $1,917,300 for the year ended December 31, 2013. Shortages of key inventory items significantly contributed to the decrease in revenue. At December 31, 2014, the Company has a sales backorder of more than $375,000. As a result of being able to purchase some of the inventory needed by the Company in October, 2014, sales for the 4th quarter of 2014 showed significant improvement over the 3rd quarter of 2014 and therefore management believes revenues for the year ended December 31, 2014, could have been significantly larger if it had sufficient inventory to meet its sales demands.

 

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Cost of goods sold decreased $500,335 or 45.2%, to $605,934, for the year ended December 31, 2014, compared to cost of goods sold of $1,106,269 for the year ended December 31, 2013. The 45.2% decrease in the cost of goods sold for the year ended December 31, 2013 is the same as the 45.2% decrease in revenue for the same time period and reflects similar profit margins on the products sold for both years.

 

Gross profit decreased by $365,946 or 45.1% to $445,085 for the year ended December 31, 2014, compared to gross profit of $811,031 for the year ended December 31, 2013. Our gross margin percentage remained at approximately 42% for the years ended December 31, 2014 and December 31, 2013.

 

General and administrative expenses decreased $147,673, or 8.6%, to $1,579,507 for the year ended December 31, 2014, compared to general and administrative expenses of $1,727,180 for the year ended December 31, 2013 Significant variations within the general and administrative expenses were as follows:

 

		December 31, 2014				December 31, 2013				Increase (Decrease)
Payroll and related expenses		$	722,805			$	624,517			$	98,288
Stock warrant expense			(109,926	)			(20,441	)			(89,485	)
Advertising and Marketing			153,065				239,521				(86,456	)
Professional fees			307,674				375,914				(68,240	)
Freight and related expenses			91,506				143,225				(51,719	)
Travel and entertainment			104,575				67,674				36,901
License and permits			45,938				26,597				19,341
Depreciation and patent amortization			46,334				31,623				14,711
All other general & admin. expenses			217,536				238,550				(21,014	)
		$	1,579,507			$	1,727,180			$	147,673

 

Payroll expense increased by $98,288 in the year ended December 31, 2014 compared to the year ended December 31, 2013 due primarily to $50,112 in additional expense in 2014 for the cost of employee stock option plan and a $30,000 bonus being awarded by the Directors to the CEO of the Company.

 

Stock warrant expense decreased by $89,485 in the year ended December 31, 2014 compared to the year ended December 31, 2013 due to adjusting the stock warrants liability based on the Black-Scholes valuation model which is used to estimate the fair value of the warrants. As shown in footnote 6 of the Notes to the Company’s Consolidated Financial statements, the Company has recorded a warrant liability of $49,404 and $159,330 as of December 31, 2014 and December 31, 2013, respectively, which is based on the Black-Scholes valuation model to estimate the fair value of the warrants. The significant assumptions considered by the model were the remaining term of the warrants, the fair value per share stock price of $.07 and $.17, a risk free treasury rate for .5 years and 1.5 years of .12% and .26% at December 31, 2014 and December 31, 2013, respectively and an expected volatility of 60%.

 

13

 

Advertising and Marketing expense decreased by $86,456 in the year ended December 31, 2014 compared to the year ended December 31, 2013. In the third quarter of 2013, the Company, as a part of an agreement with the NHRA, was involved with the tactile enhancement of the NHRA’s telecasts on ESPN2. The Company developed a commercial for television and incurred other advertising costs in the second half of 2013. After the first quarter of 2014, the company was no longer involved with the NHRA. Advertising and marketing expenditures increased again in the fourth quarter of 2014 as the Company began the tactile enhancement of CSNCA’s broadcasts of the San Jose Sharks telecasts of their home games from the SAP Center and developed a commercial for television and incurred other advertising costs. But the fourth quarter increase in Advertising and marketing expenditures was smaller than the amount spent in the second half of 2013 with the NHRA.

 

Professional fees decreased $68,240 in the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily due to a decrease in consulting expenses related to investor relations. This decrease was offset partially by the increased legal fees related to increasing the number of countries where our products are patented.

 

 Freight and related expenses decreased $51,719 in the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily due to the receipt of fewer containers of finished product from our overseas manufacturers during the year ended December 31, 2014.

 

Travel and entertainment expense increased by $36,901 in the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily due to the increase in travel related to: tactile enhanced live sports broadcast of the NHRA in the first quarter of 2014, the tactile enhancement of CSNCA’s broadcasts of the San Jose Sharks telecasts of their home games from the SAP Center, and work throughout 2014 with the Society of Motion Pictures and Television Engineers (SMPTE) to develop standards for the coding and transport of haptic-tactile broadcasts.

 

License and permits expense increased by $19,341 in the year ended December 31, 2014 compared to the year ended December 31, 2013 primarily due to the expenses related to increasing the number of countries where our products are patented and the annual licensing fees for a newly filed low frequency transducer patent.

 

Depreciation and amortization expense increased by $14,711 in the year ended December 31, 2014 compared to the year ended December 31, 2013, due to the increased depreciation associated with the purchases of $139,293 of property and equipment purchased for the tactile enhanced live sports broadcast of the NHRA that began in the 3^rd quarter of 2013. Much of this equipment was not needed for the tactile enhance broadcast of the NHL’s hockey games and consequently, has been sold by the Company in second and third quarters of 2014.

 

Research and development expenses decreased $174,435 to $22,570 for the year ended December 31, 2014, compared to $197,006 for the year ended December 31, 2013. In the third quarter of 2013, research and development expense was incurred in field testing and national proof of concepts for our patented “ButtKicker Live!®/ “4D Sports powered by ButtKicker” haptic-tactile broadcast technology for the NHRA telecasts of ESPN2. These expenses were partially offset by research and development spent early in the 4th quarter of 2014 on the tactile enhancement of CSNCA’s broadcasts of the San Jose Sharks telecasts of their home games from the SAP Center.

 

Loss from operations increased by $43,837 or 3.9% for the year ended December 31, 2014 to $1,156,992 as compared to $1,113,155 for the year ended December 31, 2013. The additional operating loss was primarily caused by the decrease in revenue and gross profit partially offset by the decreases in general and administrative expense and research and development expense as explained above.

 

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Interest expense increased $27,353 or 14.1%, to $221,129 for the year ended December 31, 2014, compared to interest expense of $193,776 for the year ended December 31, 2013. The increase was due primarily to the borrowing of an additional $100,000, as illustrated the Notes to the Financial Statements and the increased financing fees associated with delayed payments to vendors resulting from cash shortages.

 

Our net loss increased $71,238 for the year ended December 31, 2014. We had net loss of $1,378,101 (or basic and diluted net loss per share of $0.02) compared to net loss of $1,306,863 (or basic and diluted net loss per share of $0.02) for the year ended December 31, 2013. The increase in loss was caused by the decrease in gross profit and the increase in interest expense, partially offset by the decrease in general and administrative expense and research and development expense, all explained above.

 

The following table sets forth EBITDA and adjusted EBITDA for the Company, which is a non-GAAP measurement. EBITDA is defined as earnings (loss) before net interest expense, income taxes, depreciation and amortization. Adjusted EBITDA is defined as earnings before net interest expense, income taxes, depreciation, amortization, and non-cash expenses such as stock warrant expense and stock based compensation to consultants and employees. Although EBITDA and Adjusted EBITDA are not measures of performance calculated in accordance with generally accepted accounting principles (“GAAP”), management believes that these non-GAAP measures will allow for a better evaluation of the operating performance of the business and facilitate meaningful comparison of the results in the current period to those in prior periods and future periods. However, investors should not consider these measures in isolation or as a substitute for net income (loss), operating income (loss), or any other measure for determining the Company’s operating performance that is calculated in accordance with GAAP. A reconciliation of EBITDA and Adjusted EBITDA to the most comparable GAAP financial measure, net loss, follows:

 

			December 31, 2014				December 31, 2013
Net Loss			$	(1,378,101	)		$	(1,306,863	)
Adjustments
Interest expense				221,129				193,776
Depreciation and patent amortization				46,334				31,623
Taxes				-				-
EBITDA				(1,110,638	)			(1,081,464	)
Less non-cash expenses from:
Stock warrant expense				(109,926	)			(20,441	)
Payment of stock and warrants to consultants				90,362				184,771
Employee stock options expense				203,567				153,455
Adjusted EBITDA			$	(926,635	)		$	(763,679	)

 

EBITDA decreased $29,174 or 2.7% to $(1,110,638) for the year ended December 31, 2014, compared to ($1,081,464) for the year ended December 31, 2013. The decrease was mainly due to the increase in net loss from operations, an increase in interest expense, partially offset by a decrease in research and development expense.

 

Adjusted EBITDA, decreased $162,956 or 21.3% to $(926,635) for year ended December 31, 2014, compared to Adjusted EBITDA, of $(763,679) for the year ended December 31, 2013. Adjusted EBITDA decreased from the prior year primarily due to lower revenue and gross profit, partially offset by reduced research and development expense and administrative expenses in the year ended December 31, 2014, compared to the year ended December 31, 2013.

 

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Liquidity and Capital Resources

 

Total current assets were $402,678 at year ended December 31, 2014, consisting of cash of $16,185, net accounts receivable of $25,139, inventory of $361,223 and prepaid and other current assets of $131.

 

Total current liabilities were $2,697,452 as of December 31, 2014, consisting of accounts payable and accrued expenses of $1,220,871, current maturities of long-term debt of $1,400,159 and other current liabilities of $76,422.

 

As of December 31, 2014, our working capital deficit increased $785,101 or 52% to $(2,294,774) compared to our working capital deficit of $(1,509,673) for the year ended December 31, 2013.

 

Cash Flows during the year ended December 31, 2014

 

During the year ended December 31, 2014, we had a net decrease in cash and cash equivalents of $124,046 consisting of net cash used in operating activities of $576,172, net cash provided by investing activities $6,776 and net cash provided by financing activities of $445,350.

 

Net cash used by operating activities was $576,172 for the year ended December 31, 2014, consisting of an increase in: accounts payable and accrued expenses of $440,248 and decreases in accounts receivable and provision for credit losses of $37,366, net inventory of $82,538, prepaid expenses of $6,010, and deferred revenue of $31,924. These changes were reduced by net loss of $1,378,101 which had adjustments for depreciation and amortization of $73,067, amortization of debt discount of $8,974, employee stock options of $203,567 stock and warrants issued for services of $90,362, loss on the sale of assets of $1,647 and change in fair value of warrant liability of $(109,926).

 

Net cash provided by investing activities was $6,776 for the year ended December 31, 2014, consisting of the purchase of intangible assets of $16,552, proceeds on the sale of property of $38,249 and the purchase of property and equipment of $14,921.

 

Net cash provided by financing activities was $445,350 for the year ended December 31, 2014, primarily consisting of proceeds from options and warrants exercised of $411,088, proceeds from debt of $100,000, partially offset by the payment of debt of $65,738.

 

The Company also expects to need approximately $2,000,000 of cash to purchase inventory: $900,000 within the next six months and $1,100,000 more within the succeeding 6 months. The Company expects to generate these funds from operations with any deficit to be funded through capital raises. We estimate that for the next 12 months we will also need $482,000 for debt service.

 

16

 

The Company historically has incurred net losses, negative cash flows from operating activities, and has an accumulated deficit of approximately $10,585,000 at December 31, 2014. In addition, at December 31, 2014 the Company had a cash balance of $16,185 and working capital deficiency of approximately $2,295,000. Although the working capital deficiency has improved by approximately $1,032,000 since December 31, 2011, in both the near and long term, without additional financing, the Company is and will be in an illiquid position. The Company received cash through the sales of Common Stock and warrants to purchase Common Stock in the amount of $150,000 in the third quarter of 2011, $250,000 in the fourth quarter of 2011, $375,000 in the first quarter of 2012, $770,000 in the second quarter of 2012, $540,000 in the third quarter of 2012, $250,000 in the first quarter of 2013, $675,000 in the second quarter of 2013, $175,000 in the third quarter of 2013, $150,000 in the fourth quarter of 2013, $237,125 in the third quarter of 2014, and an additional $172,400 in the fourth quarter of 2014. The Company believes that the receipt of additional equity will enable it to purchase adequate inventory to meet its existing sales demand and to be able to increase sales through advertising and marketing related activities. There is no assurance that the Company will have any additional sales of stock or that the Company will be able to become operationally cash flow positive.

 

If the Company is successful in raising significant additional capital (of which there is no assurance), the Company intends to increase its budgets for advertising and marketing, targeting consumers who have shown an interest in the Company’s or similar products. Additionally, the Company intends to increase its advertising and marketing expenses by advertising directly to customers who experience its products in ButtKicker equipped cinemas. The Company also intends to hire one or more sales people to sell the Company’s products to key markets including the home theater, commercial cinema and international markets.

 

We believe the combination of the Company’s recent success in tactically enhancing the San Jose Sharks telecasts on Comcast, increased advertising and marketing spending and the addition of one or more sales people will drive demand for our products and will increase revenue and cash flow.

 

At this time, we have not secured additional financing. We do not have any commitments for additional capital from third parties or from our officers or directors or any of our shareholders to supplement our operations or provide us with financing in the future. There can be no assurance that additional capital will be available to us, or that, if available, it will be on terms satisfactory to us. If we are unable to increase revenues from operations, to raise additional capital from conventional sources and/or additional sales of stock in the future, we may be forced to curtail or cease our operations. These factors raise doubt in our ability to continue as a going concern. Our financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. There is substantial doubt that we can continue as a going concern for the next 12 months unless additional funding is secured by the Company.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

Foreign Currency Exchange

 

Our customers are located in the US and around the world, but all payments are made in U.S dollars to us. Our suppliers are located in the US and in China and we pay all of our vendors in U.S. dollars. We have no foreign currency exchange exposure.

 

Item 8. Financial Statements and Supplementary Data.

 

Information required by this Item appears in the Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm contained in Item 15(a) (1 and 2).

 

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

 

The Company has no disagreements with its accountants.

 

Item 9A. Controls and Procedures.

 

Disclosure Controls and Procedures

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported, within the time period specified in the SEC's rules and forms and is accumulated and communicated to the Company's management, as appropriate, in order to allow timely decisions in connection with required disclosure.

 

Evaluation of Disclosure Controls and Procedures

 

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 ("Exchange Act"), the Company carried out an evaluation, with the participation of the Company’s management, including Mark Luden, the Company's Chief Executive Officer ("CEO") and Richard Conn, the Company's Chief Financial Officer ("CFO") (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2014 to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure, due to the material weaknesses described below.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, is a process designed by, or under the supervision of, the chief executive officer and chief financial officer, or persons performing similar functions, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

18

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. The Company believes its weaknesses in internal controls and procedures is due in part to the Company's lack of sufficient personnel with expertise in the area of compliance with the financial reporting guidelines as established by the Securities and Exchange Commission, generally accepted accounting principles (GAAP) and tax accounting procedures. In addition, the Company lacks the personnel structure, size and complexity to segregate duties sufficiently for proper controls.

 

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management, under the supervision and with the participation of chief executive officer and chief financial officer, 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 in 1992 (COSO). Based on its evaluation our management concluded that our internal control over financial reporting was not effective as of December 31, 2014.

 

Remediation of Material Weakness in Internal Control over Financial Reporting

 

The Company is currently seeking additional personnel with expertise in these areas necessary to segregate duties for proper controls; however, until such time as additional personnel is hired, the Company believes that it will continue to recognize a weakness in its internal controls and procedures. The Company’s plan is to hire additional personnel to properly implement a control structure when the appropriate funds become available. In the meantime, the Chief Executive Officer and Chief Financial Officer will continue to perform or supervise the performance of additional accounting and financial analyses and other post-closing procedures including detailed validation work with regard to balance sheet account balances, additional analysis on income statement amounts and managerial review of all significant account balances and disclosures, to ensure that the Company's Annual report and the financial statements forming part thereof are in accordance with accounting principles generally accepted in the United States of America.

 

Changes in Internal Controls

 

During the year ended December 31, 2014, there were no significant changes in internal controls of the Company or other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Item 9B. Other Information.

 

None.

 

19

 

Part III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

 Our executive officers and directors and their ages and positions are as follows:

 

Name		Age		Position
Mark A. Luden		55		President, CEO, Secretary and Director
Richard E. Conn		59		Chief Financial Officer and Treasurer
Marvin Clamme		61		Vice President of Engineering
Kenneth McCaw		63		Director
Walter J. Doyle		79		Director

 

Mark A. Luden has served as our President, CEO, Secretary, Treasurer and a member of our board of directors since March 1999. Mr. Luden is a seasoned sales, marketing and management executive with over fourteen (14) years of sales, marketing and management experience in the enterprise financial software industry. From March 1998 to February 1999, Mr. Luden served as Director of Sales and Marketing for Invata International, a privately funded, startup enterprise real estate software company. At Invata, he was responsible for developing all sales and marketing programs. From February 1997 to March 1998, Mr. Luden served as National Accounts Manager for Computer Associates in Columbus, Ohio, where he was responsible for selling enterprise-wide systems, databases and applications software to Fortune 100 companies. From August 1987 to February 1997, he worked for CCH in various capacities including Sales Manager in the Ohio Division, Branch Manager in Dallas, Texas, Sales Director and Account Representative in Columbus, Ohio, and Sales Representative in Bangor Maine. While with CCH, Mr. Luden was part of a four person executive team managing the $80 million ProSystem fx tax software business unit.

 

In addition to leading the strategic and day-by-day operations of the Company, Mr. Luden is a member of the Consumer Electronics Association (CEA) Board of Industry Leaders and has served as Chairman of the Small Business Council, the Chairman of Division Executive Board, and was a member of the Executive Board of the CEA for 2010 and 2011. Mr. Luden is also a member of the Standards Committee of the Society of Motion Picture and Television Engineers (SMPTE). Mark is the author of one issued patent, "Capture and remote reproduction of haptic events in synchronous association with the video and audio capture and reproduction of those events." and one pending patent, “HAPTIC-TACTILE, MOTION OR MOVEMENT SIGNAL CONVERSION SYSTEM AND ASSEMBLY”. Mr. Luden’s past sales and managerial experience and serving as our President, CEO, Secretary, and a member of our board of directors since 1999, being a substantial shareholder of the Company and his affiliation with the CEA, led the Board of Directors to the conclusion that he is qualified to serve as a director of the Company.

 

20

 

Richard E. Conn has served as our Controller since April 2006 and CFO and Treasurer since May 18, 2011. From April 1982 to March 2006 he served as Vice President of Finance for CoreSource, Inc. whose principal business is Health insurance. Mr. Conn is a Certified Public Accountant in good standing and a member of the Ohio Society of Certified Public Accountants.

 

Marvin Clamme has served as a member of our board of directors and one of our employees since March 1999. Mr. Clamme resigned from the board of directors effective April 5, 2010 and was replaced by Mr. Doyle. Mr. Clamme is a professional studio engineer. Mr. Clamme is also the inventor of the ButtKicker low frequency audio transducer, and has since assigned all of his rights and interest in ButtKicker and the ButtKicker patent to the Company.

 

Kenneth McCaw, our founder, has served as a member of our board of directors since March 1990. Mr. McCaw is an accomplished producer, writer and inventor. He is a graduate of the University of California at Los Angles Film Scoring program. Mr. McCaw has written approximately 200 original music pieces and has produced over 25 albums. Mr. McCaw has written and produced music for The White House, Walt Disney Productions, The United States Olympic Committee, Opryland Productions, as well as numerous theaters and playhouses throughout the United States. Mr. McCaw is the inventor of the Hammer Jammer™, a patented, consumer key hammering mechanism for acoustic and electric guitars. Mr. McCaw founded the Company, been on the Board since its inception, invented the Hammer Jammer™ and is a substantial shareholder of the Company, all of which led the Board of Directors to the conclusion that he is qualified to serve as a director of the Company.

 

Walter J. Doyle was elected a director on April 5, 2010 at the Company’s Annual Meeting of Shareholders. Since January 1995, Mr. Doyle has served as the President of Forest Capital, an angel capital firm, located in Powell, Ohio. Previously, Mr. Doyle was founder, President and CEO of Industrial Data Technologies Corp. (IDT) for 21 years. IDT designed, developed, manufactured and marketed high-tech products for factory automation projects in the steel, automotive, food and chemical industries. Earlier, he worked for Industrial Nucleonics/Accuray Corporation (NYC and Columbus, Ohio). Even earlier, he was a US Army Paratrooper.

 

Mr. Doyle earned an Electrical Engineering degree from The City College of New York (CCNY) and an MBA from the Harvard Business School. He is a member and/or on the board of a number of businesses and local civic organizations. As discussed below under Certain Relationships and Related Transactions and Director Independence, Forest Capital, a company controlled by Mr. Doyle, made the Working Capital Loan to the Company. As provided for in the loan documents, the Company agreed to provide Forest Capital the right to appoint one member of the board of directors of the Company, which member is Mr. Doyle. (See Working Capital Loan and Consulting Agreement, Exhibit 10.15, incorporated herein by reference.) Mr. Doyle’s said past executive experience being a substantial shareholder of the Company and being nominated to the Board by Forest Capital as aforesaid, led the Board of Directors to the conclusion that he is qualified to serve as a director of the Company.

 

There are no family relationships among our directors and executive officers. The Company does not have an audit, nominating or compensation committee. In the opinion of the Board of Directors, no Director may be deemed independent.

 

21

 

We are not aware of the occurrence during the last ten years of any events that are material to an evaluation of the ability or integrity of any of our directors or executive officers such as the following: 

 

	·	Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
	·	Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
	·	Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting the involvement of such person in any type of business, securities or banking activities; and
	·	Being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

 

Other Directorships

 

Other than as indicated above, none of the Company's directors hold or have been nominated to hold a directorship in any company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 or subject to the requirements of Section 15(d) of the Securities Act of 1933 or any company registered as an investment company under the Investment Company Act of 1940.

 

Item 11. Executive Compensation.

 

Compensation Discussion and Analysis

 

General

 

We have provided what we believe is a competitive compensation package to our executive management team through a combination of base salary, equity participation and an employee benefits program.

 

This Compensation Discussion and Analysis explains our compensation philosophy, policies and practices since we became a public reporting company.

 

Our objective is to attract and retain executives with the ability and the experience necessary to lead us and deliver strong performance and value to our shareholders, we strive to provide a total compensation package that is competitive with total compensation generally provided to executives in our industry and general industry companies of similar size in terms of revenue and market capitalization. Those are the organizations against whom we generally compete for executive talent.

 

The compensation package for our executive officers may include both cash and equity incentive plans that align an executive's compensation with our short-term and long-term performance goals and objectives.

 

22

 

Offer competitive benefits package to all full-time employees.

 

We provide a benefits package to all full-time employees including health and welfare benefits such as medical insurance. We have no structured executive perquisite benefits (e.g., club memberships or sports tickets) for any executive officer, including the named executive officers, and we currently do not provide any deferred compensation programs or supplemental pensions to any executive officer, including the named executive officers.

 

Provide fair and equitable compensation.

 

We provide a total compensation program that we believe will be perceived by both our executive officers and our shareholders as fair and equitable. In addition to market pay levels and considering individual circumstances related to each executive officer, we also consider the pay of each executive officer relative to each other executive officer and relative to other members of the management team. We have designed the total compensation programs to be consistent for our executive management team.

 

Our Executive Compensation Process

 

Our board of directors acts as our compensation committee. Our executive officers are elected by our board of directors. The following discussions are generally the Company's and the board of directors' historical practices. Based on their understanding of executive compensation for comparable positions at similarly situated companies, experience in making these types of decisions and judgment regarding the appropriate amounts and types of executive compensation to pay and in part on recommendations where appropriate, from our chief executive officer, along with other considerations discussed below, the board of directors approve the annual compensation package of our executive officers with respect to the appropriate base salary, and the grants of long-term equity incentive awards.

 

We have two executive officers. The annual performance review of our executive officers is considered by the board of directors when making decisions on setting base salary and grants of long-term equity incentive awards.

 

The board of directors review the annual performance of any parties related to the CEO and consider the recommendations of the related person's direct supervisor with respect to base salary and grants of long-term equity incentive awards. The board of directors review and may approve these recommendations with modifications as deemed appropriate.

 

Our Executive Compensation Programs

 

Overall, our executive compensation programs are designed to be consistent with the objectives and principles set forth above. The basic elements of our executive compensation programs are summarized in the table below, followed by a more detailed discussion of each compensation program.

 

Element		Characteristics		Purpose
Base salary		Fixed annual cash compensation; all executives are eligible for periodic increases in base salary based on performance and market pay levels.		Keep our annual compensation competitive with the market for skills and experience necessary to meet the requirements of the executive's role with us.
Long-term equity incentive plan awards (stock options)		Performance-based equity award which has value to the extent our common stock price increases over time; targeted at the market pay level and/or competitive practices at similar companies.		Align interest of management with shareholders; motivate and reward management to increase the shareholder value of the company over the long term.
Health & welfare benefits		Fixed component. The same/compar-able health & welfare benefits (medical and disability insurance) are available for all full-time employees.		Provides benefits to meet the health and & welfare needs of employees and their families.

 

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Allocation between Long-Term and Currently Paid Out Compensation

 

The compensation we currently pay consists of base pay. The long-term compensation consists entirely of awards of stock options pursuant to our stock option plans. The allocation between long-term and currently paid out compensation is based on our objectives and how comparable companies use long-term and currently paid compensation to pay their executive officers.

 

Allocation between Cash and Non-Cash Compensation

 

It is our policy to allocate all currently paid compensation in the form of cash and all long-term compensation in the form of awards of options to purchase our common stock. We consider competitive markets when determining the allocation between cash and non-cash compensation.

 

Other Material Policies and Information

 

All pay elements are cash-based except for the long-term equity incentive program, which is an equity-based (stock options) award. We consider market pay practices and practices of comparable companies in determining the amounts to be paid, what components should be paid in cash versus equity, and how much of a named executive officer's compensation should be short-term versus long-term compensation opportunities for our executive officers, including our named executive officers, are designed to be competitive with comparable companies. We believe that a substantial portion of each named executive officer's compensation should be in performance-based pay.

 

In determining whether to increase or decrease compensation to our executive officers, including our named executive officers, annually we take into account the changes (if any) in the market pay levels, the contributions made by the executive officer, the performance of the executive officer, the increases or decreases in responsibilities and roles of the executive officer, the business needs for the executive officer, the transferability of managerial skills to another employer, the relevance of the executive officer's experience to other potential employers and the readiness of the executive officer to assume a more significant role with another organization. In addition, we consider the executive officer's current base salary in relation to the market pay of similar companies.

 

Compensation or amounts realized by executives from prior compensation from us, such as gains from previously awarded stock options or options awards, are taken into account in setting other elements of compensation, such as base pay, or awards of stock options under our long-term equity incentive program. We believe that our executive officers should be fairly compensated each year relative to market pay levels of similar companies and equity among all our executive officers. Moreover, we believe that our long-term incentive compensation program furthers our significant emphasis on pay for performance compensation.

 

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Annual Cash Compensation

 

To attract and retain executives with the ability and the experience necessary to lead us and deliver strong performance to our shareholders, we provide a competitive total compensation package for companies that we compare with. Base salaries and total compensation are targeted at market levels of similar companies, considering individual performance and experience, to ensure that each executive is appropriately compensated.

 

Base Salary

 

Annually we review salary ranges and individual salaries for our executive officers. We establish the base salary for each executive officer based on consideration of market pay levels of similar companies and internal factors, such as the individual's performance and experience, and the pay of others on the executive team.

 

We consider market pay levels among individuals in comparable positions with transferable skills within our industry and comparable companies in general industry. When establishing the base salary of any executive officer, we also consider business requirements for certain skills, individual experience and contributions, the roles and responsibilities of the executive and other factors. We believe a competitive base salary is necessary to attract and retain an executive management team with the appropriate abilities and experience required to lead us. Approximately 30% to 90% of an executive officer’s total cash compensation, depending on the executive's role with us, is paid as a base salary.

 

The base salaries paid to our named executive officers are set forth below in the Summary Compensation Table - See "Summary of Compensation." For the fiscal year ended December 31, 2014, cash compensation to our named executive officers was $100,000 to our chief executive officer and $75,000 to our CFO.

 

Long-term Equity Incentive Compensation

 

We award long-term equity incentive grants to executive officers and directors, including certain named executive officers, as part of our total compensation package. These awards are consistent with our pay for performance principles and align the interests of the executive officers to the interests of our shareholders. The board of directors reviews the amount of each award to be granted to each named executive officer and approves each award. Long-term equity incentive awards are made pursuant to our stock option plans.

 

Our long-term equity incentive compensation is currently exclusively in the form of options to acquire our common stock. The value of the stock options awarded is dependent upon the performance of our common stock price. The board of directors and management believe that stock options currently are the appropriate vehicle to provide long-term incentive compensation to our executive officers. Other types of long-term equity incentive compensation may be considered in the future as our business strategy evolves. Stock options are awarded on the basis of anticipated service to us and vest as determined by the board of directors.

 

Options are granted with an exercise price equal to the fair market value of our common stock on the date of grant. Fair market value is defined as the closing market price of a share of our common stock on the date of grant. We do not have any program, plan or practice of setting the exercise price based on a date or price other than the fair market value of our common stock on the grant date. Like our other pay components, long-term equity incentive award grants are determined based on competitive market levels of comparable companies.

 

Generally, we do not consider an executive officer's stock holdings or previous stock option grants in determining the number of stock options to be granted. We believe that our executive officers should be fairly compensated each year relative to market pay levels of comparable companies and relative to our other executive officers. Moreover, we believe that our long-term incentive compensation program furthers our significant emphasis on pay for performance compensation. We do not have any requirement that executive officers hold a specific amount of our common stock or stock options.

 

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The board of directors retains discretion to make stock option awards to executive officers at other times, including in connection with the hiring of a new executive officer, the promotion of an executive officer, to reward executive officers, for retention purposes or for other circumstances recommended by management. The exercise price of any such grant is the fair market value of our stock on the grant date.

 

For accounting purposes, we apply the guidance in Accounting Standards Codification 718, stock compensation (ASC 718), to record compensation expense for our stock option grants. ASC 718 is used to develop the assumptions necessary and the model appropriate to value the awards as well as the timing of the expense recognition over the requisite service period, generally the vesting period, of the award.

 

Executive officers recognize taxable income from stock option awards when a vested option is exercised. We generally receive a corresponding tax deduction for compensation expense in the year of exercise. The amount included in the executive officer's wages and the amount we may deduct is equal to the common stock price when the stock options are exercised less the exercise price multiplied by the number of stock options exercised. We currently do not pay or reimburse any executive officer for any taxes due upon exercise of a stock option.

 

Overview of 2014 Compensation

 

 We believe that the total compensation paid to our named executive officers for the fiscal year ended December 31, 2014 achieves the overall objectives of our executive compensation program. Executive compensation for 2014 was competitive with comparable companies. See "Summary of Compensation."

 

Other Benefits

 

Health and Welfare Benefits

 

 All full-time employees, including our named executive officers, may participate in our health and welfare benefit program.

 

Stock Ownership Guidelines

 

Stock ownership guidelines have not been implemented by the board of directors for our executive officers. We continue to periodically review best practices and re-evaluate our position with respect to stock ownership guidelines.

 

Securities Trading Policy

 

 Our securities trading policy states that executive officers, including the named executive officers, and directors may not purchase or sell puts or calls to sell or buy our stock, engage in short sales with respect to our stock, or buy our securities on margin.

 

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Tax Deductibility of Executive Compensation

 

Limitations on deductibility of compensation may occur under Section 162(m) of the Internal Revenue Code which generally limits the tax deductibility of compensation paid by a public company to its chief executive officer and certain other highly compensated executive officers to one million dollars in the year the compensation becomes taxable to the executive officer. There is an exception to the limit on deductibility for performance-based compensation that meets certain requirements.

 

Although deductibility of compensation is preferred, tax deductibility is not a primary objective of our compensation programs. We believe that achieving our compensation objectives set forth above is more important than the benefit of tax deductibility and we reserve the right to maintain flexibility in how we compensate our executive officers that may result in limiting the deductibility of amounts of compensation from time to time.

 

Summary Compensation Table. The table below sets forth for our last three completed fiscal years, the compensation earned by our President and CEO and CFO, who are our only “Named Executive Officers”.

 

SUMMARY COMPENSATION TABLE
Name and Principal Position			Year				Salary ($)				Option Awards ($)(1)(5)				All Other Compensation ($)(2)				Total ($)
Mark A. Luden				2014			$	130,000(4	)		$	45,327			$	1,499			$	176,826
President, CEO, Secretary				2013			$	100,000			$	-			$	1,394			$	101,394
				2012			$	117,692(3	)		$	472,602			$	1,499			$	581,793
Richard E. Conn				2014			$	75,000			$	17,421			$	2,747			$	95,168
CFO and Treasurer				2013			$	75,000			$	-			$	2,119			$	77,119
				2012			$	71,250			$	76,017			$	1,999			$	149,266

 

(1) In 2012, Mr. Luden received ten-year options to purchase 3,000,000 shares of our Common Stock, at an exercise price of $0.25 per share as additional compensation for his service to the Company. The options were valued at $472,602 according to the Black-Scholes option pricing model. Also in 2012, Mr. Conn received ten-year options to purchase 500,000 shares of our Common Stock, at an exercise price of $0.25 per share as additional compensation for his service to the Company. The options were valued at $76,017 according to the Black-Scholes option pricing model. The exercise price was lowered to $0.075 by the Board of Directors on December 4, 2014 to reflect the current trading range of the stock as the original exercise price of $0.25 did not provide the incentives originally expected by the Board when the options were granted.

 

(2) Represents health insurance premiums paid by the Company.

 

(3) Includes $10,000 performance bonus from 2012, paid in 2013.

 

(4) This includes a bonus of $30,000 which was approved by the Board on 12/2/2014, but was not paid in 2014.

 

(5) Compensation expense includes the value of the reduction in the exercise price of stock options issued in 2012 from $.25 to $.075 which was $45,327 for Mark Luden and $8,461 for Richard Conn.

 

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Compensation of Directors

 

On December 3, 2014, the Board approved and granted 1,500,000 stock options to the two non-employee directors of the Company with an exercise price of $.075 per share with a vesting schedule of 25% on the first anniversary of the grant, 25% on the second anniversary of the grant, 25% on the third anniversary of the grant and 25% on the fourth anniversary of the grant. Full vesting is to occur upon a change in ownership of the Company for all of these stock options. We reimburse our directors for their reasonable expenses incurred in attending meetings of our board of directors. Provisions of Nevada Law allow us to indemnify our officers, employees, directors and director nominees against liabilities and other expenses incurred as the result of defending or administering any pending or anticipated legal issue in connection with their service to us if it is determined that that person acted in good faith and in a manner which he reasonably believed was in our best interest.

 

Retention and Bonus Plan for Key Employees

 

 In December of 2006, our board of directors approved a retention and bonus plan for key employees. Our board approved the plan in order to induce key employees to remain with the Company, particularly in the event of a “change of control” such as the following: a merger or consolidation of which the Company is not the surviving corporation; a merger or consolidation in which the Company’s then current shareholders hold less than 50% of the Company’s outstanding stock; the sale of all or substantially all of the Company’s assets; the acquisition, sale or transfer of more than 50% of the outstanding voting securities of the Company; or the effectiveness of the filing of a registration statement for the public offering of securities of the Company and sale of more than 50% of the outstanding securities of the Company pursuant to such registration. If within six (6) months after a change of control a participant of the plan (which participants are determined in the sole discretion of the board of directors) is terminated from employment by the Company due to his or her disability, death or by the Company for any reason other than cause, such participant is due severance compensation from 0% to 250% of the participant’s base salary based on the amount of total consideration paid in connection with the change of control. Our board has sole authority to administer and/or amend the plan.

 

 On November 16, 2011, the Board of Directors approved a stock option plan for its employees and approved 600,000 stock options for three of its employees. The Board was advised by its legal counsel that certain changes to the stock option plan were needed and would require the previous plan and option grants to be cancelled and then replaced with a new plan and new option grants. On February 1, 2012, the Board cancelled the plan approved on November 16, 2011 and approved a new 2012 Incentive Stock Option Plan (“2012 ISOP”)and 600,000 stock options for three of its employees, (500,000 of which were granted to Rich Conn, CFO) with an exercise price of $0.25 per share with a vesting schedule of 60% on the first anniversary of the grant, 20% on the second anniversary of the grant and the final 20% on the third anniversary of the grant. On November 26, 2012, the Board approved a stock option plan and granted 3,000,000 stock options to the Company’s president and CEO, with an exercise price of $.25 per share with a vesting schedule of 33 and 1/3% on the first anniversary of the grant, 33 and 1/3% on the second anniversary of the grant and the final 33 and 1/3% on the third anniversary of the grant. See discussion below of the 2012 ISOP that was approved by the Majority Shareholders on December 31, 2012. On November 26, 2012, the Board approved a CEO Compensation plan that resulted in the Company’s president and CEO being awarded a $10,000 bonus as a result of the Company’s revenues exceeding $2,100,000 dollars and the Company’s gross margin exceeding 37.5%. The compensation plan was for 2012 only.

 

On December 4, 2014, the Board of Directors approved the following: the exercise price of incentive stock options previous issued by the Company on February 1, 2012 and November 26, 2012, were changed to $0.075 per share, the closing price of the Company’s stock on December 4th, 2014. The Company issued incentive stock options exercisable at $0.075 per share, the closing price of the Company’s stock on December 4th, 2014, to incentivize the Company’s employees as follows: 1,000,000 incentive stock options to Marvin Clamme, 500,000 incentive stock options to Nancy Luden, 250,000 incentive stock options to Rich Conn, 100,000 incentive stock options to Brendan Kelly, 100,000 incentive stock options to Andrew Luden. The vesting schedule will be as follows: of 60% on the first anniversary of the grant, 20% on the second anniversary of the grant and the final 20% on the third anniversary of the grant. The Company will issue incentive stock options exercisable at $0.075 per share, the closing price of the Company’s stock on December 4th, 2014 as follows: 750,000 incentive stock options to Walter Doyle and 750,000 incentive stock options to Ken McCaw. The vesting schedule will be as follows: 25% on the first anniversary of the grant, 25% on the second anniversary of the grant, 25% on the third anniversary of the grant and 25% on the fourth anniversary of the grant.

 

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Outstanding Equity Awards at Fiscal Year End

 

 The table below shows outstanding equity awards for the Company's executive officers as of the fiscal year ended December 31, 2014, which equity awards consists of ten-year, non-qualified stock options granted under the Company’s 1999 Non-Qualified Stock Option Plan (the "1999 Options"), all of which are vested and exercisable but none of which have been exercised and options granted under the 2012 ISOP, some of which are vested as shown below.

 

	Option Awards					Stock Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable	Number of Securities Underlying Unexercised Options (#) Unexercisable	Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)	Option Exercise Price ($)	Option Expiration Date	Number of Shares or Units of Stock That Have Not Vested (#)	Market Value of Shares or Units of Stock That Have Not Vested ($)	Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)	Equity Incentive Plan Awards Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)
	(1)
Mark A. Luden CEO	3,838,690	0	0	$0.0032	(2)	0	$0	0	$0
	6,074,533	0	0	$0.02	(3)	0	$0	0	$0
	3,000,000	0	3,0000,000	.075	(4)	1,000,000	$0	1,000,000	$0
Richard E. Conn CFO	355,629	0	0	$.0032	(5)	0	$0	0	$0
	500,000	0	500,000	.075	(6)	100,000	$0	100,000	$0
	200,000	0	0	$.0032	(7)	0	$0	0	$0
	250,000	0	250,000	.075	(8)	250,000		250,000	$0

 

(1) Post-Reorganization shares aggregate 14,218,852 shares at a conversion ratio of 31,206 to 1.

 

(2) Options for 1,640,851 shares expire June 29, 2019, for 1,029,798 shares December 14, 2020 and for 1,168,041 shares December 30, 2019.

 

(3) Options for 1,581,573 shares expire February 28, 2018 and for 4,492,960 shares March 12, 2019.

 

(4) Options for 3,000,000 shares expire November 25, 2022. Shares vest 1,000,000 on November 25, 2013, 1,000,000 on November 25, 2014, and 1,000,000 on November 25, 2015. The exercise price was lowered to $0.075 by the Board of Directors on December 4, 2014 to reflect the current trading range of the stock as the original exercise price of $0.25 did not provide the incentives originally expected by the Board when the options were granted.

 

(5) Options for 355,629 shares expire June 29, 2019 and were assigned to Richard E. Conn from Mark A. Luden, CEO on April 19, 2012.

 

(6) Options for 500,000 shares expire January 31, 2022. Shares vest 300,000 on January 31, 2013, 100,000 on January 31, 2014, and 100,000 on January 31, 2015. The exercise price was lowered to $0.075 by the Board of Directors on December 4, 2014 to reflect the current trading range of the stock as the original exercise price of $0.25 did not provide the incentives originally expected by the Board when the options were granted.

 

(7) Options for 200,000 shares expire December 30, 2019 and were purchased from Kenneth McCaw on November 25, 2013.

 

(8) Options for 250,000 shares expire December 4, 2024. Shares vest 150,000 on December 4, 2015, 50,000 on December 4, 2016, and 50,000 on December 4, 2017.

 

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

 The following table sets forth information concerning the beneficial ownership of the Company’s Common Stock on December 31, 2014 by (i) each person who is known by the Company to own beneficially more than 5% of the Common Stock, (ii) each director of The Guitammer Company, (iii) each of the executive officers of The Guitammer Company and (iv) all directors and executive officers of The Guitammer Company as a group.

 

Name and Address(1) of Beneficial Owner		Shares Beneficially Owned				Options and Warrants Beneficially Owned				Total Shares and Options Beneficially Owned				Percentages(2)
Mark Luden President, CEO and Director			6,058,610				13,463,223(5	)			19,521,833				20.24	%
Richard E. Conn, CFO and Treasurer			39,206				1,305,629				1,344,835				1.60	%
Marvin Clamme Vice President			6,397,230				6,297,166				12,694,396				14.22	%
Kenneth McCaw Director			2,340,450				8,903,946				11,244,396				12.23	%
Walter J. Doyle(3) Director			2,631,614				750,000				3,381,614				4.04	%
Christopher Doyle(4) 1970 Jewett Rd Powell, OH 43065			12,929,246				6,699,928				19,629,174				21.88	%
Julie E. Jacobs Trust c/o Francine I. Jacobs, Trustee 1105 Schrock Road Suite 602 Columbus, OH 43229			9,413,451				2,699,857				12,113,308				14.13	%
All Officers and Directors as a a Group (5 Persons)			17,467,110				30,719,964				48,187,074				42.37	%

 

(1) Addresses for the officers and directors are the Company’s address.

 

(2) The number of shares of Common Stock owned are those "beneficially owned" as determined under SEC regulations, including any shares of Common Stock as to which a person has sole or shared voting or investment power and any shares of Common Stock which the person has the right to acquire within 60 days through the exercise of any option, warrant or right. More than one person may be deemed to be a beneficial owner of the same securities. The percentage of beneficial ownership by any person as of a particular date is calculated by dividing the number of shares beneficially owned by such person, which includes the number of shares as to which such person has the right to acquire voting or investment power within 60 days, by the sum of the number of shares outstanding as of such date plus the number of shares as to which such person has the right to acquire voting or investment power within 60 days. Consequently, the denominator used for calculating such percentage may be different for each beneficial owner. As of December 31, 2014, there were 83,000,498 shares of Common Stock outstanding.

 

(3) Includes shares held in The Walter J. Doyle Trust, which shares, options and warrants Mr. Doyle is deemed to beneficially own.

 

(4) Christopher Doyle is the adult son of Walter J. Doyle. His shares include shares and warrants owned by Forest Capital which Christopher Doyle is deemed to beneficially own.

 

(5) Includes 550,000 options owned by Nancy Luden, wife of Mark Luden.

 

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Item 13. Certain Relationships and Related Transactions and Director Independence.

 

Except for the transactions described below, none of our directors, officers or principal shareholders, or any associate or affiliate of the foregoing, have any interest, direct or indirect, in any transaction or in any proposed transactions, during the years ended December 31, 2013 and 2012.

 

In July of 2009, we entered into a Working Capital Loan and Consulting Agreement (the “Working Capital Loan”), with Forest Capital, LLC (“Forest”), which is controlled by Walter J. Doyle, a Director of the Company. Pursuant to the Working Capital Loan, Forest loaned us an aggregate of $250,000, which amount bore interest at the rate of 10% per annum. The principal amount of the loan was initially payable by us upon the earlier to occur of (a) the completion of a significant funding transaction or (b) December 31, 2009, provided that the Company could extend the loan to December 31, 2010, provided that we pay all of the accrued interest then due on the loan by December 31, 2009, and that we agree to increase the interest rate of the Working Capital Loan to 20% per annum, compounded monthly and payable annual. The Working Capital Loan was so extended and was due on demand. As of February 29, 2012, the balance due on this loan was $150,000. In consideration for Forest agreeing to the Working Capital Loan, we agreed to issue and in January 2010 issued to Forest 85.3 shares of Guitammer-Ohio which because of the Reorganization have been converted into an aggregate of 2,661,871 shares of the Company’s common stock (subsequently transferred to The Walter J. Doyle Trust) and granted 10-year options to purchase shares of Guitammer-Ohio which because of the Reorganization have been converted into options to purchase 655,326 shares of the Company’s Common Stock at an exercise price of $0.02 per share. Also, the Company’s directors, including Mr. Luden, Mr. McCaw and Mr. Clamme agreed to transfer and have each transferred to Forest options to purchase shares of Guitammer-Ohio which because of the Reorganization have been converted into options to purchase 2,014,971 shares of the Company’s Common Stock (a total of 6,044,914 shares) at an exercise price of $0.02 per share. Also, the Company agreed to provide Forest the right to appoint one member of the board of directors of the Company, which member is Mr. Doyle. On December 21, 2011, $100,000 of the principal and all interest due on the loan was converted to shares of the Company’s stock pursuant to the note conversion agreement. Also, the note was amended on December 21, 2011 reissued and now bears interest at a rate of 8%. The first interest payment was due on January 3, 2013 and was paid by issuing 49,562 shares of the Company’s stock. On January 27, 2014, the Guitammer Company (the Company) entered into a Note Restatement Agreement with a revised principal balance of $162,106.52, which is the sum of (a) $150,000, the original unpaid principal amount of the 2011 Note, plus (b) $12,106.52, which is the unpaid accrued interest on that original unpaid principal balance computed from January 1, 2013 through January 3, 2014, and which is being converted into unpaid principal as of January 3, 2014. All accrued and unpaid interest on the Note is payable on January 3, 2015, and all unpaid principal and all remaining accrued and unpaid interest on the Note is payable in full on January 3, 2016.

 

In May 2003, we borrowed $800,000 at 8% interest per annum from Thelma Gault (the “Gault Loan”) (a shareholder of the Company and owner of Eminence Speaker LLC, a manufacturing partner of the Company). The Gault Loan included a security interest over substantially all of our assets, and required that we needed Ms. Gault’s prior approval before incurring any additional debt. In connection with the Gault Loan, we granted Ms. Gault options to purchase shares of Guitammer-Ohio which because of the Reorganization have been converted into options to purchase an aggregate of 3,276,630 shares of our Common Stock. All of the options have an exercise price of $0.02 per share and have vested. The Gault Loan was originally due May 6, 2008.

 

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The Gault Loan was amended in January 2008 to increase the interest rate to 10% per annum (beginning on May 6, 2008), provide for 72 monthly payments to be made on the loan starting in June 2008, to extend the due date of the loan until June 1, 2014, and to provide that in the event the Company obtains financing of over $4,000,000, the Company shall use commercially reasonable efforts to negotiate to use a portion of the funding to repay the Gault Note and that the Company shall use its commercially reasonable efforts to make yearly prepayments on the loan in an amount equal to 7.5% of the Company’s available cash on hand as of the end of the immediately preceding year. The amendment to the Gault Loan also added certain events of default under the loan including if Mark Luden is no longer active in the day-to-day operations of the Company, absent the written approval of a replacement by Ms. Gault.

 

On April 25, 2008 Ms. Gault signed an Intercreditor Agreement with the Director of Development of the State of Ohio, also a creditor of the Company, in which she agreed to share, paripassu, with the Director her security interest in the assets of the Company securing the Gault Loan.

 

In February 2009, the Gault Loan was amended again to subordinate the repayment of the loan to the repayment of the Credit Agreement described below. In November 2010, the Gault Loan was amended once again to subordinate the repayment of the loan to the repayment of the Julie E. Jacobs Trust’s and the Standard Energy Company’s loans described below. The outstanding balance on the Gault Loan as of December 31, 2013 was $584,352 and it is due on demand.

 

On March 9, 2009, we entered into a Credit Facilitation Agreement (the “Credit Agreement”) with Walter J. Doyle, as Trustee of the Walter J. Doyle Trust dated February 5, 1992, and Francine I. Jacobs, Trustee of the Revocable Trust created by Julie E. Jacobs under Agreement dated November 25, 2009 (collectively “Doyle and Jacobs”), both of whom were investors in the Company. Pursuant to the Credit Agreement, Doyle and Jacobs each agreed to guarantee 50% of a Merrill Lynch line of credit loan to the Company of $400,000, which loan carries a variable interest rate tied to the LIBOR rate. The amount loaned pursuant to the Credit Agreement was to be used to acquire inventory and finance accounts receivable. The loan is secured by a first priority security interest and lien on all of Guitammer property and assets. We agreed to pay Doyle and Jacobs an annual fee of 4% of the outstanding amount of the Credit Agreement, to sell to each of Doyle and Jacobs an aggregate of 20% of the then outstanding shares of Guitammer-Ohio for $1.00 per share, or 292 shares of Guitammer-Ohio each which because of the Reorganization have been converted into 9,112,152 shares of our Common Stock, an aggregate of 18,224,304 shares, and pay the legal fees associated with the Credit Agreement. On December 21, 2011, the annual fee that was due on the loans was converted to shares of the Company’s stock pursuant to the note conversion agreement.

 

Additionally, in connection with the Credit Agreement, we agreed to grant to certain of our key employees, directors and officers options to purchase shares of Guitammer-Ohio which because of the Reorganization were converted into options to purchase shares of our Common Stock, as follows:

 

	·	Ken McCaw – Options to purchase 3,744,720 shares of Common Stock;
	·	Marvin Clamme – Options to purchase 3,744,720 shares of Common Stock; and
	·	Mark Luden – Options to purchase 4,992,960 shares of Common Stock.

 

All of the options have an exercise price of $0.02 per share and have vested.

 

The Credit Agreement is due and payable on demand. The balance due of the Credit Agreement as of December 31, 2013 was $395,350.

 

On April 7, 2010 the Julie E. Jacobs Trust (“Jacobs Trust”) loaned us $100,000. The loan was due on June 7, 2010 but has not been paid. The Note bore interest at the rate of 30% per annum and was payable on demand. As additional consideration for the loan, the Company agreed to issue to the Jacobs Trust Warrants to purchase 125,003 shares of our Common Stock post- Reorganization at $0.005 per share at the time of a Company IPO. On December 21, 2011, the interest due on the loan was converted to shares of the Company’s stock pursuant to the note conversion agreement. Also, the note was amended on December 21, 2011 reissued and now bears interest at a rate of 8%. The first interest payment was due on January 3, 2013 and was paid by issuing 33,042 shares of the Company’s stock. On January 27, 2014, the Company entered into a Note Restatement Agreement with the Julie Jacobs Trust with a revised principal balance of $108,071.01, which is the sum of (a) $100,000, the original unpaid principal amount of the 2011 Note, plus (b) $8,071.01, which is the unpaid accrued interest on that original unpaid principal balance computed from January 1, 2013 through January 3, 2014, and which is being converted into unpaid principal as of January 3, 2014. All accrued and unpaid interest on the Note is payable on January 3, 2015, and all unpaid principal and all remaining accrued and unpaid interest on the Note is payable in full on January 3, 2016.

 

32

 

On October 5, 2010 the Standard Energy Company loaned us $100,000. Standard Energy Company is controlled by Gerald Jacobs, a substantial shareholder of the Company. The loan bore interest at the rate of 10% per annum, is unsecured and was payable September 30, 2011. On December 21, 2011, the principal and interest due on the loan was converted to shares of the Company’s stock pursuant to the note conversion agreement.

 

On October 5, 2010 the Company issued its Promissory Note payable to Walter J. Doyle Trust in the amount of $25,000 to evidence a loan made to the Company that date. The note bore interest at the rate of 10% per annum and was due September 30, 2011. On December 21, 2011, the principal and interest due on the loan was converted into 112,108 shares of the Company’s Common Stock.

 

On November 12, 2010 the Company arranged an inventory financing agreement with the Walter J. Doyle Trust and the Julie E. Jacobs Trust, for an aggregate of $300,000 and a monthly interest rate of 2%. The loan was evidenced by two-$150,000 promissory notes payable to the lenders (one of which is the Standard Energy Company) and secured by a first lien on all of the assets of the Company. The notes were due on October 14, 2011. On December 21, 2011, the principal and interest on the loan was converted into 1,500,456 shares of the Company’s Common Stock.

 

 Director Independence

 

In the opinion of the Board of Directors, no Director may be deemed independent.

 

Item 14. Principal Accounting Fees and Services

 

		Year ending December 31, 2014				Year ending December 31, 2013
Audit and review fees		$	61,000			$	61,000
Audit-related Fees			-				-
Tax fees			-				-
All other fees			-				-

 

33

 

PART IV

 

 

Item 15. Exhibits, Financial Statement Schedules  

 

1. Consolidated Financial Statements.

 

The following consolidated financial statements of The Guitammer Company and subsidiary, are  submitted  as a  separate  section of this  report  (See  F-pages)  and are incorporated by reference in Item 8:

 

F-1	Report of Independent Registered Public Accounting Firm
F-2	Consolidated Balance  Sheets  as  of  December  31,  2014  and  2013
F-3	Consolidated Statements of Operations for the years ended December 31, 2014 and 2013
F-4	Consolidated  Statement  of Changes in  Stockholders'  Deficit for the years ended December 31, 2014 and 2013
F-5	Consolidated  Statements  of Cash Flows for the years ended  December 31, 2014 and 2013
F-6	Notes to Consolidated Financial Statements

 

All  schedules  are omitted  because  they are either not  required or not applicable or the required  information is shown in the  Consolidated  Financial Statements or Notes thereto.

 

34

 

2. Exhibits

 

a. The following exhibits are filed as part of this report or incorporated herein as indicated.

 

Exhibit No.		Date of Document		Name of Document
2.0*		May 17, 2011		Agreement and Plan of Reorganization
3.0*		March 3, 1990		Articles of Incorporation of Guitammer-Ohio
3.1*		June 6, 2005		Certificate of Amendment of Guitammer- Ohio
3.2*		June 17, 2005		Certificate of Amendment of Guitammer- Ohio
3.3*				Code of Regulations of Guitammer - Ohio
3.4*		May 17, 2011		Articles of Incorporation of Guitammer- Nevada
3.5*				Bylaws of Guitammer - Nevada
4.0*		September 30, 1999		1999 Non-Qualified Stock Option Plan, as amended
4.1*				Form of Option Agreement
4.2*		June 17, 2005		2005 Amendment to1999 Non-Qualified Stock Option Plan
4.3**		July 14, 2011		Form of Warrant issued to The Walter J. Doyle Trust
4.4**		July 14, 2011		Form of Warrant issued to Standard Energy Company
10.1*		November 1, 2002		Richard B. Luden $82,000 Note
10.1A#		December 21, 2011		Richard Luden Conversion Agreement 82K
10.2*		May 13,  2005		Note Purchase Agreement—Walter Doyle, John O. Huston and Eric Roy
10.3*		September 1, 2007		First Amendment To Note Purchase Agreement—Walter Doyle, John O. Huston and Eric Roy
10.4*		May 13,  2005		Walter J. Doyle $150,000 Note
10.4A*		September 1, 2007		Amended and Restated Walter Doyle Note
10.4B###		January 31, 2012		Walter Doyle 150K Jan 31, 2012 Note Conversion Agreement
10.5*		May 13,  2005		Eric Roy $100,000 Note
10.5A*		March 28, 2011		Agreement to Convert An Existing Note—Eric P. Roy
10.5B*		September 1, 2007		Eric Roy 9.4 Stock Options on 100K 0901207 note
10.5C*		May 13, 2005		Eric Roy 16 stock options 05132005

 

35

 

10.5D*		May 13, 2006		Eric Roy 16 Stock options 05132006
10.5E*		September 1, 2007		Amended and Restated Eric Roy Note
10.5F###		January 31, 2012		Eric Roy Jan 31, 2012 Note Conversion Agreement
10.6*		May 13,  2005		John O. Huston $50,000 Promissory Note
10.6A*		September 1, 2007		John O. Huston 4.7 Stock options 09012007
10.6B*		May 13, 2005		John O. Huston 8 Stock Options 05132005
10.6C*		May 13, 2006		John O. Huston 8 Stock Options 05132006
10.6D*		September 1, 2007		Amended and Restated John O. Huston Promissory Note
10.6E###		January 31, 2012		John Huston Jan 31 2012 Note Conversion Agreement
10.7*		June 29, 2005		Note Purchase Agreement—Walter Doyle, Andrea L. Levenson and Gust Van Sant
10.8*		September 1, 2007		First Amendment To Note Purchase Agreement—Walter Doyle, Andrea L. Levenson and Gust Van Sant
10.9*		June 29, 2005		Walter J. Doyle $50,000 Promissory Note
10.9A*		September 1, 2007		Amended and Restated Walter Doyle Note
10.9B###		January 31, 2012		Walter Doyle 50K Jan 31, 2012 Note Conversion Agreement
10.10*		June 29, 2005		Andrea Lerner Levenson $50,000 Promissory Note
10.10A*		September 1, 2007		Andrea Lerner Levenson 4.7 Stock Options on 50K 09012007 note
10.10B*		June 29, 2006		Andrea Lerner Levenson 8 stock options 6292006
10.10C*		June 29, 2005		Andrea Lerner Levenson 8 stock options 06292005
10.10D*		September 1, 2007		Amended and Restated Andrea L. Levenson Promissory Note
10.10E###		January 31, 2012		Andrea Levenson Jan 31, 2012 Note Conversion Agreement
10.11*		June 29, 2005		Gust Van Sant $50,000 Promissory Note
10.11A*		September 1, 2007		Gust Van Sant 4.7 Stock Options on 50K 09012007 note
10.11B*		June 29, 2005		Gust Van Sant 8 Stock Options 06292005
10.11C*		June 29, 2006		Gust Van Sant 8 Stock Options 06292006
10.11D*		September 1, 2007		Amended and Restated Gust Van Sant Promissory Note
10.11E###		January 31, 2012		Gus Van Sant Jan 31, 2012 Note Conversion Agreement

 

36

 

10.12*		July 19, 2005		Promissory Note --Opal Private Equity Fund, LP
10.12A*		September 1, 2007		Opal Private Equity Stock Warrants on 100K note
10.12B*		July 19, 2005		Opal 16 Stock Warrants 07192005
10.12C*		July 19, 2006		Opal 16 Stock Warrants 07192006
10.12D*		September 1, 2007		Amended and Restated Opal Promissory Note
10.13*		September 1, 2007		First Amendment To Note Purchase Agreement--Opal Private Equity Fund, LP
10.14*		July 19, 2005		Opal Private Equity Fund, LP $100,000 Note Purchase agreement
10.15*		July 3, 2005		Forest Capital $250,000 Working Capital Loan and Consulting Agreement
10.15A*		January 1, 2010		Forest Capital 214.7 options 01012010
10.15B#		December 21, 2011		Forest Capital Amended loan agreement 150k
10.15C##		February 1, 2012		Addendum to Conversion and Amended Loan Agreement with Forest Capital
10.15D&&		December 21, 2011		Forest Capital Conversion Agreement 250K
10.15E+&+		January 31, 2014		Forest Capital $150,000 Second Restated Promissory Note Rev 01272014
10.16*		May 5, 2003		Thelma Gault $800,000 Loan and Option Agreement
10.17*		January 31, 2008		First Amendment To Thelma Gault $800,000 Loan Agreement
10.18*		February 28, 2009		Second Amendment To Thelma Gault $800,000 Loan Agreement
10.19*		January 31, 2008		Thelma Gault $800,000 Amended and Restated Promissory Note
10.20*		November 18, 2010		Thelma Gault Subordination Agreement 1st Lien carve out
10.21*		March 9, 2009		Credit Facilitation Agreement—Walter J. Doyle Trust and Julie E. Jacobs Trust
10.21A*		February 26, 2009		Merrill Lynch Loan Application and acceptance
10.21B*		March 2009		Merrill Lynch Loan agreement
10.21C*		December 1, 2009		Revised Merrill Lynch Loan agreement
10.21D&&		December 21, 2011		Jacobs Trust Fee conversion agreement on 200k loan

 

37

 

10.21E&&		December 21, 2011		Doyle Trust Fee Conversion Agreement on 200K loan
10.22*		April 25, 2008		Ohio Innovation Loan Agreement
10.23*		April 25, 2008		Ohio Innovation Loan Security Agreement
10.24*		September 11, 2008		Ohio Innovation Loan Modification Agreement
10.24A*		September 17, 2009		Ohio Innovation Loan Modification Agreement 2nd Mod
10.24B*		November 24, 2010		Ohio Innovation Loan Modification Agreement 3rd Mod
10.24C-@-		December 1, 2012		Ohio Innovation Loan Modification Agreement 4th Mod
10.24D-@-		December 1, 2012		Ohio Innovation Loan Modification Agreement 5th Mod
10.25*		November 29, 2010		Ohio Innovation Loan Subordination Agreement
10.25A*		April 25, 2008		Ohio Innovation Loan Intercreditor agreement
10.25B*		April 25, 2008		Ohio Innovation Loan Cognovit promissory note
10.26*		April 7, 2010		Julie E. Jacobs Trust $100,000 Loan Agreement
10.26A#		December 21, 2011		Jacobs Trust Interest Conversion Agreement on 100K loan
10.26B#		December 21, 2011		Jacobs Trust Amended loan agreement 100K loan
10.26C+&+		January 31, 2014		Jacobs Trust $100,000 Second Restated Promissory Note Rev 01272014
10.27*		October 4, 2010		Amendment To Julie E. Jacobs Trust $100,000 Loan Agreement
10.28*		January 11, 2011		Joseph Albert $100,000 Convertible Promissory Note
10.29*		January 11, 2011		Joseph Albert $100,000 Convertible Promissory Note Extension Agreement
10.29B&&&		June 8, 2012		Joseph Albert Note Conversion Agreement
10.30*				Joseph Albert 50,000 Common Stock Purchase Warrants
10.30A*				Joseph Albert 100,000 Common Stock Purchase Warrants
10.30B&&&		June 8, 2012		Joseph Albert 150,000 Common Stock purchase Warrants
10.31*		October 5, 2010		Standard Energy Company $100,000 Loan Agreement and Promissory Note
10.31A#		December 21, 2011		Standard Energy Note Conversion Agreement
10.31B##		February 1, 2012		Addendum to Note Conversion Agreements with Standard Energy Company
10.32*		October 11, 2010		Doyle Trust $25,000 Promissory Note
10.32A*		October 5, 2010		Doyle Trust $25,000 Loan Agreement

 

38

 

10.32B##		February 1, 2012		Addendum to Note Conversion Agreements with The Walter J. Doyle Trust
10.32C&&		December 21, 2011		Doyle Trust Note Conversion Agreement 25K
10.33*		November 12, 2010		Walter J. Doyle Trust and Julie E. Jacobs Trust Inventory Financing Agreement
10.33A*		November 12, 2010		Jacobs Trust Stock 82.8 Options
10.34*		November 12, 2010		Walter J. Doyle Trust $150,000 Promissory Note
10.34A#		December 21, 2011		Doyle Trust Conversion Agreement 150K
10.34B##		February 1, 2012		Addendum to Note Conversion Agreements with The Walter J. Doyle Trust
10.35*		November 12, 2010		Standard Energy Company $150,000 Promissory Note
10.35A#		December 21, 2011		Standard Energy Note Conversion Agreement 100k
10.35B##		February 1, 2012		Addendum to Note Conversion Agreements with Standard Energy Company
10.36*		February 2, 2011		Robison Note Extension Agreement
10.36A*		July 10, 2010		Robison original promissory note
10.37*		February 2, 2011		Robison $50,000 Convertible Promissory Note
10.37A&&&		June 22, 2012		Robison Note Conversion agreement
10.38*				Robison Common Stock Purchase Warrants for 50,000 shares and 25,000 shares
10.38A&&&		June 22, 2012		Robison Common Stock Purchase Warrants for 75,000 shares
10.39*		February 24, 2011		Carl A. Generes $35,000 Promissory Note
10.40*		July 13, 2009		Lease Modification  Agreement
10.40A*		January 18, 2006		Lease Agreement – original
10.40B **		April 10, 2008		First Lease Agreement Amendment
10.40C***		August 11, 2011		(Second) Lease Modification Agreement
10.41&&		November 16, 2011		Watters Agreement November 2011
10.41A ****		February 9, 2012		Extension to Watters agreement January to March 2012
10.42&&		December 5, 2011		Jeff Paltrow dba Litehouse Capital Contractual Agreement December 2011
10.43&&		December 19, 2012		Cervelle Group marketing Agreement December 2011
10.44****		February 10, 2012		Ertman agreement January to March 2012
10.46+&+		January 31, 2014		Walter Doyle Trust $50,000 Promissory Note 01272014
10.47+&+		January 31, 2014		Julie Jacobs Trust $50,000 Promissory Note 01272014
10.48A@@		September 12, 2014		LFT Manufacturing Operating Agreement
10.48B@@		September 12, 2014		Warrant agreement for  consideration with LFT Manufacturing Operating Agreement
10.49@@		August 29, 2014		Letter Agreement Regarding Technology Initiative with Guitammer, San Jose Sharks, Comcast SportsNet Bay area and Comcast SportsNet Ca.
21.1*				List of Subsidiaries of the Registrant

 

39

 

31.1 %%		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 %%		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 %%		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 %%		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002

 

* Filed with the SEC on July 8, 2011 as Exhibits to Amendment No. 1 to the Company’s Form 10 Registration Statement and are incorporated herein by reference.

 

** Filed with the SEC on July 28, 2011 as Exhibits to Amendment No. 2 to the Company’s Form 10 Registration Statement and are incorporated herein by reference.

 

*** Filed with the SEC on August 12, 2011 as Exhibit to Amendment No. 3 to the Company’s Form 10 Registration Statement and is incorporated herein by reference.

 

# Filed with the SEC on December 23, 2011 as Exhibits to Form 8-K

 

## Filed with the SEC on February 2, 2012 as Exhibits to Form 8-K

 

###  Filed with the SEC on February 6, 2012 as Exhibits to Form 8-K

 

&&  Filed with the SEC on April 6, 2012 as Exhibits to Form 10-K

 

****  Filed with the SEC on May 15, 2012 as Exhibits to Form 10-Q

 

&&&  Filed with the SEC on August 13, 2012.

 

+&+ Filed with the SEC on January 31, 2014 as Exhibits to Form 8-K.

 

-@- Filed with the SEC on March 14, 2014 as Exhibits to Form 10-K

 

@@ Filed with the SEC on November 14, 2014 as Exhibits to Form 10-Q

 

%% Filed with the SEC herewith.

 

40

 

Signatures

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act, the Company has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 

 

	The Guitammer Company
Date: March 13, 2015	By:	/s/ Mark A. Luden
	Name:	Mark A. Luden
	Title:	President and CEO

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Signature		Capacity
/s/ Mark A. Luden		Director, Chairman of the Board,
Mark A. Luden		President and Chief Executive
		Officer (Principal Executive Officer)
/s/ Kenneth McCaw		Director
Kenneth McCaw
/s/ Richard E. Conn		Chief Financial Officer
Richard E. Conn		(Principal Financial and Principal Accounting Officer)

 

41

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

The Guitammer Company

 

We have audited the accompanying consolidated balance sheets of The Guitammer Company (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2014 and 2013. The Guitammer Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Guitammer Company as of December 31, 2014 and 2013 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2014 and 2013 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

/s/ Schneider Downs & Co., Inc.

 

Columbus, Ohio

March 13, 2015

 

F-1

 

THE GUITAMMER COMPANY

CONSOLIDATED BALANCE SHEETS

 

		December 31,				December 31,
		2014				2013
ASSETS
Current assets
Cash and cash equivalents		$	16,185			$	140,231
Accounts receivable, net			25,139				62,505
Inventory			361,223				443,761
Prepaid expenses and other current assets			131				6,141
Total current assets			402,678				652,638
Property and equipment, net			64,173				127,186
Deferred financing costs, net			25,066				38,335
Other assets			29,729				21,472
Total Assets		$	521,646			$	839,631
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Line of credit		$	39,523			$	39,523
Accounts payable			853,933				533,438
Accrued expenses			366,938				376,188
Deferred revenue			36,899				68,823
Current portion of long-term debt - related parties			604,529				584,352
Current portion of long-term debt - non-related parties			795,630				559,987
Total current liabilities			2,697,452				2,162,311
Long-term debt, net of current portion - related parties			340,229				250,000
Long-term debt, net of current portion - non related parties			-				302,479
Total Liabilites			3,037,681				2,714,790
Commitments			-				-
Stockholders' deficit
Common stock, par value of $.001, 150,000,000 shares authorized; 83,000,498 and 77,905,248 shares
issued and outstanding at December 31, 2014 and December 31, 2013, respectively			83,001				77,906
Additional paid-in capital			7,985,860				7,253,730
Accumulated deficit			(10,584,896	)			(9,206,795	)
Total Stockholders' deficit			(2,516,035	)			(1,875,159	)
Total Liabilities and Stockholders' deficit		$	521,646			$	839,631

 

See accompanying Notes to Consolidated Financial Statements.    

 

F-2

 

THE GUITAMMER COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS 

 

		Year Ended December 31,
		2014				2013
Total revenue		$	1,051,019			$	1,917,300
Cost of goods sold			605,934				1,106,269
Gross profit			445,085				811,031
Operating expenses
General and administrative			1,579,507				1,727,180
Research and development			22,570				197,006
			1,602,077				1,924,186
Loss from operations			(1,156,992	)			(1,113,155	)
Other income (expense)
Interest expense			(221,129	)			(193,776	)
Interest income			20				68
			(221,109	)			(193,708	)
Loss before provision for income taxes			(1,378,101	)			(1,306,863	)
Provision for income taxes			-				-
Net loss attributable to common stockholders		$	(1,378,101	)		$	(1,306,863	)
Basic and diluted loss per share		$	(0.02	)		$	(0.02	)
Basic and diluted weighted average common shares outstanding			79,562,108				73,712,472

 

See accompanying Notes to Consolidated Financial Statements.                

 

F-3

 

THE GUITAMMER COMPANY

CONSOLIDATED STATEMENT OF CHANGES  IN STOCKHOLDERS' DEFICIT

YEARS ENDED DECEMBER 31, 2014 and 2013

 

											Additional
			Common Stock								Paid-in				Accumulated
			Shares				Amount				Capital				Deficit				Total
Balance, January 1, 2013			68,779,482				$	68,780			$	5,641,492			$	(7,899,932	)		$	(2,189,660	)
Common stock and warrants issued to retire accrued interest			82,604					82				20,569				-				20,651
Employee stock option compensation			-					-				153,455				-				153,455
Common stock and warrants issued for services			949,500					950				183,821				-				184,771
Options/warrants exercised for common stock purchase			906,162					906				11,581				-				12,487
Common stock and warrants issuance			7,187,500					7,188				1,242,812				-				1,250,000
Net loss			-					-				-				(1,306,863	)			(1,306,863	)
Balance, December 31, 2013			77,905,248				$	77,906			$	7,253,730			$	(9,206,795	)		$	(1,875,159	)
Warrants issued for debt issuance and to revise debt agreements to include accrued interest			-					-				32,208				-				32,208
Employee stock option compensation			-					-				203,567				-				203,567
Common stock and warrants issued for services			687,500					687				89,675				-				90,362
Options/warrants exercised for common stock purchase			4,407,750					4,408				406,680				-				411,088
Net loss			-					-				-			$	(1,378,101	)			(1,378,101	)
Balance, December 31, 2014			83,000,498				$	83,001			$	7,985,860			$	(10,584,896	)		$	(2,516,035	)

 

See accompanying Notes to Consolidated Financial Statements.              

 

F-4

 

THE GUITAMMER COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Year ended December 31,
		2014				2013
Cash flows from operating activities
Net loss		$	(1,378,101	)		$	(1,306,863	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and patent amortization			46,334				31,623
Amortization of deferred financing fees			26,733				20,001
Amortization of debt discount			8,974				-
Employee stock options			203,567				153,455
Stock and warrants issued for services			90,362				184,771
Loss on sale of assets			1,647				-
Change in fair value of warrant liability			(109,926	)			(20,441	)
Changes in assets and liabilities
Accounts receivable			37,366				(41,494	)
Inventory, net			82,538				185,490
Prepaid expenses			6,010				125,498
Accounts payable and accrued expenses			440,248				(250,901	)
Deferred revenue			(31,924	)			(60,562	)
Net cash used in operating activities			(576,172	)			(979,423	)
Cash flows from investing activities
Purchase of intangible assets			(16,552	)			-
Proceeds on sale of property and equipment			38,249				-
Purchase of property and equipment			(14,921	)			(139,293	)
Net cash provided by (used in) investing activities			6,776				(139,293	)
Cash flows from financing activities
Proceeds from stock and warrants			-				1,250,000
Proceeds from options and warrants exercised			411,088				12,487
Proceeds from debt			100,000				-
Payment of debt			(65,738	)			(82,676	)
Net cash provided by financing activities			445,350				1,179,811
Net (decrease) increase in cash and cash equivalents			(124,046	)			61,095
Cash and cash equivalents, beginning of period			140,231				79,136
Cash and cash equivalents, end of period		$	16,185			$	140,231
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest		$	92,344			$	176,734
Income taxes		$	-			$	-
Supplemental disclosure of non-cash investing and financing activities
Issuance of common stock in connection with debt retirement		$	-			$	20,651
Accrued interest converted to debt		$	20,178			$	-
Issuance of warrants for debt modification		$	13,464			$	-
Issuance of warrants for debt discount		$	18,744			$	-

 

See accompanying Notes to Consolidated Financial Statements.    

 

F-5

 

1 -	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business

 

The financial information presented represents The Guitammer Company (the “Company”) originally incorporated on March 6, 1990, under the laws of the State of Ohio, and then re-domiciled to Nevada on May 18, 2011.

 

In April 2011, the Board of Directors approved a resolution to create a holding company to own 100% of the Ohio Company (“Guitammer-Ohio”). The holding company is incorporated in the State of Nevada and has 150 million authorized common shares. Existing shareholders of Guitammer-Ohio received 31,206 shares in the holding company for each share they owned, resulting in a total of 50,001,374 shares of Common Stock, of Guitammer-Nevada evidencing the same proportional interest in Guitammer-Nevada as they held in Guitammer-Ohio. The per share numbers and the per share amounts in the financial statements and the notes to the financial statements reflect the retroactive application of our stock split.

 

The Company is involved in the design and distribution of a low frequency audio transducer branded as the original ButtKicker® products. The Company, headquartered in Ohio, sells products internationally.

 

Basis of Presentation

 

All significant inter-company transactions and accounts have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid debt instruments and other short-term investments with an initial maturity of three months or less to be cash equivalents.

 

The Company maintains cash and cash equivalent balances at a financial institution that is insured by the Federal Deposit Insurance Corporation, subject to certain limitations.

 

Accounts Receivable

 

Accounts receivable are carried at cost less an allowance for doubtful accounts. The allowance for doubtful accounts is established through provisions charged against income and is maintained at a level believed adequate by management to absorb estimated bad debts based on current economic conditions.

 

Accounts receivable are uncollateralized customer obligations due under normal trade terms generally requiring payment within 30 days from the invoice date. The Company recorded an allowance of approximately $4,600 at December 31, 2014 and December 31, 2013.

 

F-6

 

1 -	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Inventory

 

Inventory, consisting of finished goods, is stated at the lower of cost or market. Cost is determined using the weighted average method. Inventory that is determined to be obsolete or not sellable is expensed immediately. The Company recorded a reserve for obsolete items of $10,415 at December 31, 2014 and December 31, 2013.

 

Property and Equipment, net

 

Property and equipment are recorded at cost less accumulated depreciation. Expenditures for major additions and improvements are capitalized, while minor replacements, maintenance, and repairs and maintenance are charged to expense as incurred. Leasehold improvements are amortized over the shorter of the assets’ economic lives or the lease term. Depreciation is provided using the straight-line method over the estimated useful lives of the assets as follows:

 

Equipment and electronics	2 - 7 years
Vehicles	4 years
Furniture and fixtures	7 years
Leasehold improvements	Shorter of lease terms or 7 years

 

Deferred Financing costs, net

 

Deferred financing costs are recorded at cost less accumulated amortization. Amortization is provided using the straight-line method over the life of the loan for which the financing costs were incurred.

 

Impairment of Long-Lived Assets

 

Long-lived assets to be held and used are reviewed for impairment whenever events or circumstances indicate that the carrying value of such assets may not be recoverable. Determination of recoverability is generally based on an estimate of undiscounted cash flows resulting from the use of the asset and its eventual disposition. If the evaluation indicates that the carrying amount of an asset is not recoverable from our undiscounted cash flows, then an impairment loss is measured by comparing the carrying amount of the asset to its fair value.

 

Revenue Recognition

 

The Company recognizes revenue from the sale of its products when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed and determinable, and collectability is reasonably assured.

 

Deferred Revenue

 

The Company received prepayment for products from some of its customers as the Company requires prepayment before goods are shipped to all international customers. As of December 31, 2014 and December 31, 2013, the Company had deferred revenue of $36,899 and $68,823, respectively. The Company recognizes revenue and decreases deferred revenue in accordance with the revenue recognition policy.

 

Income Taxes

 

Prior to the creation of the Nevada holding company formed on May 18, 2011, the Company had elected S Corporation status for Federal and Ohio state income tax purposes. Under these elections, the Company’s taxable income was included on the stockholders individual income tax returns, and the Company made no provision for Federal and State income tax. Effective with the Company redomiciling to Nevada on May 18, 2011, the Company elected C Corporation status for both Federal and State income tax purposes.

 

F-7

 

1 -	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

  

There were no uncertain tax positions at December 31, 2014 or December 31, 2013, as the Company’s tax positions for open years meet the recognition thresholds of more likely than not to be sustained upon examinations. When necessary, the Company would accrue penalties and interest related to unrecognized tax benefits as a component of income tax expense. Tax returns for the years 2011 through 2013 are currently open to examination. Tax returns prior to 2011 are no longer subject to examination by tax authorities.

 

Fair Value of Financial Instruments

 

The Company measures and discloses the estimated fair value of financial assets and liabilities using the fair value hierarchy prescribed by U.S. generally accepted accounting principles. The fair value hierarchy has three levels, which are based on reliable available inputs of observable data. The hierarchy requires the use of observable market data when available. The levels are defined as follows:

 

Level 1 – quoted prices for identical instruments in active markets;

 

Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations in which significant inputs and significant value drivers are observable in active markets; and

 

Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

The carrying amount reported in the balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The fair value of the long term debt and revolving line of credit at December 31, 2014 and December 31, 2013 approximated the carrying amount based on interest rates that were close to market rates or being close to maturity and were determined on a Level 2 measurement.

 

The Black-Scholes valuation model is used to estimate the fair value of the warrants. The significant assumptions considered by the model were the remaining term of the warrants, the fair value per share stock price of $.07 and $.17, a risk free treasury rate for .5 years and 1.5 years of .12% and .26% at December 31, 2014 and December 31, 2013, respectively and an expected volatility of 60%. At December 31, 2014 and December 31, 2013, the fair value of warrants were determined on a Level 2 measurement.

 

Advertising

 

Costs of advertising and marketing are expensed as incurred including the cost of making commercials. Advertising and marketing costs were $153,064 and $239,521 for the years ending December 31, 2014 and 2013, respectively.

 

F-8

 

1 -	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Shipping and Handling

 

Shipping and handling costs of approximately $113,262 and $124,204 for the years ending December 31, 2014 and 2013, respectively, are included in general and administrative expenses in the statements of operations.

 

Research and development costs

 

The costs of research and development activities are expensed when incurred.

 

Earnings (Loss) Per Share of Common Stock

 

Earnings (loss) per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per share (EPS) include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. Common stock equivalents were not included in the computation of diluted earnings per share when the Company reported a loss because to do so would be antidilutive for periods presented. Anti-dilutive securities not included in net loss per share calculations for the years presented include:

 

		December 31,				December 31,
		2014				2013
Potentially dilutive securities:
Outstanding time-based stock options			44,211,505				40,761,505
Outstanding time-based warrants			15,000,908				18,154,428

 

Stock Based Compensation

 

Share-based compensation is measured as the fair value of the award at its grant date based on the estimated number of awards that are expected to vest and is recorded over a defined service period. Compensation expense is recognized based on the estimated grant date fair value method using a Black-Scholes valuation model. It is the Company’s policy to recognize expense using the straight-line method over the vesting period.

 

Recently Issued Accounting Standards

 

In July, 2013, the FASB issued Accounting Standards Update 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 Summary. U.S. GAAP 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 amendments in this ASU state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This ASU applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or required disclosures.

 

F-9

 

1 -	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

  

In May, 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) Summary - The FASB has made available Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers: Topic 606. 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. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

 

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

 

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. We are currently assessing the impact this standard will have on the Company’s consolidated financial statements or required disclosures.

  

F-10

 

1 -	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

  

In June, 2014, the FASB issued Accounting Standards Update No. 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The issue is the result of a consensus of the FASB Emerging Issues Task Force (EITF). The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation - Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in this ASU either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this ASU as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. In addition, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. We are currently assessing the impact this standard will have on the Company’s consolidated financial statements or required disclosures.

 

In August, 2014, the FASB 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. We are currently assessing the impact this standard will have on the Company’s consolidated financial statements or required disclosures.

 

F-11

 

1 -	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

In November, 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. The amendments in this ASU do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify how current U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument. The amendments in this ASU also clarify that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (i.e., the relative strength of the debt-like or equity-like terms and features given the facts and circumstances) when considering how to weight those terms and features. Specifically, the assessment of the substance of the relevant terms and features should incorporate a consideration of: (1) the characteristics of the terms and features themselves (for example, contingent versus noncontingent, in-the-money versus out-of-the-money); (2) the circumstances under which the hybrid financial instrument was issued or acquired (e.g., issuer-specific characteristics, such as whether the issuer is thinly capitalized or profitable and well-capitalized); and (3) the potential outcomes of the hybrid financial instrument (e.g., the instrument may be settled by the issuer issuing a fixed number of shares, the instrument may be settled by the issuer transferring a specified amount of cash, or the instrument may remain legal-form equity), as well as the likelihood of those potential outcomes. The amendments in this ASU apply to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption, including adoption in an interim period, is permitted. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The effects of initially adopting the amendments in this ASU should be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the fiscal year for which the amendments are effective. Retrospective application is permitted to all relevant prior periods. We are currently assessing the impact this standard will have on the Company’s consolidated financial statements or required disclosures.

 

2 -	GOING CONCERN

 

The Company has incurred net losses, negative cash flows from operating activities, and has an accumulated deficit of approximately $10,585,000 at December 31, 2014. In addition, at December 31, 2014 the Company had a cash balance of approximately $16,000 and working capital deficiency of approximately $2,295,000. The Company has relied upon cash from its financing activities to fund its ongoing operations as it has not been able to generate sufficient cash from its operating activities in the past and there is no assurance it will be able to do so in the future. Unless the Company can obtain additional cash resources, these factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

F-12

 

2 -	GOING CONCERN (continued)

 

The Company needs additional capital to fund current working capital requirements, ongoing debt service and to repay its obligations that are maturing over the upcoming twelve month period. Management plans to increase revenues and to control operating expenses in order to reduce losses from operations. Additionally, the Company will continue to seek equity and/or debt financing in order to enable the Company to meet its financial obligations until it achieves profitability. The Company may not be able to obtain this additional financing on acceptable terms or at all.

 

3 -	PROPERTY AND EQUIPMENT, NET

 

		December 31,				December 31,
		2014				2013
Equipment and electronics		$	175,876			$	179,659
Vehicles			-				35,043
Furniture and fixtures			20,257				20,257
Leasehold improvements			12,313				12,313
			208,446				247,272
Less accumulated depreciation			(144,273	)			(120,086	)
Property and equipment, net		$	64,173			$	127,186

 

Depreciation expense for the years ended December 31, 2014 and 2013 was $38,039 and $24,315, respectively.

 

4 -	DEFERRED FINANCING COSTS, NET

 

		December 31,				December 31,
		2014				2013
Deferred financing costs		$	153,454			$	139,990
Less Accumulated Amortization			(128,388	)			(101,655	)
Deferred financing costs, net		$	25,066			$	38,335

 

F-13

 

4 -	DEFERRED FINANCING COSTS, NET (continued)

 

Amortization expense for deferred financing costs was $26,733 and $20,001 for the years ended December 31, 2014 and 2013 respectively. In January 2014, the notes payable to Forest Capital for $150,000 and the Julie Jacobs Trust for $100,000 were modified extending the maturity date by two years and the unpaid interest on each of these notes was added to the loan balance. As an inducement to extend the notes term and add the interest due and unpaid interest to the notes balance, the Company issued 324,000 warrants to Forest Capital and 216,000 warrants to the Julie Jacobs Trust. The cost of the warrants was valued at $13,464 using the Black Scholes valuation model and was added to deferred financing costs which will be amortized over the remaining life of the loan.

 

5 -	LINE OF CREDIT

 

The Company has entered into an unsecured line of credit arrangement with Key Bank, which carries a maximum possible loan balance of $40,000 at an annual interest rate of 6.25% and is due on demand. As of December 31, 2014 and December 31, 2013, the Company had borrowed $39,523.

 

6 -	ACCRUED EXPENSES

 

Accrued expenses consisted of the following at December 31, 2014 and December 31, 2013:

 

		December 31,				December 31,
		2014				2013
Accrued payroll		$	47,379			$	9,471
Accrued interest			233,308				160,398
Warrant liability			49,404				159,330
Miscellaneous accrued expenses			36,847				46,989
		$	366,938			$	376,188

 

As more fully described in footnote 8, the Company has recorded a warrant liability of $49,404 and $159,330 as of December 31, 2014 and December 31, 2013, respectively, which is based on the Black-Scholes valuation model to estimate the fair value of the warrants. The significant assumptions considered by the model were the remaining term of the warrants, the fair value per share stock price of $.07 and $.17, a risk free treasury rate for .5 years and 1.5 years of .12% and .26% at December 31, 2014 and December 31, 2013, respectively and an expected volatility of 60%.

 

F-14

 

7 -

DEBT

 

Debt payable to related parties is as follows:

 

			December 31,				December 31,
			2014				2013
Note payable to Julie E. Jacobs Trust, a stockholder, in the amount of $50,000 with interest on the unpaid principal balance computed from the date of this loan until paid in full at the rate equal to the Wall Street Journal Prime Rate plus 4.75%, (which is 8% as of the date of the loan and at 12/31/2014)  with interest payable annually on January 3rd and with the principal balance due on January 3, 2016. As an inducement to make this loan, the Company issued 400,000 warrants to purchase stock at $.24 per share which were valued at $9,372 using the Black Scholes valuation model and were recorded as a loan discount.  The discount is being amortized over the life of the loan and the amortization expense for the year ended December 31, 2014 was approximately $4,500.		$	45,114			$	-
Note payable to The Walter Doyle Trust, a stockholder, in the amount of $50,000 with interest on the unpaid principal balance computed from the date of this loan until paid in full at the rate equal to the Wall Street Journal Prime Rate plus 4.75%, (which is 8% as of the date of the loan and at 12/31/2014)  with interest payable annually on January 3rd and with the principal balance due on January 3, 2016. As an inducement to make this loan, the Company issued 400,000 warrants to purchase stock at $.24 per share which were valued at $9,372 using the Black Scholes valuation model and were recorded as a loan discount.  The discount is being amortized over the life of the loan and the amortization expense for the year ended December 31, 2014 was approximately $4,500.			45,114				-
Note payable to Forest Capital, an affiliate of the Walter J. Doyle Trust, a stockholder, in the original amount of $250,000 at an annual interest rate of 10%. Effective December 13, 2009, the annual interest rate increased to 20%. On December 21, 2011, $100,000 of the note was converted to shares of stock at a price of $.25 per share and the note was amended decreasing the annual interest rate to 8% with interest payable annually on January 3rd and with the principal balance due on January 3, 2014. The note was extended on January 27, 2014 to January 3, 2016 and the $12,107 in interest due at January 3, 2014 was included in the new note balance of $162,107. The $12,107 addition to the loan is payable to Forest Capital upon the receipt by the Company of new equity funding of $100,000 or more.  Since more than $100,000 of equity funding has been received, the $12,107 is now payable to Forest Capital and has been included in the current portion of related party debt.  In connection with the note extension, 324,000 warrants to purchase stock at $0.24 per share were issued in return for the agreement to extend the note to January 3, 2016.		$	162,107			$	150,000

 

F-15

 

7 -	DEBT (Continued)

 

			December 31,				December 31,
			2014				2013
Note payable to Julie E. Jacobs Trust (JJ Trust) in the original amount of $100,000 at an annual interest rate of 20%.  Effective September 26, 2010, the annual interest rate increased to 30% with the note payable on demand. On December 21, 2011, note was amended decreasing the annual interest rate to 8% with interest payable annually on January 3rd and with the principal balance due on January 3, 2014. The note was extended on January 27, 2014 to January 3, 2016 and the $8,071 in interest due at January 3, 2014 was included in the new note balance of $108,071. The $8,071 addition to the loan is payable to the JJ Trust upon the receipt by the Company of new equity funding of $100,000 or more.  Since more than $100,000 of equity funding has been received, the $8,071 is now payable to the JJ Trust and has been included in the current portion of related party debt.  In connection with the note extension 216,000 warrants to purchase stock at $0.24 per share were issued in return for the agreement to extend the note to January 3, 2016.			108,071				100,000
Note payable to Thelma Gault, a stockholder, in the original amount of $800,000 at an interest rate of 10%. The loan is collateralized by all assets of the Company, and on April 25, 2008 signed an agreement in which her collateralization is shared with the State of Ohio. On November 18, 2010, Thelma Gault signed an agreement subordinating up to $700,000 of debt to the Walter Doyle Trust and the Julie Jacobs Trust and to Standard Energy through the Julie Jacobs Trust. Note was due on June 1, 2014 and now is considered  due on demand.			584,352				584,352
Total debt payable to related parties		$	944,758			$	834,352
Less current portion of debt payable to related parties			604,529				584,352
Long term debt payable to related parties		$	340,229			$	250,000

 

F-16

 

7 -	DEBT (Continued)

 

Other debt is as follows:

 

		December 31,				December 31,
		2014				2013
Note payable to Ohio Innovation Loan Fund (OILF) at an interest rate of 8%. The interest rate increases to 10.5% effective October 1, 2014 as a result of missing a loan covenant.  Monthly payments of principal, interest, escrow, and service fees are based on the loan agreement.  The loan is collateralized by all assets of the Company, and this collateralization is shared with the Thelma Gault per agreement signed on April 25, 2008. On November 29, 2010, The Director of Development for the State of Ohio signed an agreement subordinating up to $700,000 of debt to the Walter Doyle Trust and the Julie Jacobs Trust and to Standard Energy through the Julie Jacobs Trust.  On December 1, 2012, Note was modified extending the due date to November 2015. The Company’s last payment was made in October of 2014 for July of 2014, causing the loan to now be considered due on demand. The Company is working with the OILF to get payments back on schedule.		$	325,280			$	391,018
Notes payable to Merrill Lynch in the original amount of $400,000, with interest payable at Libor plus .56%. In addition, this debt is guaranteed 50% each by the Walter J. Doyle Trust and the Julie E. Jacobs Trust. As compensation for their guarantees, the trusts receive 4% per annum and share a first position lien on all assets. The note is due on demand.			395,350				396,448
Notes payable to four different investors in the original amount of $250,000 at an interest rate of 12%. On January 31, 2012, all of these notes except for a $75,000 note were converted to shares of stock at a price of $.25 per share. The $75,000 note was due June 30, 2012 and is now considered due on demand.			75,000				75,000
Other debt		$	795,630			$	862,466
Less current portion of debt payable to non-related parties			795,630				559,987
Long term debt payable to non-related parties			-				302,479

 

F-17

 

7 -	DEBT (Continued)

 

The principal maturities of the notes payable for the next five years and in the aggregate are as follows:

 

		Year ending
		December 31,
2015		$	1,400,159
2016			340,229
2017			-
2018			-
2019			-
		$	1,740,388

 

The Company is not in compliance with certain debt covenants and has not received waivers from the lender. As a result, the notes payable with an outstanding balances of $75,000 and $325,280 are due on demand and are classified as current in the accompanying balance sheets.

 

Conversion of debt

 

During the year ended December 31, 2013, certain debt instruments were converted to equity. Prior to conversion, some of these debt instruments were modified to include a debt conversion feature. Based on the terms of the transactions, these modifications and conversion were treated as equity transactions.

 

The following table lists debt that was converted during the year ended December 31, 2013:

 

		Conversion of Debt Table
		Debt				Accrued Interest				Total				Stock issued
Note Converted		Extinguished				Extinguished				Extinguished				Shares
Forest Capital accrued interest on note due January 3, 2013		$	-			$	12,391			$	12,391				49,562
Julie E. Jacobs Trust accrued interest on note due January 3, 2013			-				8,260				8,260				33,042
		$	-			$	20,651			$	20,651				82,604

 

F-18

 

8 -	STOCKHOLDERS’ DEFICIENCY

 

Stock Sales

 

During the period ended December 31, 2014, warrants were exercised for the purchase of 4,407,750 shares; 312,500 of the warrants were exercised at a price of $.005 per share and 4,095,250 of the warrants were exercised at a price of $.10 per share. During the year ended December 31, 2013, the company sold 7,187,500 shares of stock and warrants (one share of stock and one warrant equals one unit) as part of a private placement memorandum; 1,000,000 of the units were sold for $.25 per unit with the stock warrants exercisable at $.36 per share, 250,000 of the units were sold for $.20 per unit with the stock warrants exercisable at $.24 per share and 5,937,500 of the units were sold to existing private placement investors for $.16 per unit with the stock warrants exercisable at $.24 per share. Additionally, stock options and warrants were exercised for the purchase of 906,162 shares at a purchase price ranging from $.0032 to $.021 per share.

 

Options

 

On February 1, 2012, the Board approved and granted 600,000 stock options to three of its employees, with an exercise price of $.25 per share with a vesting schedule of 60% on the first anniversary of the grant, 20% on the second anniversary of the grant and the final 20% on the third anniversary of the grant. On November 26, 2012, the Board approved and granted 3,000,000 stock options to the Company’s president and CEO, with an exercise price of $.25 per share with a vesting schedule of 33 and 1/3% on the first anniversary of the grant, 33 and 1/3% on the second anniversary of the grant and the final 33 and 1/3% on the third anniversary of the grant. On December 3, 2014,the Board reduced the exercise price on the 600,000 and 3,000,000 stock options issued on February 1, 2012 and November 26, 2012, respectively, from $.25 to $.075, which was the market price of the stock on December 3, 2014. Additional compensation expense of approximately $55,000 has been recognized based on this exercise price reduction in the year ended December 31, 2014 and additional compensation expense of approximately $23,000 will be recognized based on this exercise price reduction in the year ended December 31, 2015. On December 3, 2014, the Board approved and granted 1,950,000 stock options to five of its employees, with an exercise price of $.075 per share with a vesting schedule of 60% on the first anniversary of the grant, 20% on the second anniversary of the grant and the final 20% on the third anniversary of the grant. On December 3, 2014, the Board approved and granted 1,500,000 stock options to the two non-employee directors of the Company with an exercise price of $.075 per share with a vesting schedule of 25% on the first anniversary of the grant, 25% on the second anniversary of the grant, 25% on the third anniversary of the grant and 25% on the fourth anniversary of the grant. Full vesting is to occur upon a change in ownership of the Company for all of these stock options.

 

F-19

 

8 -	STOCKHOLDERS’ DEFICIENCY (continued)

 

The following table summarizes the activity for all stock options:

 

		Number of Options				Range of Exercise Price				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term in Years				Weighted Average Grant Date Fair Value
Outstanding options as of January 1, 2013			44,725,371			$	.00320-.25000			$	.01993				6.08			$	.03561
Options granted			-
Options cancelled/expired			(3,370,248	)		$	.02131-00320			$	.02131				-			$	.01168
Options exercised			(593,618	)		$	.02131			$	.01819				5.78			$	.02433
Outstanding options as of December 31, 2013			40,761,505			$	.00320-.25000			$	.03704				5.55			$	.03285
Options granted			3,450,000			$	.07500			$	.07500				9.93			$	.07500
Options cancelled/expired			-				-				-				-				-
Options exercised			-				-				-				-				-
Outstanding options as of December 31, 2014			44,211,505			$	.00320-.07500			$	.02575				4.97			$	.0239

 

The following table provides information about options under the Plan that are outstanding and exercisable as of December 31, 2014:

 

					Options Outstanding			Options Exercisable
Exercise Price			As of December 31, 2014			Weighted Average Contractual Life Remaining		As of December 31, 2014
$	.00320			10,056,677		4.76 years			10,056,677
$	.02131			27,104,828		4.05 years			27,104,828
$	.07500			3,600,000		7.77 years			2,480,000
$	.07500			3,450,000		9.93 years			-
				44,211,505					39,641,505

 

F-20

 

8 -	STOCKHOLDERS’ DEFICIENCY (continued)

 

Included in the above table are 6,541,614 options to non-employees and 37,669,891 to officers, directors and employees of the Company.

 

Warrants

 

The Company has 15,000,908 and 18,154,428 warrants outstanding as of December 31, 2014 and December 31, 2013, respectively. For the year ending December 31, 2014, 2,269,230 warrants were issued at an exercise price of $0.24 as follows: 1,340,000 warrants were issued in connection with the new debt issuances and debt modifications and the Company issued 929,230 warrants in exchange for services.

 

In July 2014, the Company began a capital raise program consisting of a reduction in the exercise price of the Company’s outstanding warrants to purchase its common stock to $0.10 per share, for all of the Company’s outstanding warrants with an exercise price greater than $0.15 per share and to sell new shares of common stock for $0.12 or less per share (“New Shares”) depending on market conditions. The Company’s immediate goal was to raise $2,000,000. The Company set a minimum capital raise threshold of $1,500,000 before purchases of New Shares or warrant exercises can be accepted, unless specific authorization to consummate the transaction is received from the New Shares purchaser or warrant exerciser. For the period ending December 31, 2014, $409,525 has been received from the exercise of warrants through this program. The Company received specific authorization in the form of a signed waiver from all of those that exercised warrants waiving the requirement for the Company to raise a minimum of $1,500,000 of capital. The capital raise program was closed as of October 2, 2014.

 

In addition to the $409,525 that was raised through the capital raise program, an additional $1,563 was raised through the exercise of 312,500 warrants at an exercise price of $.005 per share for the year ending December 31, 2014.

 

On October 18, 2013, the Company extended any unexpired Common Stock Purchase Warrants for one additional year for all unexpired warrants issued in connection with investments in the PPM and the follow-up PPM.

 

This table summarizes the grant date and exercise date for all warrants:

 

F-21

 

8 -	STOCKHOLDERS’ DEFICIENCY (continued)

 

		Number of				Exercise
		Warrants				Price			Expiration Date
Outstanding Warrants from January 1, 2011			1,291,928			$	.02131		July, 2015
Warrants Granted			-				-		All have expired
Outstanding Warrants from December 31, 2011			1,291,928			$	.02131		Expiration dates As listed above
Warrants Granted			700,000			$	.36000		January, 2015
			240,000			$	.36000		February, 2015
			140,000			$	.36000		March, 2015
			1,000,000			$	.36000		April, 2015
			360,000			$	.36000		May, 2015
			380,000			$	.36000		June, 2015
			60,000			$	.36000		July, 2015
			40,000			$	.36000		August, 2015
			2,500,000			$	.24000		May, 2016
			200,000			$	.24000		June, 2016
			100,000			$	.24000		October, 2016
Outstanding Warrants from December 31, 2012			6,931,928			$	.02131-.36000		Expiration dates As listed above
Warrants Granted			40,000			$	.36000		January, 2015
			40,000			$	.36000		February, 2015
			40,000			$	.36000		March, 2015
			40,000			$	.36000		April, 2015
			40,000			$	.36000		May, 2015
			3,806,250			$	.24000		May, 2016
			62,500			$	.24000		June, 2015
			312,500			$	.24000		June, 2016
			62,500			$	.24000		July, 2015
			250,000			$	.24000		July, 2016
			62,500			$	.24000		August, 2015
			62,500			$	.24000		September, 2015
			500,000			$	.24000		September, 2016
			62,500			$	.24000		October, 2015
			156,250			$	.24000		October, 2016
			62,500			$	.24000		November, 2015
			781,250			$	.24000		November, 2016
			62,500			$	.24000		December, 2015
Outstanding Warrants from December 31, 2013			13,455,678			$	.02131-.36000		Expiration dates As listed above
Warrants Granted			62,500			$	.24000		January, 2016
			616,000			$	.24000		January, 2017
			62,500			$	.24000		February, 2016
			62,500			$	.24000		March, 2016
			62,500			$	.24000		April, 2016
			62,500			$	.24000		May, 2016
			62,500			$	.24000		June, 2016
			62,500			$	.24000		July, 2016
			62,500			$	.24000		August, 2016
			62,500			$	.24000		September, 2016
			62,500			$	.24000		October, 2016
			194,000			$	.10000		October, 2018
			62,500			$	.24000		November, 2016
			47,730			$	.10000		December, 2018
Outstanding Warrants as of December 31, 2014			15,000,908			$	.02131-.36000		Expiration dates As listed above

 

F-22

 

8 -	STOCKHOLDERS’ DEFICIENCY (continued)

 

The warrants for 1,291,928 shares issued prior to January 1, 2011, include certain provisions that protect the holders from a decline in the stock price of the Company. As a result of those provisions, the Company recognizes the warrants as liabilities at their fair values on each reporting date.

 

As shown in footnote 6, the Company has recorded a warrant liability of $49,404 and $159,330 as of December 31, 2014 and December 31, 2013, respectively, which is based on the Black-Scholes valuation model to estimate the fair value of the warrants.

 

The significant assumptions considered by the model were the remaining term of the warrants, the fair value per share stock price of $.07 and $.17, a risk free treasury rate for .5 years and 1.5 years of .12% and .26% at December 31, 2014 and December 31, 2013, respectively and an expected volatility of 60%.

 

9 -	COMMITMENTS

 

In July of 2013, the Company entered into a four year extension of the lease for the rental of the office and warehouse space expiring on August 31, 2017. Under the terms of the current lease and the four year extension, the Company’s future minimum rental payments are: $86,600 for 2015, $89,000 for 2016, and $60,400 for 2017. Total rent expense was $85,256 and $84,644 for years ending December 31, 2014 and 2013, respectively.

 

On July 12, 2013, the company entered into the “Broadcast Technology and Promotional Rights Agreement between the NHRA and The Guitammer Company” whereby in exchange for use of its broadcast technology and certain sponsor payments the parties agreed that the NHRA telecasts on ESPN2 would be tactically enhanced and Guitammer would receive sponsor benefits including: television commercials, on-air sponsored segments, presence at certain NHRA races in the Manufacturer’s Midway, and other promotional rights and benefits. On April 10, 2014, the agreement was suspended retroactively, effective January 1, 2014 due to a disagreement between the NHRA and ESPN regarding the nature of the tactile enhancement of the previous season’s tested, approved and successfully tactile enhanced NHRA broadcasts by the Company. The agreement will be reinstated for one 12 month period when and if this situation is resolved. The $100,000 payment made by the Company in January of 2014 was refunded to the Company in April, 2014 as a part of the suspension agreement.

 

Stock and warrants issued for services

 

During the year ending December 31, 2014, the Company issued 687,500 shares of common stock and 929,230 warrants for consulting services valued at $90,362. During the year ending December 31, 2013, the Company issued 949,500 shares of common stock and 717,500 warrants for services valued at $184,771.

 

F-23

 

9 -	COMMITMENTS (continued)

 

On February 10, 2012, the Company entered into a 3 month agreement with John Ertmann for advisory services. Under the terms of the agreement, Mr. Ertmann will be compensated at a rate of 40,000 shares of common stock and 40,000 warrants per month. The agreement has been extended through December, 2014, with the compensation arrangement of 40,000 shares of common stock and 40,000 warrants per month for April and May of 2013, and 62,500 shares of common stock and 62,500 warrants per month for the months June 2013 through December 2014. In December, 2014, Mr. Ertmann was not available for advisory services and consequently, no common stock or warrants were issued for that month.

 

On May 20, 2013, the Company entered into a 3 month agreement with JFenway LLC for investor relations services. Under the terms of the agreement JFenway LLC was compensated at a rate of 100,000 shares of common stock for the 3 months of services.

 

On August 29, 2014 the Company, the San Jose Sharks (“Sharks”) NHL hockey team and Comcast SportsNet California (“CSNCA”) executed a “Letter Agreement Regarding Technology Initiative” to integrate Guitammer’s broadcast technology in the SAP Center at San Jose and into the CSNCA’s telecasts of the San Jose Sharks home games at the SAP Center for the 2014/15 NHL season, and to collectively promote and market the enhanced broadcast to the San Jose Sharks and CSNCA viewers. Starting from the first home game on October 11^th to present, the CSNCA’s Sharks telecasts have successfully been broadcast in 4D using Guitammer’s technology. The official public launch of this agreement was November 20^th, 2014.

 

10 -	CONCENTRATION OF CREDIT RISK

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. Receivables are stated at the amounts management expects to collect from outstanding balances. Generally, the Company does not require collateral or other security to support contract receivables.

 

The Company had one major customer for the year ending December 31, 2014 and had no major customers for the year ending December 31, 2013. A major customer is defined as one that purchases ten-percent or more in a reporting period. Net sales for the years ended December 31, 2014 and 2013 include sales to the following major customer:

 

Customer		2014				2013
Amazon.com			12.8	%			9.6	%

 

Amazon.com accounted for 36.5% and 12.6% of the total accounts receivable balance at December 31, 2014 and December 31, 2013, respectively.

 

The Company had major suppliers in each of the reporting periods presented. A major supplier is defined as one that provides ten-percent or more of total cost-of-sales in a particular reporting period or has an outstanding account payable balance of ten-percent or more as of the reporting period.

 

F-24

 

10 -	CONCENTRATION OF CREDIT RISK (continued)

 

			December 31,
			2014											2013
			Purchases During Period						Account Payable Percentage at end of Period					Purchases During Period				Account Payable Percentage at end of period
Eminence Speaker LLC			31			%			35		%			52		%			46	%
Actiway Industrial Co.			30			%			12		%			9		%			25	%
LFT Manufacturing, LLC			20			%			16		%			-					-
Sonavox Canada, Inc.			13			%			9		%			32		%			16	%

 

11 -	RELATED PARTY TRANSACTIONS

 

One of the Company’s shareholders is also a note holder and a minority shareholder of a major supplier to the Company. This shareholder is a note holder who also owns 2,590,098 shares of the Company’s common stock and is a minority shareholder in Eminence Speaker, LLC, a major supplier to the Company.

 

On September 12, 2014, Guitammer entered into an agreement with an unrelated third party to organize a joint venture company named LFT Manufacturing that will manufacture and distribute certain Guitammer products. Guitammer and the third party will make capital contributions of $1,000 each to the joint venture company. Guitammer and the third party each have 50% interests in the joint venture company. The joint venture company borrowed from the third party the amount necessary to fund the startup costs to manufacture products, including initial tooling, obtaining factory space, and labor costs. In conjunction with the joint venture, the Company agreed to grant 2,750,000 warrants to purchase common stock of the Company exercisable at $.10 per share upon the completion of certain criteria which have not been achieved and therefore has not been recorded at December 31, 2014. The company purchased $106,036 of product from LFT Manufacturing, LLC for the year ended December 31, 2014. The Company accounts for this joint venture as an equity method investment. Under the equity method of accounting, an Investee company’s accounts are not reflected within the Company’s Consolidated Balance Sheets and Consolidated Statements of Income; however, the Company’s share of the earnings or losses of the Investee Company is reflected in the Company’s Consolidated Statements of Income. The Company’s carrying value in an equity method Investee company would be reflected in the Company’s Consolidated Balance Sheets. The Company’s share of earnings was not significant for the year ending December 31, 2014 and therefore nothing has been recorded in the Company’s Consolidated financial statements.

 

F-25

 

12 -	OTHER ASSETS

 

Other assets consist of patents and trademarks related to the ButtKicker brand products and technology. The assets are being amortized over 10 years based on the estimated useful lives of the patents and trademarks. Amortization of the intangible assets, which is included in general and administrative expenses, was $8,295 and $7,308 for the years ended December 31, 2014 and 2013, respectively. The estimated future amortization expense for intangible assets is approximately: $7,700 in 2015, $6,300 in 2016, $3,900 in 2017, $2,200 in 2018 and 2019 and under $2,000 thereafter.

 

13 -	INCOME TAXES

 

The Company accounts for income taxes under the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of differences between the carrying amounts and the tax basis of the assets and liabilities. No provision has been recorded for a deferred tax asset due to net operating losses and full valuation allowances against deferred income taxes.

 

A reconciliation of the federal statutory rate to the Company’s effective tax rate for the years ended December 31, 2014 and 2013 is as follows:

 

		December 31,
		2014			2013
Tax benefit at statutory rate		34.0	%			34.0	%
Valuation allowance		(24.9	)			(30.4	)%
Other, net		(9.1	)			(3.6	)%
Effective tax rate		-				-

 

The tax effects of temporary differences that give rise to significant portions of the net deferred tax asset balance at December 31, 2014 and 2013 are as follows:

 

		December 31,
		2014				2013
Accounts receivable allowances			1,563				1,563
Fixed Assets			43,839				55,237
Net Operating loss carry forward			1,480,398				1,078,452
			1,525,800				1,135,252
Valuation allowance			(1,525,800	)			(1,135,252	)
Net Deferred tax asset		$	-			$	-

 

14 -	SUBSEQUENT EVENTS

 

Since December 31, 2014, a total of 187,500 shares and 187,500 warrants were issued to pay for services valued at approximately $30,000.

 

F-26