UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2016

 

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

 

For the transition period from __________ to __________

 

Commission File Number: ________________

 

SOLIS TEK INC.

(FORMERLY CINJET, INC.)

(Exact name of registrant as specified in its charter)

 

Nevada		20-8609439
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

16926 S. Keegan Ave.

Carson, CA 90746

(Address of principal executive offices, Zip Code)

 

(888) 998-8881

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the 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 Web site, 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 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.

 

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 number of shares of registrant’s common stock outstanding as of August 15, 2016 was 29,596,998. The registrant had no outstanding preferred stock as of that date.

 

 

 

Table of Contents

 

FORM 10-Q

SOLIS TEK INC. AND SUBSIDIARIES

JUNE 30, 2016

TABLE OF CONTENTS

 

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements.	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	23
Item 4.	Controls and Procedures.	23
Item 1.	Legal Proceedings.	24
Item 1A.	Risk Factors.	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	24
Item 3.	Defaults Upon Senior Securities.	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information.	24
Item 6.	Exhibits.	24
SIGNATURES		25

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements.

 

Solis Tek Inc.

Condensed Consolidated Balance Sheets

 

		June 30, 2016				December 31, 2015
		(Unaudited)
ASSETS
Current Assets
Cash		$	316,882			$	106,316
Accounts receivable, net of allowance for doubtful accounts and returns of $275,065 and $233,951 at June 30, 2016 and December 31, 2015			758,857				560,974
Inventories			2,608,335				3,819,859
Inventories under warranty claims - related party			87,859				75,621
Advances to suppliers			38,824				22,420
Prepaid expenses and other current assets			18,454				10,241
Income taxes receivable			82,666				75,390
Total Current Assets			3,911,877				4,670,821
Property and equipment, net			237,032				267,701
Other assets			32,071				32,071
TOTAL ASSETS		$	4,180,980			$	4,970,593
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable and accrued expenses		$	375,342			$	564,445
Due to related party vendor			783,356				1,171,754
Notes payable - related parties			265,000				255,000
Amounts due to officers-shareholders			144,917				127,265
Income taxes payable			37,700				-
Capital lease obligations, current portion			13,251				12,807
Loans payable, current portion			11,236				349,089
Line of credit			-				600,000
Total Current Liabilities			1,630,802				3,080,360
Capital lease obligations, long-term			16,660				23,413
Notes payable - related parties, long-term			600,000				-
Loans payable, long-term			30,114				34,219
TOTAL LIABILITIES			2,277,576				3,137,992
Shareholders’ Equity
Preferred stock, no par value, 20,000,000 shares authorized; no shares issued and outstanding			-				-
Common stock, $0.0001 par value, 100,000,000 shares authorized; 29,596,998 and 29,576,998 shares issued and outstanding, respectively			2,960				2,958
Additional paid-in capital			2,772,604				2,711,606
Accumulated deficit			(872,160	)			(881,963	)
Total Shareholders’ Equity			1,903,404				1,832,601
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	4,180,980			$	4,970,593

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

Solis Tek Inc.

Condensed Consolidated Statements of Operations

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
		(Unaudited)								(Unaudited)
Sales		$	2,125,830			$	1,843,643			$	4,710,498			$	3,935,127
Cost of goods sold			1,324,165				1,109,473				2,982,876				2,455,924
Gross profit			801,665				734,170				1,727,622				1,479,203
Operating expenses
Research and development			58,000				48,384				115,000				95,225
Selling, general and administrative expenses			765,531				674,148				1,519,225				1,345,814
Total operating expenses			823,531				722,532				1,634,225				1,441,039
Income (loss) from operations			(21,866	)			11,638				93,397				38,164
Other income (expenses)
Interest expense			(23,620	)			(12,294	)			(50,394	)			(24,238	)
Interest income			4,500				-				4,500				-
Reverse merger costs			-				(248,980	)			-				(248,980	)
			(19,120	)			(261,274	)			(45,894	)			(273,218	)
Income (loss) before income taxes			(40,986	)			(249,636	)			47,503				(235,054	)
Provision (benefit) for income taxes			(5,829	)			9,464				37,700				21,454
NET INCOME (LOSS)		$	(35,157	)		$	(259,100	)		$	9,803			$	(256,508	)
BASIC AND DILUTED INCOME (LOSS) PER SHARE		$	(0.00	)		$	(0.01	)		$	0.00			$	(0.01	)
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED			29,596,998				26,371,890				29,595,789				25,942,164

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

Solis Tek Inc.

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)

 

		Common Stock								Additional				Accumulated
		Shares				Amount				Paid-in Capital				Deficit				Total
Balance, December 31, 2015			29,576,998			$	2,958			$	2,711,606			$	(881,963	)		$	1,832,601
Fair value of common stock issued for services			20,000				2				60,998				-				61,000
Net income for the six months ended June 30, 2016			-				-				-				9,803				9,803
Balance, June 30, 2016 (Unaudited)			29,596,998			$	2,960			$	2,772,604			$	(872,160	)		$	1,903,404

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

Solis Tek Inc.

Condensed Consolidated Statements of Cash Flows

 

		Six Months Ended
		June 30,
		2016				2015
		(Unaudited)
Cash Flows from Operating Activities
Net income (loss)		$	9,803			$	(256,508	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Provision for bad debts			41,114				-
Depreciation and amortization			35,102				19,706
Amortization of loan fees			20,000				-
Interest expense on loans payable - related parties			21,036				7,919
Fair value of common stock issued for services			61,000				-
Changes in Assets and Liabilities
(Increase) Decrease in:
Accounts receivable			(238,997	)			7,234
Inventories			1,211,524				(577,417	)
Inventories under warranty claims			(12,238	)			(162,755	)
Advances to suppliers			(16,404	)			(129,173	)
Prepaid expenses and other current assets			(8,213	)			(6,957	)
Income taxes receivable			(7,276	)			-
Other assets			-				(400	)
(Decrease) Increase in:
Accounts payable and accrued expenses			(189,103	)			93,756
Due to related party vendor			(388,398	)			560,600
Customer deposits			-				(270	)
Income taxes payable			37,700				(54,125	)
Net cash provided by (used in) operating activities			576,650				(498,390	)
Cash Flows from Investing Activities
Cash acquired upon reverse merger			-				322
Purchases of property and equipment			(4,433	)			(92,839	)
Net cash used in investing activities			(4,433	)			(92,517	)
Cash Flows from Financing Activities
Net proceeds from sale of common stock			-				806,000
Repayment of line of credit			(600,000	)			-
Payments on capital lease obligations			(6,309	)			(7,805	)
Proceeds from notes payable - related parties			710,000				-
Payment on notes payable-related parties			(100,000	)			-
Payments on loans payable			(361,958	)			-
Payments on amounts due to officers			(3,384	)			(24,529	)
Net cash provided by (used in) financing activities			(361,651	)			773,666
Net increase in cash			210,566				182,759
Cash beginning of period			106,316				408,996
Cash end of period		$	316,882			$	591,755
Interest paid		$	32,449			$	14,408
Taxes paid		$	7,276			$	142,479

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

SOLIS TEK INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

 

NOTE 1 – BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements of Solis Tek Inc. and Subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

 

History and Organization

 

Solis Tek Inc. (the “Company”) was originally incorporated under the laws of the State of Nevada on March 2, 2007 as Cinjet, Inc. (“Cinjet”). Effective September 1, 2015, Cinjet changed its corporate name to Solis Tek Inc. On June 23, 2015, the Company entered into an Agreement of Merger and Plan of Reorganization (the “Agreement”) with Solis Tek Inc., a California corporation (“STI”), and CJA Acquisition Corp., a California corporation and a wholly owned subsidiary of the Company (“Merger Sub”), providing for the merger of Merger Sub with and into STI (the “Merger”), with STI surviving the Merger as a wholly-owned subsidiary of the Company. The Merger Agreement was approved by the Company’s Board of Directors and the sole Director of the Company, effective June 23, 2015. The Merger closed on June 23, 2015.

 

At the effective time of the Merger, each share of STI common stock issued and outstanding was converted automatically into the right to receive .166 shares of the common stock of the Company, with an aggregate of 26,187,000 shares of the Company’s common stock issued to the former shareholders of STI.

 

Upon the closing of the Merger, STI paid a total of $22,500 to four shareholders of the Company for the cancellation of a total of 61,297,002 shares of the Company’s common stock. Also at the closing of the Merger, STI paid $198,100 to the Company to settle and pay liabilities of $405,932, which represented all of the then current liabilities of the Company. After the closing, a total of 29,551,998 shares of the Company were outstanding.

 

Upon completion of the Merger, the former stockholders of STI owned approximately 89% of the outstanding shares of the Company’s common stock and the holders of the outstanding shares of the Company’s common stock prior to the Merger owned the balance. As the former owners and management of STI have voting and operating control of the Company after the Merger, the transaction has been accounted for as a recapitalization with the STI deemed the acquiring companies for accounting purposes, and the Company deemed the legal acquirer. Due to the change in control, the consolidated financial statements reflect the historical results of STI prior to the Merger, and that of the combined company following the Merger. Common stock and the corresponding capital amounts of the Company pre-Merger have been retroactively restated as capital stock shares reflecting the exchange ratio in the Merger. No step-up in basis or intangible assets or goodwill has been recorded in this transaction and the cash paid by the Company of $248,980 (including $28,380 of transaction costs) has been reflected as a cost of the transaction in 2015.

 

Overview of Business

 

The Company is an importer, distributer and marketer of digital lighting equipment for the hydroponics industry. Using certain of its proprietary technologies, the Company provides innovative aptitudes with its ballast, reflector and lamp products. The Company’s customers include retail stores, distributors and commercial growers in the United States and abroad.

 

 

SOLIS TEK INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

 

Stock Split

 

On July 7, 2015, the Company’s shareholders authorized its Board of Directors to effectuate a stock split of the Company’s issued and outstanding shares of common stock at a ratio of 6-for-1 (the “Stock Split”), which was ultimately declared effective by the Board of Directors as of the close of business on September 1, 2015. As a result of the Stock Split, every one issued and outstanding share of the Company’s common stock was changed and converted into six shares of common stock. Share related information presented in these financial statements and accompanying footnotes has been retroactively adjusted to reflect the reduced number of shares resulting from this action.

 

Income (Loss) Per Share Calculations

 

Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares available. Shares of restricted stock subject to vesting are included in basic weighted average common shares outstanding from the time they vest. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Weighted average number of shares outstanding has been retroactively restated for the equivalent number of shares received by the accounting acquirer as a result of the reverse merger as if these shares had been outstanding as of the beginning of the earliest period presented.

 

Revenue Recognition

 

The Company recognizes revenue upon shipment of the Company’s products to its customers, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured. Title to the Company’s products primarily is transferred to the customer once the product is shipped from the Company’s warehouses. In certain cases, the products are shipped directly from the Company’s vendors directly to the Company’s customer, in which case title is transferred once the product is received by the customer. Products are not shipped until there is a written agreement with the customer with a specified payment arrangement. Any discounts that are offered are done as a reduction of the invoiced amount at the time of billing.

 

Payments received before the relevant criteria for revenue recognition are satisfied are recorded as customer deposits. There were no customer deposits at June 30, 2016 and December 31, 2015.

 

The Company does not offer a general right of return on any of its sales and considers all sales as final. The Company generally provides a three-year warranty on its ballasts. The Company does not maintain a warranty reserve as the Company is able to chargeback its vendors for all warranty claims. As of June 30, 2016 and December 31, 2015, the Company recorded a reserve for returned product in the amount of $130,410, which reduced the accounts receivable balances as of those periods.

 

 

SOLIS TEK INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in valuing our allowances for doubtful accounts and inventory valuations, among others. Actual results could differ from these estimates.

 

Property and Equipment

 

Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The Company has determined the estimated useful lives of its property and equipment, as follows:

 

Machinery and equipment	5 years
Computer equipment	3 years
Furniture and fixtures	7 years

 

Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the related accounts and the resulting gain or loss is reflected in the statements of operations.

 

Income Taxes

 

Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized. The Company recorded a valuation allowance against its deferred tax assets as of June 30, 2016 and December 31, 2015.

 

The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50 percent likely of being realized upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that the Company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes.

 

 

SOLIS TEK INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Concentration Risks

 

The Company operates in markets that are highly competitive and rapidly changing. Significant technological changes, shifting customer needs, the emergence of competitive products or services with new capabilities, and other factors could negatively impact the Company’s operating results. State and federal government laws could have a material adverse impact on the Company’s future revenues and results of operations.

 

The Company’s products require specific components that currently are available from a limited number of sources. The Company purchases its key products and components from single vendors. During the six months ended June 30, 2016 and 2015, its ballasts, lamps and reflectors, which comprised the vast majority of the Company’s purchases during those periods, were each only purchased from one separate vendor. The ballast vendor is a related party (see Note 4).

 

The Company performs a regular review of customer activity and associated credit risks and does not require collateral or other arrangements. There were no customers that accounted for more than 10% of the Company’s revenue for the three and six months ended June 30, 2016 and 2015. Shipments to customers outside the United States comprised 0.4% and 1% for the three months ended June 30, 2016 and 2015, respectively. Shipments to customers outside the United States comprised 0.4% and 2% for the six months ended June 30, 2016 and 2015, respectively.

 

As of June 30, 2016, two customers accounted for 26% and 15% of the Company’s trade accounts receivable balance, and as of December 31, 2015, two customers accounted for 15% and 20% of the Company’s trade accounts receivable balance. Customers outside the United States represented 1% and 8% of the Company’s trade accounts receivable balance as of June 30, 2016 and December 31, 2015, respectively.

 

Fair Value measurements

 

The Company determines the fair value of its assets and liabilities based on the exchange price in U.S. dollars that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:

 

●	Level 1 — Quoted prices in active markets for identical assets or liabilities.
●	Level 2 — Inputs, other than Level 1, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
●	Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

  

The carrying amounts of financial instruments such as cash, accounts receivable, inventories, and accounts payable and accrued liabilities, approximate the related fair values due to the short-term maturities of these instruments.

 

 

SOLIS TEK INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recently Issued Accounting Pronouncements

 

In July 2015, the FASB issued Accounting Standards Update 2015-11, Simplifying the Measurement of Inventory, which requires that inventory within the scope of ASU 2015-11 be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out (LIFO) and the retail inventory method are not impacted by the new guidance. ASU 2015-11 applies to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of ASU 2015-11 at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for public business entities in fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2015-11 on the Company’s financial statements and disclosures.

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.

 

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

 

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

 

 

SOLIS TEK INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

 

NOTE 3 - PROPERTY AND EQUIPMENT

 

Property and equipment consists of the following at June 30, 2016 and December 31, 2015:

 

		June 30, 2016				December 31, 2015
Machinery and equipment		$	235,939			$	231,506
Computer equipment			12,448				12,448
Furniture and fixtures			89,266				89,266
Leasehold improvements			7,000				7,000
			344,653				340,220
Less: accumulated depreciation and amortization			(107,621	)			(72,519	)
Property and equipment, net		$	237,032			$	267,701

 

Depreciation and amortization expense for the three months ended June 30, 2016 and 2015 was $17,587 and $11,881, respectively. Depreciation and amortization expense for the six months ended June 30, 2016 and 2015 was $35,102 and $19,706, respectively.

 

Property and equipment include assets acquired under capital leases of $64,632 at June 30, 2016 and December 31, 2015, respectively. Related depreciation included in accumulated depreciation was $30,378 and $23,814 at June 30, 2016 and December 31, 2015, respectively.

 

NOTE 4 - RELATED PARTY TRANSACTIONS

 

Supplier

 

A family member of an officer/shareholder owns a minority interest in a company in China, which as of 2014, is the sole supplier of ballasts to the Company. Purchases from the related party for the three months ended June 30, 2016 and 2015 totaled approximately $602,000 and $1,646,000, respectively. Purchases from the related party for the six months ended June 30, 2016 and 2015 totaled approximately $1,504,000 and $2,737,000, respectively. The Company believes purchase prices from the related party approximate what the Company would have to pay from an independent third party vendor. At June 30, 2016 and December 31, 2015, the Company owed the related party $783,356 and $1,171,754, respectively.

 

Amounts Due to Officers/Shareholders

 

As of June 30, 2016 and December 31, 2015, the Company owed two officers/shareholders $138,629 and $127,265, respectively. Included in the balances were short-term loans from the two officers/shareholders to the Company totaling $3,297 as of June 30, 2016 and December 31, 2015, respectively. The balances are payable on demand, bear zero interest and are unsecured. The balances also included interest owed on the notes payable to related parties, which totaled to $42,013 and $28,969 at June 30, 2016 and December 31, 2015, respectively. Also included is $93,319 and $94,999 of unpaid compensation, which was owed to the officers/shareholders at June 30, 2016 and December 31, 2015, respectively.

 

 

SOLIS TEK INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

 

NOTE 5 – NOTES PAYABLE TO RELATED PARTIES

 

Notes Payable to Officers/Shareholders

 

On July 1, 2012, the Company entered into notes payable agreements with two of its officers/shareholders. The maximum borrowings allowed under each individual note are $200,000. Through December 31, 2013, each note bore interest at 20% per annum. Beginning on January 1, 2014, the interest rate on the notes was reduced to 8% per annum. The notes are due 30 days after demand. Amounts owed on the combined note balances were $195,000 at June 30, 2016 and December 31, 2015, respectively. There was no interest paid to the officers/shareholders relating to the notes for the six months ended June 30, 2016 and 2015. Interest expense on the notes for the three months ended June 30, 2016 and 2015 was $3,889, respectively. Interest expense on the notes for the six months ended June 30, 2016 and 2015 was $7,779 and $7,920, respectively.

 

In May 2016, the Company entered into two separate notes payable agreements with the same two officers/shareholders. Under each of the agreements, the Company borrowed $300,000 from each of the officers/shareholders. The notes accrue interest at 8% per annum, are unsecured and are due on or before May 31, 2018. A total of $600,000 was due on the combined notes at June 30, 2016. Interest expense on the notes for the six months ended June 30, 2016 was $6,970. Interest paid to the officers/shareholders relating to the notes for the six months ended June 30, 2016 was $1,705.

 

Loans Payable, Related Parties

 

In November 2015, the Company borrowed $60,000 from the parents of one of the Company’s officer/shareholders. The loan accrues interest at 10% per annum, is unsecured and is due on or before December 31, 2016. A total of $60,000 was owed on the loan as of June 30, 2016 and December 31, 2015.

 

In January 2016, the Company borrowed an additional $110,000 from relatives of one of the Company’s officers/shareholders. The loan accrues interest at 10% per annum, is unsecured and is currently due. In April 2016, $100,000 was repaid on the loan. A total of $10,000 was owed on the loan as of June 30, 2016.

 

Interest expense on the two loans for the six months ended June 30, 2016 was $6,288 and accrued interest at June 30, 2016 was $6,288.

 

NOTE 6 - LINE OF CREDIT

 

Through May 2016, the Company had a revolving line of credit with a bank in which it could borrow up to $600,000. The line of credit expired May 1, 2016. Borrowings under the line of credit bore interest at 4.75%. The line of credit was secured by substantially all assets of the Company and a personal guarantee from one of the Company’s officers/shareholders, including his personal residence. The outstanding balance on the line of credit was $600,000 at December 31, 2015. The line of credit was terminated after the balance was fully paid in May 2016.

 

 

SOLIS TEK INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

 

NOTE 7 – LOANS PAYABLE

 

Loans payable consist of the following at June 30, 2016 and December 31, 2015:

 

		June 30, 2016				December 31, 2015
Business loan (a)		$	3,079			$	341,035
Automobile loans (b)			38,271				42,273
			41,350				383,308
Less: current portion			(11,236	)			(349,089	)
Non-current portion		$	30,114			$	34,219

 

	a.	In September 2015, the Company entered into a Business Loan and Security Agreement, under which the Company can borrow up to $500,000. The loan matures in September 2016 and is secured by credit card collections and certain Company assets. The agreement requires the Company to repay the loan from the credit card deposits it receives from its customers. The repayment rate is 21% of each deposit. The loan does not accrue interest but includes a non-refundable fee of $40,000, which can be reduced if paid early. In September 2015, the Company borrowed $500,000 under the agreement. At June 30, 2016 and December 31, 2015, $3,079 and $341,035 was owed on the loan, respectively. Loan fee amortization, recorded as interest expense, was $10,000 and $20,000 for the three and six months ended June 30, 2016, respectively. There was no loan fee amortization for the three and six months ended June 30, 2015.
	b.	In 2015, the Company entered into two loan agreements to purchase automobiles. The combined principal amount of the loans was $44,093 and they mature by November 2021. The loans require a combined monthly payment of principal and interest of $747. A total of $38,271 and $42,273 was owed on the loans as of June 30, 2016 and December 31, 2015, respectively.

 

NOTE 8 – SHAREHOLDERS’ EQUITY

 

At December 31, 2015, there were 29,576,998 shares of common stock issued and outstanding and no preferred shares outstanding. During the six months ended June 30, 2016, the Company issued a total of 20,000 shares of its common stock to two of its employees. The shares vested upon grant. The fair value of the shares on the date of grant was $11,000, which was recorded as stock compensation expense on the date of grant.

 

In November 2015, the Company entered into a four year employment agreement with one of its employees in which the employee was granted 500,000 shares of the Company’s common stock. The fair value of the shares on the date of grant was $400,000, which is being amortized ratably over the four year service period. The amount amortized as stock based compensation during the six months ended June 30, 2016 was $50,000. The shares vest equally in six month periods over the four years, with the first tranche of 62,500 shares vesting in May 2016.

 

 

SOLIS TEK INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

 

NOTE 9 – COMMITMENTS

 

Capital Leases

 

The Company leases equipment under capital lease agreements. Future minimum lease payments at June 30, 2016 are as follows:

 

Years ending December 31,		Amount
Remainder of 2016		$	7,475
2017			14,950
2018			9,668
Total minimum lease payments			32,093
Less: amount represented by interest			(2,182	)
Less: current portion			(13,251	)
Capital lease obligations, net of current portion		$	16,660

 

Technology License Agreement

 

In March 2013, the Company entered into a Technology License Agreement with a third party vendor for consulting services. Under the agreement, the Company agreed to pay the vendor $100,000 per year commencing on March 1, 2013.

 

In 2015, the agreement was amended. Under the amended agreement, the Company will pay the vendor a minimum consulting amount of $100,000 per year, plus a royalty of 7% of all net sales of the vendor’s products above $1,428,571 per calendar year. For each of the six months ended June 30, 2016 and 2015, $50,000 was recorded as research and development expense under the agreement on the condensed consolidated Statements of Operations. No royalty fees were owed under the agreement for the six months ended June 30, 2016. A total of $123,763 was owed under the agreements as of June 30, 2016 and December 31, 2015 and is included in Accounts Payable and Accrued Expenses on the condensed consolidated Balance Sheets.

 

 

SOLIS TEK INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

 

NOTE 10 – INCOME TAXES

 

The components of income tax benefit for the six months ended June 30, 2016 and 2015 are as follows:

 

		Three Months Ended								Six Months Ended
		June 30, 2016				June 30, 2015				June 30, 2016				June 30, 2015
Current
Federal		$	(4,614	)		$	7,364			$	29,183			$	16,693
State			(1,215	)			2,100				8,517				4,761
Total Current			(5,829	)			9,464				37,700				21,454
Deferred
Federal			29,157				(9,284	)			36,176				98,230
State			5,145				(506	)			6,384				16,846
Valuation Allowance			(34,302	)			9,790				(42,560	)			(115,076	)
Total provision (benefit)		$	(5,829	)		$	9,464			$	37,700			$	21,454

 

The Company’s effective income tax rate differs from the amount computed by applying the federal statutory income tax rate to income before income taxes as follows:

 

		Three Months Ended								Six Months Ended
		June 30, 2016				June 30, 2015				June 30, 2016				June 30, 2015
Income tax provision at federal statutory rate			(34.0	)%			(34.0	)%		$	34.0	%			(34.0	)%
State income tax provision, net of federal benefit			(6.0	)%			(6.0	)%			6.0	%			(6.0	)%
Change in valuation allowance			25.8	%			43.8	%			39.4	%			49.1	%
Income taxes at effective income tax rate			(14.2	)%			3.8	%			79.4	%			9.1	%

 

 

SOLIS TEK INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

 

NOTE 10 – INCOME TAXES (CONTINUED)

 

The components of deferred taxes consist of the following at June 30, 2016 and December 31, 2015:

 

		June 30, 2016				December 31, 2015
Inventory reserves		$	125,361			$	140,141
Allowance for doubtful accounts and returns			110,026				93,581
Impairment of note receivable			100,000				100,000
Other accrued expenses			86,833				87,505
Depreciation			(60,702	)			(52,702	)
Stock compensation			30,487				6,087
Less: Valuation allowance			(392,005	)			(374,612	)
Net deferred tax assets		$	-			$	-

 

Deferred income taxes result from temporary differences between income tax and financial reporting computed at the effective income tax rate. The Company has established a valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such assets. Management periodically evaluates the recoverability of the deferred tax assets. At such time it is determined that it is more likely than not that deferred tax assets are realizable, the valuation allowance will be reduced.

 

The Company files U.S. federal and U.S. state tax returns. The Company’s major tax jurisdictions are U.S. federal and the States of California and New Jersey. Such amount has been accrued and reflected in income taxes payable. Years that are subject to tax examinations are the open years from 2013 through 2015.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our:

 

	●	business strategy;
	●	financial strategy;
	●	future operating results; and
	●	plans, objectives, expectations and intentions contained in this report that are not historical.

 

All statements, other than statements of historical fact included in this report, regarding our strategy, intellectual property, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this report. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as in this report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur.

 

Organizational History

 

Solis Tek Inc. (the “Company”) was originally incorporated under the laws of the State of Nevada on March 2, 2007 as Cinjet, Inc. (“Cinjet”). Effective September 1, 2015, Cinjet changed its corporate name to Solis Tek Inc. On June 23, 2015, the Company entered into an Agreement of Merger and Plan of Reorganization (the “Agreement”) with Solis Tek Inc., a California corporation (“STI”), and CJA Acquisition Corp., a California corporation and a wholly owned subsidiary of the Company (“Merger Sub”), providing for the merger of Merger Sub with and into STI (the “Merger”), with STI surviving the Merger as a wholly-owned subsidiary of the Company. The Merger Agreement was approved by the Company’s Board of Directors and the sole Director of the Company, effective June 23, 2015. The Merger closed on June 23, 2015.

 

At the effective time of the Merger, each share of STI common stock issued and outstanding was converted automatically into the right to receive .166 shares of the common stock of the Company, with an aggregate of 26,187,000 shares of the Company’s common stock issued to the former shareholders of STI.

 

Upon the closing of the Merger, STI paid a total of $22,500 to four shareholders of the Company for the cancellation of a total of 61,297,002 shares of the Company’s common stock. Also at the closing of the Merger, STI paid $198,100 to the Company to settle and pay liabilities of $405,932, which represented all of the then current liabilities of the Company. After the closing, a total of 29,551,998 shares of the Company were outstanding.

 

Upon completion of the Merger, the former stockholders of STI owned approximately 89% of the outstanding shares of the Company’s common stock and the holders of the outstanding shares of the Company’s common stock prior to the Merger owned the balance. As the former owners and management of STI have voting and operating control of the Company after the Merger, the transaction has been accounted for as a recapitalization with the STI deemed the acquiring companies for accounting purposes, and the Company deemed the legal acquirer. Due to the change in control, the consolidated financial statements reflect the historical results of STI prior to the Merger, and that of the combined company following the Merger. Common stock and the corresponding capital amounts of the Company pre-Merger have been retroactively restated as capital stock shares reflecting the exchange ratio in the Merger. No step-up in basis or intangible assets or goodwill will be recorded in this transaction and the cash paid by the Company of $248,980 (including $28,380 of transaction costs) has been reflected as a cost of the transaction.

 

 

Overview of Business

 

The Company is focused on the research, design, development and manufacturing of advanced, energy efficient indoor horticulture lighting and ancillary equipment. Our vision is to apply the latest advances in high efficiency lighting and controls technology as well as effective manufacturing techniques to deliver highly differentiated products with clear benefits at competitive prices to the greenhouse and indoor horticulture markets.

 

The Company is a California corporation that was formed in June of 2010. We commenced our operations immediately by designing, developing and sourcing of a line of Solis Tek Digital Ballasts intended for use in high intensity lighting systems used for horticulture. An electrical ballast is a device intended to limit the amount of current in an electric circuit. A familiar and widely used example is the inductive ballast used in fluorescent lamps, to limit the current through the tube, which would otherwise rise to destructive levels due to the tube’s negative resistance characteristic. Since the commencement of operations, our product line has evolved from digital ballasts to a line of lighting products including a line of specialty ballasts ranging from 400 watts to 1,000 watts with various features, a line of specialty metal halide digital lamps, a line of reflectors, high intensity lighting accessories and a new line of light emitting diode (“LED”) lighting technologies.

 

Critical Accounting Policies

 

The Securities and Exchange Commission (“SEC”) defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of the accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition.

 

Allowance for Doubtful Accounts

 

The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, the age of the accounts receivable balances, credit quality, economic conditions that may affect a customer’s ability to pay and expected default frequency rates. Trade receivables are written off at the point when they are considered uncollectible.

 

Inventories

 

The Company provides inventory reserves based on excess and obsolete inventories determined primarily by future demand forecasts. The write down amount is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

 

Inventories under warranty claims

 

In the ordinary course of business, the Company receives product returns from its customers. The product returns are almost entirely ballasts. Since its inception, the Company has purchased its ballasts from two Chinese manufacturers and one of them (a related entity, see Note 5) offers a three year warranty on its products. Through June 30, 2016, that manufacturer was not able to repair the Company’s ballasts, as the Company could not return the products to the manufacturer’s facility due to Chinese customs reasons. As such, in late 2015, the related party vendor issued the Company a credit memo for the entire amount of their returned product, totaling $653,118. During the six months ended June 30, 2016, the related party vendor issued the Company additional credit memos for the entire amount of their returned product during that period, totaling $233,336. The Company is planning to send the products to a free trade zone in Hong Kong or to another location in China, to repair, or replace, the defective products. As the manufacturer has issued the Company a credit for all of the defective product, the Company has not recorded a reserve on any of those products. But, the Company has recorded a reserve on the other manufacturer’s products.

 

 

Recently Issued Accounting Pronouncements

 

See Management’s discussion of recent accounting policies included in footnote 1 to the condensed consolidated financial statements.

 

Results of Operations

 

Results of Operations for the three months ended June 30, 2016 compared to the three months ended June 30, 2015.

 

Revenue and Cost of Goods Sold

 

Revenue for the three months ended June 30, 2016 and 2015 was $2,125,830 and $1,843,643, respectively. The increase of $282,187 was primarily due to more market penetration within our hydroponic customers and commercial facilities during the second quarter of 2016, as compared to the first quarter of the prior year.

 

Cost of sales for the three months ended June 30, 2016 and 2015, was $1,324,165 and $1,109,473, respectively. Gross profit for the three months ended June 30, 2016 and 2015, was $801,665 and $734,170, respectively. The gross profit increase of $67,495 was due to the increase in revenue, as the Company’s gross profit margin was 38% during the second quarter of 2016 compared to 40% during the second quarter of 2015.

 

Research and Development Expenses

 

Research and development (“R&D”) expenses for the three months ended June 30, 2016 and 2015 was $58,000 and $48,384, respectively. The increase in R&D expenses of $9,616 was due to the increase in payroll costs during the second quarter of 2016 compared to the second quarter of 2015.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative (“SG&A”) expenses for the three months ended June 30, 2016 and 2015 was $765,531 and $674,148, respectively. The increase in SG&A expenses of $91,383 was due primarily to the increase in labor costs of $37,135 and stock compensation costs of $61,000, plus a decrease in other SG&A expenses.

 

Other Income (Expenses)

 

Interest expense for the three months ended June 30, 2016 and 2015 was $23,620 and $12,294, respectively. The increase in interest expense of $11,326 was due to the three loans payable agreements the Company entered into during the third and fourth quarters of 2015 and the two related party loans payable the Company entered into in the fourth quarter of 2015 and in the first quarter of 2016. In June 2015, the Company entered into a merger agreement with STI. Costs incurred during the second quarter of 2015 relating to the merger were $248,980.

 

Net Loss

 

Our net loss for the three months ended June 30, 2016 was $35,157 and our net loss for the three months ended June 30, 2015 was $259,100. The decrease in net loss of $223,943 was primarily due to the merger costs of $248,980 during the second quarter of 2015, but was also due to the increase in gross profit of $67,495, offset by the increase in SG&A expenses of $91,383 and R&D expenses of $9,616.

 

 

Results of Operations for the six months ended June 30, 2016 compared to the six months ended June 30, 2015.

 

Revenue and Cost of Goods Sold

 

Revenue for the six months ended June 30, 2016 and 2015 was $4,710,498 and $3,935,127, respectively. The increase of $775,371 was primarily due to more market penetration within our hydroponic customers and commercial facilities during the first six months of 2016, as compared to the first six months of the prior year.

 

Cost of sales for the six months ended June 30, 2016 and 2015, was $2,982,876 and $2,455,924, respectively. Gross profit for the six months ended June 30, 2016 and 2015, was $1,727,622 and $1,479,203, respectively. The gross profit increase of $248,419 was due to the increase in revenue, as the Company’s gross profit margin was 37% during the first six months of 2016 compared to 38% during the first six months of 2015.

 

Research and Development Expenses

 

Research and development (“R&D”) expenses for the six months ended June 30, 2016 and 2015 was $115,000 and $95,225, respectively. The increase in R&D expenses of $19,775 was due to the increase in payroll costs during the first six months of 2016 compared to the first six months of 2015.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative (“SG&A”) expenses for the six months ended June 30, 2016 and 2015 was $1,519,225 and $1,345,814, respectively. The increase in SG&A expenses of $173,411 was due primarily to the increase in labor costs of $88,702 and stock compensation costs of $61,000, plus an increase in other SG&A expenses.

 

Other Expenses

 

Interest expense for the six months ended June 30, 2016 and 2015 was $50,394 and $24,238, respectively. The increase in interest expense of $26,156 was due to the three loans payable agreements the Company entered into during the third and fourth quarters of 2015 and the two related party loans payable the Company entered into in the fourth quarter of 2015 and in the first quarter of 2016. In June 2015, the Company entered into a merger agreement with STI. Costs incurred during the second quarter of 2015 relating to the merger were $248,980.

 

Net Income (Loss)

 

Our net income for the six months ended June 30, 2016 was $9,803 and our net loss for the six months ended June 30, 2015 was $256,508. The decrease in net loss of $266,311 was primarily due to the merger costs of $248,980 during the second quarter of 2015, but was also due to the increase in gross profit of $248,419, offset by the increase in SG&A expenses of $173,411 and R&D expenses of $19,775.

 

Liquidity and Capital Resources

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.

 

For the six months ended June 30, 2016

 

Cash flows from operating activities

 

During the six months ended June 30, 2016, the Company had cash flows provided by operating activities of $576,650 compared to $498,390 used in operating activities during the six months ended June 30, 2015. The reasons for the increase in cash provided by operating activities in the amount of $1,075,040 was due mainly to the decreases in inventories of $1,788,941 and inventories under warranty claims of $150,517, offset by the increase in accounts receivable of $246,231 and the decreases in accounts payable and accrued expenses of $282,859 and due to related party vendor of $948,998.

 

 

Cash flows from investing activities

 

During the six months ended June 30, 2015, we had purchases of property and equipment of $92,839, while during the six months ended June 30, 2016, we had purchases of property and equipment of $4,433.

 

Cash flows from financing activities

 

During the six months ended June 30, 2016, we had proceeds from a note payable-related party of $110,000 and from notes payable to officers-shareholders of $600,000. We used cash from financing activities to make payments for our loans payable of $361,958, for our capital lease obligations of $6,309, for our bank line of credit of $600,000, for our notes payable-related parties of $100,000 and for amounts due to officers-shareholders of $3,384. During the six months ended June 30, 2015, we had net proceeds from the sale of common stock of $806,000. We used cash from financing activities to make payments for our capital lease obligations of $7,805 and for amounts due to officers-shareholders of $24,529.

 

Financial Position

 

As of June 30, 2016, we had 316,882 in cash, working capital of $2,281,075 and an accumulated deficit of $872,160.

 

As of December 31, 2015, we had $106,316 in cash, working capital of $1,590,461 and an accumulated deficit of $881,963.

 

The Company has a revolving line of credit with a bank in which it can borrow up to $600,000. The line of credit expired April 1, 2014, but has been extended until May 1, 2016. Borrowings under the line of credit bear interest at 4.75%. The outstanding balance on the line of credit was $600,000 at December 31, 2015. The line of credit is secured by substantially all assets of the Company and a personal guarantee from one of the Company’s officers/shareholders, including his personal residence. The line of credit was paid-off in May 2016.

 

In September 2015, the Company entered into a Business Loan and Security Agreement, under which the Company can borrow up to $500,000. The loan matures in September 2016. The agreement requires the Company to repay the loan from the credit card deposits it receives from its customers. The repayment rate is 21% of each deposit. The loan does not accrue interest but includes a non-refundable loan fee of $40,000, which can be reduced if the loan is paid off early.

 

In 2015, the Company entered into two loan agreements to purchase automobiles. The combined principal amount of the loans was $44,093 and they mature by November 2021. The loans require a combined monthly payment of principal and interest of $747.

 

In November 2015, the Company borrowed $60,000 from the parents of one of the Company’s officers/shareholders. The loan accrues interest at 10% per annum, is unsecured and is due on or before December 31, 2016. A total of $60,000 was owed on the loan as of June 30, 2016 and December 31, 2015. In January 2016, the Company borrowed an additional $110,000 from relatives of one of the Company’s officers/shareholders. The loan accrues interest at 10% per annum, is unsecured and is currently due.

 

In May 2016, the Company entered into two separate notes payable agreements with the same two officers/shareholders. Under each of the agreements, the Company borrowed $300,000. The notes accrue interest at 8% per annum, are unsecured and are due on or before May 31, 2018. A total of $600,000 was due on the combined notes at June 30, 2016. Interest expense on the notes for the six months ended June 30, 2016 was $6,970. Interest paid to the officers/shareholders relating to the notes for the six months ended June 30, 2016 was $1,705.

 

 

Off-Balance Sheet Arrangements

 

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 4. Controls and Procedures.

 

Evaluation of disclosure controls and procedures

 

Based upon an evaluation of the effectiveness of our disclosure controls and procedures performed by our Chief Executive Officer as of the end of the period covered by this report, our Chief Executive Officer concluded that our disclosure controls and procedures are not effective as a result of a weakness in the design of internal control over financial reporting identified below.

 

As used herein, “disclosure controls and procedures” mean controls and other procedures of our company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Management’s Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) under the Securities Exchange Act of 1934. Our Chief Executive Officer/Chief Accounting Officer conducted an evaluation of the effectiveness of our control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on management’s evaluation under the framework, management has concluded that our internal control over financial reporting was not effective as of June 30, 2016.

 

We identified material weaknesses in our internal control over financial reporting primarily attributable to (i) lack of segregation of incompatible duties; and (ii) insufficient Board of Directors representation. These weaknesses are due to our inadequate staffing during the period covered by this report and our lack of working capital to hire additional staff. Management has retained an outside, independent financial consultant to record and review all financial data, as well as prepare our financial reports, in order to mitigate this weakness. Although management will periodically re-evaluate this situation, at this point it considers that the risk associated with such lack of segregation of duties and the potential benefits of adding employees to segregate such duties are not cost justified. We intend to hire additional accounting personnel to assist with financial reporting as soon as our finances will allow.

 

This quarterly report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

 

Changes in Internal Control Over Financial Reporting

 

No changes in our internal control over financial reporting occurred during the six months ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II

 

Item 1. Legal Proceedings.

 

The Company is, from time to time, involved in legal proceedings, regulatory actions, claims and litigation arising in the ordinary course of business. These matters are not expected to have a material adverse effect upon the Company’s financial condition.

 

Item 1A. Risk Factors.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

Exhibit Number		Description of Exhibit
31.1		Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.
31.2		Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.
32.1		Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code.
32.2		Certification by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code.
101.INS		XBRL Instance Document.*
101.SCH		XBRL Taxonomy Extension Schema.*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase.*
101.DEF		XBRL Taxonomy Extension Definition Linkbase.*
101.LAB		XBRL Taxonomy Extension Label Linkbase.*
101.PRE		XBRL Extension Presentation Linkbase.*

 

*

Attached as Exhibit 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) the Balance Sheets, (ii) the Statement of Operations, (iii) the Statement of Shareholders’ Equity, (iv) the Statement of Cash Flow, and (v) Notes to Financial Statements.

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	SOLIS TEK INC. AND SUBSIDIARIES
	By:	/s/ Alan Lien
		Alan Lien
		Chief Executive Officer
		August 15, 2016