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EX-32.2 - CERTIFICATION - SPORTS FIELD HOLDINGS, INC.f10k2016ex32ii_sportsfieldh.htm
EX-32.1 - CERTIFICATION - SPORTS FIELD HOLDINGS, INC.f10k2016ex32i_sportsfieldhol.htm
EX-31.2 - CERTIFICATION - SPORTS FIELD HOLDINGS, INC.f10k2016ex31ii_sportsfieldh.htm
EX-31.1 - CERTIFICATION - SPORTS FIELD HOLDINGS, INC.f10k2016ex31i_sportsfieldhol.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended: December 31, 2016

 

or

 

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

 

Commission file number: 000-54883

 

SPORTS FIELD HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   46-0939465
(State or other jurisdiction of
incorporation or organization)
 

(I.R.S. Employer

Identification No.)

 

4320 Winfield Road, Suite 200

Warrenville, IL 60555

(Address of principal executive offices)

 

978-914-7570

(Registrant’s telephone number, including area code)

 

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

 

Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.00001 per share

 

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

 

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

 

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

 

Indicate by checkmark 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 ☒ No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

 

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

 

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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 30, 2016, based on a closing price of $0.66 was $10,297,037. As of March 31, 2017, the registrant had 17,095,083 shares of its common stock, par value $0.00001 per share, outstanding. 

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page No.
PART I  
     
Item 1. Business 1
Item 1A. Risk Factors 9
Item 1B. Unresolved Staff Comments 16
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Mine Safety Disclosures 16
     
PART II  
     
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 17
Item 6. Selected Financial Data 21
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 27
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 27
Item 9A. Controls and Procedures 27
Item 9B. Other Information 27
    28
PART III  
     
Item 10. Directors, Executive Officers and Corporate Governance 29
Item 11. Executive Compensation 34
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 38
Item 13. Certain Relationships and Related Transactions, and Director Independence 40
Item 14. Principal Accounting Fees and Services 41
     
PART IV  
     
Item 15. Exhibits, Financial Statements Schedules 42
     
SIGNATURES 45

 

 

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Included in this Annual Report on Form 10-K are “forward-looking” statements, as well as historical information. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that the expectations reflected in these forward-looking statements will prove to be correct. Our actual results could differ materially from those anticipated in forward-looking statements as a result of certain factors, including matters described in the section titled “Risk Factors.” Forward-looking statements include those that use forward-looking terminology, such as the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “project,” “plan,” “will,” “shall,” “should,” and similar expressions, including when used in the negative. Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, these statements involve risks and uncertainties and we cannot assure you that actual results will be consistent with these forward-looking statements. We undertake no obligation to update or revise these forward-looking statements, whether to reflect events or circumstances after the date initially filed or published, to reflect the occurrence of unanticipated events or otherwise.  

 

 

 

 

PART I

 

Item 1. Business.  

 

Our Corporate History

 

We were incorporated on February 8, 2011, as Anglesea Enterprises, Inc. Initially our activities consisted of providing marketing and web-related services to small businesses including the design and development of original websites, creative writing and graphics, virtual tours, audio/visual services, marketing analysis and search engine optimization. On June 16, 2014, Anglesea, Merger Sub, Sports Field Private Co, and the Majority Shareholders, entered into the Merger Agreement pursuant to which the Merger Sub was merged with and into Sports Field Private Co, with Sports Field Private Co surviving as a wholly-owned subsidiary of Anglesea. Anglesea acquired, through a reverse triangular merger, all of the outstanding capital stock of Sports Field Private Co in exchange for issuing Sports Field Private Co’s shareholders 11,914,275 shares of Anglesea’s common stock.

 

Upon completion of the Merger, on June 16, 2014, Anglesea merged with Sports Field Private Co in a short-form merger transaction. Upon completion of the Short Form Merger, the Company became the parent company of the Sport Field Private Co’s then wholly owned subsidiaries, Sports Field Contractors LLC, FirstForm, Inc. (formerly SportsField Engineering, Inc.) and Athletic Construction Enterprises, Inc. In connection with the Short Form Merger, Anglesea changed its name to Sports Field Holdings, Inc. on June 16, 2014.

 

Overview

 

Sports Field, through its wholly owned subsidiary FirstForm, is an innovative product development company engaged in the design, engineering and construction of athletic fields and facilities and sports complexes and the sale of customized synthetic turf products and synthetic track systems.

 

According to Applied Market Information (AMI), over 2,000 athletic field projects were constructed in the U.S. in 2015, creating a $1.8 billion synthetic turf market. These statistics are supported by the number of square meters of synthetic turf manufactured and installed in the U.S. in 2015, based on an average size of 80,000 square feet per project. We believe synthetic turf fields have become the field of choice for public and private schools, municipal parks, and recreation departments, non-profit and for profit sports venue businesses, residential and commercial landscaping and golf related venues. We believe this is due to the spiraling costs associated with maintaining natural grass athletic fields and the demand for increased playing time, durability of the playing surface and the ability to play on that surface in any weather conditions.

 

Although synthetic turf athletic fields and synthetic turf have become a viable alternative to natural grass fields over the past several years, there are a number of technical and environmental issues that have arisen through the evolution of the development of turf and the systems designed around its installation. Sports Field has focused on addressing the main technical issues that still remain with synthetic turf athletic fields and synthetic turf, including but not limited to environmental and safety concerns related to infill used in synthetic turf fields as well the reduction of surface heat, and Gmax levels (the measure of how much force the surface absorbs and, in return, how much is deflected back to the athlete) as well drainage issues related to the base construction of turf installation).

 

In addition to the increased need for available playing space, collegiate athletic facilities have become an attractive recruiting tool for many institutions. The competition for athletes and recruiting has resulted in a multitude of projects to build new, or upgrade existing, facilities. These projects include indoor fields, bleachers, press boxes, lighting, concession stands as well, as locker rooms and gymnasiums. We believe that our position in the sports facilities design, construction and turf sales industry allows us to benefit from this increased demand because we are able to compete for the sale of turf as well as the design and construction on such projects, whereas our competitors can typically only compete for the turf components or the construction, but not both. In fact, according to a current IBIS report, there are no national firms competing in these sectors that have even 5% market share.

 

 1 

 

 

Through our strategic operations design, we have the ability to operate throughout the U.S., providing high quality synthetic turf systems focused on player safety and performance and construct those facilities for our clients using local subcontracted labor. Due to our ability to design, estimate, engineer, general contract and install our solutions, we can spend more of every owner dollar on product rather than margin and overhead, thereby delivering a premium product at market rates for our customers. Since inception we have completed a variety of projects from the design, engineering and build of entire football stadiums to the installation of a specialized turf track systems. Members of our management team have also designed, engineered and installed baseball stadiums, soccer and lacrosse fields, indoor soccer facilities, softball fields and running tracks for private sports venues, public and private high schools and public and private universities. In addition, members of our team have designed and engineered and constructed concession stands with full kitchen facilities, restroom structures, press boxes, baseball dugouts, bleacher seating, ticket booths, locker room facilities and gymnasium expansion projects.

 

Lines of Business

 

Sports Field, through its wholly owned subsidiary, FirstForm, has two primary lines of business which are all integral parts of the organizations overall business model. Our primary revenue generation comes from the sale and installation of our PrimePlay™ line of synthetic turf products. Our secondary source of revenue is generated as a result of the design, engineering, constructing, and construction management of athletic facilities and sports complexes. The construction management process is led by John Rombold and Scott Allen. Mr. Rombold is a licensed General Contractor as well as an experienced Project Manager. Scott Allen is a licensed Architect. Projects are bid and estimates for those bids are handled by both Mr. Rombold and Mr. Allen taking into consideration the scope of the work and cost of materials and labor. Once the Company is awarded a project based on a winning bid, Mr. Rombold will manage the fields being installed. Mr. Allen manages the Field Site Manager that the Company hires for each project. We bid all work done on each site to at least 3 subcontracted labor companies that meet our high standard of quality. The combination of these two business units allow for the business to operate as a Turn-Key Athletic Facilities provider for a truly “one-stop-shop” simplified customer experience.

 

Historically, approximately 80% of the Company’s gross revenues are from synthetic turf surfacing products and systems sales. Sports facilities design, engineering, construction and construction management have represented approximately 20% of the Company’s gross revenue. Projecting forward in the current year, the percentage of turf systems sales to construction related revenues should be approximately 70% to 30% respectively. Our goal is to continue to increase construction revenues in order to create a more even mix between revenue streams in order to insulate the total revenue from fluctuations in the turf sales or construction markets.

 

Target Markets

 

Our main target market is the more than 60,000 colleges, universities, high schools and primary schools in the United States with athletic programs, both public and private. Municipal parks and recreations departments, commercial and residential landscaping as well as golf and golf related activities also represent significant market opportunities for the Company.

 

Additionally, we target private club sports associations and independent athletic training facilities inclusive of all major sports, including; football, soccer, baseball, softball, lacrosse, field hockey, rugby, as well as track and field.

 

We also intend to market our unique design-build services to public youth sports leagues and all semi-professional and professional sports leagues.

 

Growth Strategy

 

Our primary goal is to be a leading provider of unique turn-key services that combine our strengths in safe and high performance synthetic turf systems, athletic facilities design, engineering and construction expertise. The key elements of our strategy include:

 

Expand our sales organization and increase marketing. Our sales structure is comprised of four discrete units: direct sales representatives, distribution group partners, deal finders and sports ambassadors. We currently have six fully staffed sales territories within the U.S.: the Northeast, Southeast, Northcentral, Southcentral, Northwest and Southwest, with each territory containing its own dedicated sales professional. Our four distribution group partners represent a total of nine sales people around the U.S. We are currently contracted with eight commission only deal finders who have extensive contacts in the sports industry and are making introductions for our direct sales team members to key decision makers around the U.S. Once a project lead is established, our distribution partners and deal finders bring in the local territory representative and drive the sales to close together as a team. We intend to continue to expand our highly-trained direct sales organization to secure contracts in every major region of the United States. By securing contracts and establishing Sports Field in all major regions of the country, the Company intends to seek to leverage those client relationships and successful projects to aggressively market to all potential clients in these regions.

 

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Develop and broaden high profile relationships to increase sales and drive revenues. In addition to installing a new football/lacrosse field, we have recently entered into a four-year marketing agreement with IMG Academy in Bradenton, Florida (“IMG”), a world renowned school and athletic training destination. IMG’s nationally recognized sports programs attract premier athletes from all over the globe. Our official supplier agreement with IMG allows us to utilize their logo in our marketing materials, perform site visits with clients to see our products as well as allow space for our 14,000 square foot research and development installation which we has allowed us to conduct research in an effort to consistently update our product offerings to make sure we are trying to put out what we believe to be the safest and highest performing products in the market. In addition, we are allowed to utilize IMG athletes to conduct product testing to ensure performance and safety for up to four times each year.
 

On August 3, 2016, we entered into a sponsorship agreement (the “Sponsorship Agreement”) with the National Council of Youth Sports (the “NCYS”). The Sponsorship Agreement positions the Company as an allied-level member and “Recommended Provider” of PrimePlay™ Replicated Grass™ turf systems. In addition, NCYS will provide the Company with media/marketing exposure across its member and affiliate network, cross promotion exposure and opportunities, and reciprocal use of brand trademarks and tradenames on promotional materials. In exchange, the Company shall pay to NCYS, among other potential fees, an annual non-refundable sponsorship fee of $20,000. The Sponsorship Agreement commenced upon execution and continues for an initial term of one (1) year, automatically renewing for successive one (1) year terms unless terminated by either party pursuant to the terms thereunder.

 

The NCYS membership includes over 200 member organizations that serve more than 60,000,000 registered youth participants. The NCYS leads the youth sports industry in offering its members exceptional value, and quality resources and services that are relevant, reliable, meaningful and purposeful. As NCYS’s preferred synthetic turf provider, we believe we will benefit from improved access to decision-makers within the national youth sports scene, introductions to fellow members, and unique educational opportunities regarding the Company’s advanced synthetic turf products.

 

We hope to continue to develop high profile strategic relationships that will allow for greater awareness of our products and services with institutions that are focused on athlete safety and athletic performance.

 

Drive adoption and awareness of our eco-friendly turf and infill products among coaches, athletic directors, administrators, and athletes. We intend to educate coaches, athletic directors, administrators and athletes on the compelling case for our two infill products. The Company currently offers two infill products, Organite and a yet to be named infill product (“New Infill Product”). Organite is our eco-friendly infill product that consists of Zeolite, Walnut Shell (Non-Allergenic Organic Shells and ethylene propylene diene monomer (EPDM) rubber. EPDM is a virgin rubber that contains no metals of any kind or known carcinogens in any color except black. On occasion, Organite contains minimal levels of Black EPDM which is sometimes known to contain carbon black, a potential inhalation hazard during manufacturing, however, we are not aware of any data showing any health hazards related to ingestion and therefore we strongly believe that EPDM is a much safer alternative to SBR crumb rubber. Our New Infill Product is eco-friendly and has absolutely no rubber at all and contains a proprietary mix of materials that are completely inert or biodegradable. Due to pricing competition we keep Organite available for clients more concerned with cost but we believe that our “rubberless” product will resonate amongst owners and drive additional demand for our products. Our infills are free from lead, chromium and all other potential cancer causing agents that are commonly found in fields all across the U.S. Our PrimePlay™ synthetic turf products are free from the polyurethane backing, which cannot be recycled, that is commonly present in the majority of turf installations today.

 

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Environmentally friendly, ecologically-safe, recyclable products and coating materials are available and we are using them in our current products. We believe our products perform, in all respects, as well or better than the ecologically-challenged products traditionally considered and currently used by many of our competitors. Due to our turn-key design-build process, we are able to offer our customers fields with ecologically friendly materials at a price that is competitive with the traditional products that are cheap and contain materials that are not safe. We believe that increased awareness of the benefits of our eco-friendly infill will favorably impact our sales.

 

Develop new technology products and services. Since inception, we have been in pursuit of developing a turf system that is comprised of synthetic fiber, turf backing, infill and shock/drainage pad that would allow us to market a product that virtually eliminates all of the current problems plaguing the industry. To date, we have studied and developed a high performing infill product that is free from any potential carcinogens and is capable of reducing field temperatures, designed a turf stitch pattern that will reduce infill migration to prevent injury, removed polyurethane from our backing to allow for recycling, tested and are provided a shock pad system from a third party supplier, that will allow for high performance while reducing impact injuries due to lower Gmax and engineered drainage design plans that allow the system to be free from standing water even in the event of major downpours. All of the improvements to the system are continuously being challenged and tested at our research and development site located on the campus at IMG in Bradenton, Florida.

 

Our next goal is to permanently staff a research and development office with development staff so that we can use everything we have learned about existing products and continue to create new products that will continue to improve performance while remaining safe for the players and the environment.

 

Pursue opportunities to enhance our product offerings. We may also opportunistically pursue the licensing or acquisition of complementary products and technologies to strengthen our market position or improve product margins. We believe that the licensing or acquisition of products would only strengthen our existing portfolio.

 

Lessen our dependency on third party manufacturers. As part of our long-term plans, we are exploring the possibility of reducing our reliance on third party manufacturers by bringing certain manufacturing, service and research and development functions in-house, which could include the acquisition of equipment and other fixed assets or the acquisition or lease of a manufacturing facility.

 

Operational Strengths

 

Highly Experienced Management and Key Personnel. We have assembled a senior management team and key personnel which includes Jeromy Olson, our CEO, Scott Allen, our Director of Architecture & Engineering, John Rombold, our Director of Project Management, and Kort Wickenheiser, our Director of Sales. This current leadership team is comprised of individuals with significant experience in sales, design, architecture, engineering and construction industry.

 

Diversified Project Classes. The diversity of project types that are within our capabilities is a strength that we can exploit if there is an economic slowdown on any one particular sector. Our architectural design, engineering and construction expertise along with our surfacing product sales can support the company revenue streams in two discrete ways.

 

Specialized Market Approach. We are currently winning project bids at prices above our competitors that use crumb rubber, due to customer demand for safer products. When other companies are forced to offer solutions similar to ours, we are already competitively priced. Much of the reason for that is that we save money by employing our own project management, architecture and engineering which ultimately lowers our overhead as compared to other companies that are not turn-key. We believe that by targeting and maintaining this type of expertise in athletic facilities the Company is more insulated from general economic downturn than general construction companies otherwise would be. This specialization is less susceptible to customers driving normal price points lower through mass competition.

 

Infrastructure built for growth. Current staffing levels have positioned the Company with excess operational capacity capable of doubling project execution without a significant impact on overhead.

 

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Featured Products and Services

 

PrimePlay™ Synthetic Turf Systems. All synthetic turf systems and products are marketed as our PrimePlay™ line of products to service the athletic facilities market. Within this line are the synthetic turf and track products, infill materials and shock/drainage pads.

 

 

 

 

* Represents our turf system from the stone base under the field, shockpad, turf, and infill

 

PrimePlay™ Replicated Grass™. Our flagship synthetic turf system, Replicated Grass™, is designed with a shorter tuft-height and higher face-weight which combine to produce a surface with almost three times the blade-density of leading competitors. The result is a surface with increased infill stability because if the infill can be displaced, there is no way to maintain consistent performance characteristics. Because our infill is so stable and does not displace under normal use, there is no change in performance characteristics over time and the infill does not require replacement on a regular basis as some of our competitor’s products that use crumb rubber. This increased density also offers athletes natural “ball-action”, or “ball roll”, and “natural foot-feel”, or “foot action” so it feels like they are playing on a real, lush grass surface. Replicated Grass™ also contains our “rubberless” New Infill Product which is composed primarily of organic shell husk and zeolite. These infill materials offer no risk of cancer or other related health risks as well as many other valuable characteristics.

 

Product Features

 

Safe Alternative to Crumb Rubber. In February of 2016, three federal agencies — the U.S. Environmental Protection Agency (EPA), the Centers for Disease Control and Prevention (CDC) /Agency for Toxic Substances and Disease Registry (ATSDR), and the U.S. Consumer Product Safety Commission (CPSC) — launched a joint initiative to study key safety and environmental human health questions related to the use of SBR crumb rubber in synthetic turf athletic fields, and any potential link to cancer. Sports Field has never used crumb rubber since its inception. The Company currently offers two infill products, Organite and our New Infill Product. Organite is our eco-friendly infill product that consists of Zeolite, Walnut Shell (Non-Allergenic Organic Shells and ethylene propylene diene monomer (EPDM) rubber. EPDM is a virgin rubber that contains no metals of any kind or known carcinogens in any color except black. On occasion, Organite contains minimal levels of Black EPDM which is sometimes known to contain carbon black, a potential inhalation hazard during manufacturing, however, we are not aware of any data showing any health hazards related to ingestion and therefore we strongly believe that EPDM is a much safer alternative to SBR crumb rubber. Our New Infill Product is eco-friendly and has absolutely no rubber at all and contains a proprietary mix of materials that are completely inert or biodegradable. Due to pricing competition we keep Organite available for clients more concerned with cost but we believe that our “rubberless” product will resonate amongst owners and drive additional demand for our products.

 

Heat Reduction. An often overlooked health risk associate with artificial turf is the extremely high temperatures that can exist above the playing surface due to absorption of heat from the sun. When using rubber infills, the reflectivity of an artificial turf system is generally lower than natural grass (darker colors absorb more electromagnetic radiation) due to the exposure of dark infill. Further, artificial turf and rubber infill do not naturally contain and hold moisture, to provide evaporative cooling, as natural grass and soils do. Our product uses zeolite, which is light in color to absorb less heat and is a porous material that is capable of holding up to 55% of its weight in water. This moisture is released as temperatures rise to create an evaporative cooling effect on the field. Our internal data and testing has shown that our surfaces on average are 18.6 degrees cooler than that of most competitors.

 

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Shock Attenuation. Rubber infills all have the same inherent problem, they break down and compact after prolonged exposure to UV light. As this happens over time the surfaces get harder and harder as the rubber loses its elasticity. This process increases the risk of impact injuries for athletes.

 

The National Football League’s (the “NFL”) recent attention to head injuries is reflected in its adoption of new standards for impact forces. New NFL guidelines require that NFL fields have a G-Max (G-Max is a measurement of how much force the surface will absorb, the higher the G-Max rating the less absorption of force by the surface) value that is not greater than 100 (based on the “Clegg” method of calculating G-Max). We believe that this criterion will eventually trickle-down and apply to all sports surfaces, and all artificial turf fields will have to maintain a G-Max below 115 (indoor) and 125 (outdoor) (Clegg) for the life of the product.

 

Therefore, we developed a system and a New Infill Product with no rubber and integrated the use of a third-party manufactured proprietary shock/drainage pad to be utilized under the playing surface. This pad allows for our system to produce Gmax scores under 80(need units) for the life of the product, which is well below the NFL minimum and the average new installation of sand and crumb rubber fields which average around Gmax of 110.

 

Base Construction. One of the key elements of any reliable turf athletic facility is the base construction. Conventional free-draining stone bases incorporate an inherent engineering conflict – drainage capacity vs. grade stability. In addition, the infiltration rate of the stone base cannot be accurately measured or predicted and degrades over time. To help eliminate these issues, we customize our drainage methodologies to meet specific project requirements and then we lay down our Replicated Grass products over the customized base. Our drainage methodology virtually eliminates engineering conflicts, practically eliminates invasive excavation, greatly reducing material import and export.

 

Below is an illustration of a typical installation design:

 

 

 

Warranty

 

The Company generally provides a warranty on products installed for up to 8 years with certain limitations and exclusions based upon the manufacturer’s product warranty.

 

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Sales and Marketing

 

Our current sales structure is comprised of four (4) discrete units, our direct sales representatives, distribution group partners, deal finders and our sports ambassadors. We currently have six (6) fully staffed sales territories; the Northeast, Southeast, Northcentral, Southcentral, Northwest and Southwest with each territory containing its own dedicated sales professional. Our four (4) distribution group partners representing a total of nice (9) sales people around the U.S. are also representing the Company every single day. We are currently contracted with eight (8) commission only deal finders who have extensive contacts in the sports industry and are making introductions for our direct sales team members to key decision makers around the U.S. Once a project lead is established, our distribution partners and deal finders bring in the local territory rep and drive the sales to close together as a team. We intend to continue to expand our direct sales organization in an effort to secure contracts in every major region of the United States. By securing contracts and establishing Sports Field in all major regions of the country, the Company will seek to leverage those client relationships and successful projects to aggressively market to all potential clients in these regions.

 

We have initiated an ambassador program that includes current and former professional athletes from the sports in which they played. We currently have agreements with Ray Lewis, a future Hall of Fame retired NFL player, Rick Honeycutt, former MLB pitcher and current pitching coach of the Los Angeles Dodgers and Chris Wingert, current 12-year veteran Major League Soccer player who is currently playing with the Salt Lake City Real (collectively our “Sports Ambassadors”). These professionals maintain high level contacts with the NFL, Major League Baseball, professional soccer leagues, and major universities and colleges. These contacts have introduced the Company to NFL owners, professional athletes, college presidents and athletic directors, head coaches and other important industry contacts.

 

Our complete sales team, including our Sports Ambassadors, are active through the United States and will continue to call on relationships with their contacts. The efforts of this group of twenty-seven (27) professionals comprise a major component of the Company’s sales and marketing initiatives and these contacts in the professional and collegiate sports industries represent a significant asset as the Company looks to continue its growth.

 

The Company has also engaged in targeted and innovative direct marketing to athletic directors, school business managers, college and high school athletic programs, high school football coaches, landscape architects, engineering firms, and municipal parks and recreation departments. This plan has its focus on our innovative products and construction methodologies.

 

Over a year ago, in advance of a full scale marketing campaign, we began an effort to completely rebrand the company. This rebranding included a renaming that would allow us to market to our strengths in the industry and speak more directly to the values we represent. Effective April 4, 2016, Sports Field Engineering, Inc., our wholly-owned subsidiary, changed its name to FirstForm, Inc. This name change along with a new iconic logo and branding campaign includes a new brand development phase and roll out through every form of market communication.

 

Since April 4, 2016, we have created new tools as part of a comprehensive marketing plan that includes a brand new website with a focused SEO plan, creation of our new trade show booth exhibit materials, professional collateral sales literature and Power Point. It also includes the automation of our sales process through the adoption of a new customer relationship management software and mobile sales tools, engaging the market with the use of technology in concert with our high level professional sales team.

 

We intend continued expansion of our highly-trained direct sales organization to secure contracts in every major region of the United States. By securing contracts and establishing Sports Field in all major regions of the country, the Company will seek to leverage those client relationships and successful projects to aggressively market to all potential clients in these regions.

 

Competition

 

The competitive landscape with respect to manufacturing is very well-established, with seven companies selling the majority of synthetic turf products. Based on management’s experience and knowledge of the synthetic turf industry, Field Turf is the leading manufacturer of synthetic turf athletic fields and synthetic turf products, with what we believe is roughly 45% of the overall market and is one of the only companies operating in this space that we characterize as a true manufacturer. Shaw Sports, Astroturf, LLC, Sprint Turf, Pro Grass, A-Turf, and Hellas Construction are all purveyors of synthetic turf athletic fields with varying degrees of manufacturing and assembly. We estimate that these six companies account for approximately 20% of synthetic turf athletic field sales. There remains over 20 other distributors, and to varying degrees manufacturers and assemblers, of synthetic turf products that account for the remaining 35% of the synthetic turf athletic fields market. These applications run the entire gamut of synthetic turf from residential and commercial landscaping, to golf applications, parks and recreation, private parks, airports, highway medians, downhill skiing, and other applications.

 

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The competitive landscape from an installation and construction perspective looks very different when compared to the landscape of the manufacturing side of the industry. In regard to installation and construction of artificial turf fields and athletic facilities, the industry is very much fragmented. There are no clear national leaders from the perspective of facilities construction. The bulk of the construction is provided by local or regional general contracting firms that specialize in certain phases of synthetic turf athletic fields and facility construction, but, to our knowledge, no competitors with significant market share offer a true turn-key operation, to include their own in-house engineering staff. Sports Field offers full service design and engineering services, with forensic studies of athletic facilities to properly prepare and recommend custom specifications based on specific circumstances unique to every facility. In addition, the Company will provide full service turn-key construction services for the facility depending on a client’s needs, or simply provide project management services for a particular project.

 

Trademarks

 

We currently have one registered trademark and two pending trademarks with the United States Patent and Trademark Office, which include FirstForm®, a second unnamed trademark under FirstForm (“Unnamed Infill Trademark”) and PrimePlay®, respectively. The application for PrimePlay is still pending and has been allowed by the USPTO and we anticipate that registration for this mark should issue in due course following our filing of evidence of use with the USPTO. The Unnamed Infill Trademark was filed as a second trademark under FirstForm® to serve as a placeholder until we decide on a name for our New Infill Product. At such time as the Company decides on a proper name for this product we will amend the Unnamed Infill Trademark accordingly.

 

We also believe we have certain common law rights with respect to the prior and continued usage of the names “Replicated Grass” and “Organite”.

 

Replicated Grass is our signature synthetic turf product.

 

Service Mark

 

The Company’s service mark is “Building the Best Comes First” which stands for the Company’s commitment to research and development. We have not yet applied to register this mark, but plan to do so.

 

Employees

 

We have 6 full time employees. Additionally, the Company employs 23 independent contractors, including 21 contract employees for sales and two for accounting and investor relations services. None of our employees are represented by a labor union.

 

Properties

 

Our principal office is located at 4320 Winfield Road, Suite 200, Warrenville, IL 60555. This office has approximately 500 sq. ft. office space rented at a rate of $1,100 per month. This space is utilized for office purposes and it is our belief that the space is adequate for our immediate needs. Additional space may be required as we expand our business activities. We do not foresee any significant difficulties in obtaining additional facilities if deemed necessary.

 

Where You Can Find More Information

 

Our website address is www.firstform.com. We do not intend our website address to be an active link or to otherwise incorporate by reference the contents of the website into this Report. The public may read and copy any materials the Company files with the U.S. Securities and Exchange Commission (the “SEC”) at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030. The SEC maintains an Internet website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

 

 8 

 

 

Item 1A. Risk Factors.

 

RISK FACTORS

 

RISKS RELATED TO OUR COMPANY

 

WE ARE NOT YET PROFITABLE AND MAY NEVER BE PROFITABLE.

 

Since inception through December 31, 2016, Sports Field has raised approximately $8,300,000 in capital. During this same period, we have recorded net accumulated losses totaling $13,957,580. As of December 31, 2016, we had a working capital deficit of $3,569,741. Our net losses for the three most recent fiscal years ended December 31, 2016, 2015 and 2014 have been $3,688,062, $3,338,157 and $3,832,856, respectively. Our ability to achieve profitability depends upon many factors, including the ability to develop and commercialize products. There can be no assurance that we will ever achieve profitable operations.

 

WE HAVE RECEIVED A GOING CONCERN OPINION FROM OUR AUDITORS.

 

As reflected in the financial statements we have received a going concern opinion from our auditors. As of December 31, 2016, the Company has cash of $15,388 and a working capital deficit of $3,569,741. Furthermore, the Company had a net loss and net cash used in operations of $3,688,062 and $2,266,721, respectively, for the year ended December 31, 2016 and an accumulated deficit totaling $13,957,580. Accordingly, these factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The ability of the Company to continue its operations as a going concern is dependent on management’s plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements.

 

WE HAVE A LIMITED OPERATING HISTORY.

 

We have been in existence for approximately four years. Our limited operating history means that there is a high degree of uncertainty in our ability to: (i) develop and commercialize our products; (ii) achieve market acceptance of our products; or (iii) respond to competition. Additionally, even if we do implement our business plan, we may not be successful. No assurances can be given as to exactly when, if at all, we will be able to recognize profits high enough to sustain our business. We face all the risks inherent in a new business, including the expenses, difficulties, complications, and delays frequently encountered in connection with conducting operations, including capital requirements. Given our limited operating history, we may be unable to effectively implement our business plan which could materially harm our business or cause us to cease operations.

 

WE MAY SUFFER LOSSES IF OUR REPUTATION IS HARMED.

 

Our ability to attract and retain customers and employees may be adversely affected to the extent our reputation is damaged. If we fail, or appear to fail, to deal with various issues that may give rise to reputational risk, we could harm our business prospects. These issues include, but are not limited to, appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money-laundering, privacy, record-keeping, sales and trading practices, and the proper identification of the legal, reputational, credit, liquidity, and market risks inherent in our business. Failure to appropriately address these issues could also give rise to additional legal risk to us, which could, in turn, increase the size and number of claims and damages asserted against us or subject us to regulatory enforcement actions, fines, and penalties.

 

 9 

 

 

WE DEPEND ON OUR CHIEF EXECUTIVE OFFICER AND THE LOSS OF HIS SERVICES COULD ADVERSELY AFFECT OUR BUSINESS.

 

We place substantial reliance upon the efforts and abilities of Jeromy Olson, our Chief Executive Officer. Though no individual is indispensable, the loss of the services of Mr. Olson could have a material adverse effect on our business, operations, revenues or prospects. We do not maintain key man life insurance on the life of Mr. Olson.

 

Our success depends on attracting and retaining qualified personnel and subcontractors in a competitive environment.

 

The success of our business is dependent on our ability to attract, develop and retain qualified personnel advisors and subcontractors. Changes in general or local economic conditions and the resulting impact on the labor market may make it difficult to attract or retain qualified individuals in the geographic areas where we perform our work. If we are unable to provide competitive compensation packages, high-quality training programs and attractive work environments or to establish and maintain successful partnerships, our ability to profitably execute our work could be adversely impacted.

 

Accounting for our revenues and costs involves significant estimates.

 

Accounting for our contract-related revenues and costs, as well as other expenses, requires management to make a variety of significant estimates and assumptions. Although we believe we have sufficient experience and processes to enable us to formulate appropriate assumptions and produce reasonably dependable estimates, these assumptions and estimates may change significantly in the future and could result in the reversal of previously recognized revenue and profit. Such changes could have a material adverse effect on our financial position and results of operations.

 

AS AN “EMERGING GROWTH COMPANY” UNDER APPLICABLE LAW, WE WILL BE SUBJECT TO LESSENED DISCLOSURE REQUIREMENTS, WHICH COULD LEAVE OUR STOCKHOLDERS WITHOUT INFORMATION OR RIGHTS AVAILABLE TO STOCKHOLDERS OF MORE MATURE COMPANIES.

 

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As such, we are eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not “emerging growth companies” including, but not limited to:

 

  only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;

 

  not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002; and

 

  reduced disclosure regarding certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation.

 

We may take advantage of these and other exemptions available to “emerging growth companies” or “smaller reporting companies”. We could remain an “emerging growth company” until the last day of the fiscal year following the fifth anniversary of this offering, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenue exceeds $1 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1 billion in nonconvertible debt during the preceding three-year period.

 

Because of these lessened regulatory requirements, our stockholders may be left without information or rights available to stockholders of more mature companies.

 

 10 

 

 

WE RECENTLY COMPLETED A DEBT FINANCING WHICH IS secured by the grant of a security interest in all of our assets and upon a default the lender may foreclose on all of our assets.

 

As further described in “Recent Developments” above, in July 2016, we entered into the Loan Agreement with Genlink, pursuant to which Genlink made available to the Company a Revolving Loan. Pursuant to the Loan Agreement, the Company issued the Genlink Note up to an aggregate principal amount of One Million Dollars ($1,000,000), of which the Company has borrowed $1,000,000 to date, which is payable on December 20, 2017. Additionally, pursuant to the Loan Agreement, the Company and Genlink entered into the Security Agreement, pursuant to which the Company granted Genlink a senior security interest in substantially all of the Company’s assets as security for repayment of the Revolving Loan. In the event of the Company’s failure to make payments or to otherwise comply with the terms of the Revolving Loan under the Security Agreement or the Genlink Note, Genlink can declare a default and seek to foreclose on the Company’s assets. If the Company is unable to repay or refinance such indebtedness it may be forced to cease operations and the holders of the Company’s securities may lose their entire investment.

 

Our contract backlog is subject to unexpected adjustments and cancellations and could be an uncertain indicator of our future earnings.

 

We cannot guarantee that the revenues projected in our contract backlog will be realized or, if realized, will be profitable. Projects reflected in our contract backlog may be affected by project cancellations, scope adjustments, time extensions or other changes. Such changes may adversely affect the revenue and profit we ultimately realize on these projects.

 

IF WE FAIL TO ESTABLISH AND MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROL, WE MAY NOT BE ABLE TO REPORT OUR FINANCIAL RESULTS ACCURATELY OR TO PREVENT FRAUD. ANY INABILITY TO REPORT AND FILE OUR FINANCIAL RESULTS ACCURATELY AND TIMELY COULD HARM OUR REPUTATION AND ADVERSELY IMPACT THE TRADING PRICE OF OUR SECURITIES.

 

Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. As a result of our small size, any current internal control deficiencies may adversely affect our financial condition, results of operation and access to capital.

 

We currently have insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements. Additionally, there is a lack of formal process and timeline for closing the books and records at the end of each reporting period and such weaknesses restrict the Company’s ability to timely gather, analyze and report information relative to the financial statements. As a result, our management has concluded that as of December 31, 2016, we have material weaknesses in our internal control procedures and our internal control over financial reporting was ineffective.

 

Because of the Company’s limited resources, there are limited controls over information processing. There is inadequate segregation of duties consistent with control objectives. Our Company’s management is composed of a small number of individuals resulting in a situation where limitations on segregation of duties exist. In order to remedy this situation, we would need to hire additional staff. Currently, the Company has begun to hire additional staff to facilitate greater segregation of duties. Management intends to begin documenting and formalizing controls and procedures.

 

RISKS RELATING TO OUR INDUSTRY

 

THE INSTALLATION OF SYNTHETIC TURF IS A HIGHLY COMPETITIVE INDUSTRY.

 

The installation of synthetic turf is a highly competitive and highly fragmented industry. Competing companies may be able to beat our bids for the more desirable projects. As a result, we may be forced to lower bids on projects to compete effectively, which would then lower the fees we can generate. We may compete for the management and installation of synthetic turf with many entities, including nationally recognized companies. Many competitors may have substantially greater financial resources than we do. In addition, certain competitors may be willing to accept lower fees for their services.

 

 11 

 

 

THE SUCCESS OF OUR BUSINESS IS SIGNIFICANTLY RELATED TO GENERAL ECONOMIC CONDITIONS AND, ACCORDINGLY, OUR BUSINESS COULD BE HARMED BY THE ECONOMIC SLOWDOWN AND DOWNTURN IN FINANCING OF PUBLIC WORKS CONTRACTS.

 

Our business is closely tied to general economic conditions. As a result, our economic performance and the ability to implement our business strategies may be affected by changes in national and local economic conditions. During an economic downturn funding for public contracts tends to decrease significantly thereby limiting the growth and opportunities available for new and established businesses in the synthetic turf industry. An economic downturn may limit the number of projects that we are able to bid on and limit the opportunities we have to penetrate the synthetic turf industry, stunting the Company’s growth prospects and having a material adverse effect on our business.

 

THE COMPANY’S BUSINESS MAY BE SUBJECT TO THE EFFECTS OF ADVERSE PUBLICITY AND NEGATIVE PUBLIC PERCEPTION RELATED TO SYNTHETIC TURF PRODUCTS.

 

Negative public perception regarding our industry resulting from, among other things, concerns raised by advocacy groups or the public in general about synthetic turf fields and the potential impact on human health related to certain chemical compounds found in the infill of such fields may negatively impact the sales of synthetic turf products. Despite not using any toxic or known harmful materials in our products, there can be no assurance that the Company will not be subject to adverse publicity or negative public perception surrounding the impact on human health of synthetic turf and related products in the future or that such negative public perception would not have an adverse or material negative impact on its financial position, results of operations or cash flows.

 

IF WE ARE UNABLE TO OBTAIN RAW MATERIALS IN A TIMELY MANNER OR IF THE PRICE OF RAW MATERIALS INCREASES SIGNIFICANTLY, PRODUCTION TIME AND PRODUCT COSTS COULD INCREASE, WHICH MAY ADVERSELY AFFECT OUR BUSINESS.

 

Synthetic turf made to our specifications can be purchased from a variety of manufacturers, there are several sources of all of our infill products and two manufacturers from which we can purchase expanded polypropylene shock and drainage pads. We do not anticipate any supply issues due to the fact that the raw materials to develop these products are readily available and currently not scarce. We do not have any exclusive supplier contracts for our products. We buy our pad, infill components and turf from manufacturers at the best price we can negotiate based on volume discounts but if the prices of the raw materials necessary to make these products, including the yarn, backing and infill in our products, rise significantly, we may be unable to pass on the increased cost to our customers. Our results of operations could be adversely affected if we are unable to obtain adequate supplies of raw materials in a timely manner or at reasonable cost. In addition, from time to time, we may need to reject raw materials that do not meet our specifications, resulting in potential delays or declines in output. Furthermore, problems with our raw materials may give rise to compatibility or performance issues in our products, which could lead to an increase in customer returns or product warranty claims. Errors or defects may arise from raw materials supplied by third parties that are beyond our detection or control, which could lead to additional customer returns or product warranty claims that may adversely affect our business and results of operations.

 

Failure to maintain safe work sites could result in significant losses.

 

Construction and maintenance sites are potentially dangerous workplaces and often put our employees and others in close proximity with mechanized equipment, moving vehicles, chemical and manufacturing processes, and highly regulated materials. On many sites, we are responsible for safety and, accordingly, must implement safety procedures. If we fail to implement these procedures or if the procedures we implement are ineffective, we may suffer the loss of or injury to our employees, as well as expose ourselves to possible litigation. Our failure to maintain adequate safety standards could result in reduced profitability or the loss of projects or clients, and could have a material adverse impact on our financial position, results of operations, cash flows and liquidity.

 

An inability to obtain bonding could have a negative impact on our operations and results.

 

We may be required to provide surety bonds securing our performance for some of our public and private sector contracts. Our inability to obtain reasonably priced surety bonds in the future could significantly affect our ability to be awarded new contracts, which could have a material adverse effect on our financial position, results of operations, cash flows and liquidity.

 

 12 

 

 

Design-build contracts subject us to the risk of design errors and omissions.

 

Design-build is increasingly being used as a method of project delivery as it provides the owner with a single point of responsibility for both design and construction. We generally do not subcontract design responsibility as we have our own architects and engineers in-house. In the event of a design error or omission causing damages, there is risk that the subcontractor or their errors and omissions insurance would not be able to absorb the liability. In this case we may be responsible, resulting in a potentially material adverse effect on our financial position, results of operations, cash flows and liquidity.

 

Many of our contracts have penalties for late completion.

 

In some instances, including many of our fixed price contracts, we guarantee that we will complete a project by a certain date. If we subsequently fail to complete the project as scheduled we may be held responsible for costs resulting from the delay, generally in the form of contractually agreed-upon liquidated damages. To the extent these events occur, the total cost of the project could exceed our original estimate and we could experience reduced profits or a loss on that project.

 

Strikes or work stoppages could have a negative impact on our operations and results.

 

Some of our projects require union labor and although we have not experienced strikes or work stoppages in the past, such labor actions could have a significant impact on our operations and results if they occur in the future.

 

Failure of our subcontractors to perform as anticipated could have a negative impact on our results.

 

We subcontract portions of many of our contracts to specialty subcontractors, but we are ultimately responsible for the successful completion of their work. Although we seek to require bonding or other forms of guarantees, we are not always successful in obtaining those bonds or guarantees from our higher-risk subcontractors. In this case we may be responsible for the failures on the part of our subcontractors to perform as anticipated, resulting in a potentially adverse impact on our cash flows and liquidity. In addition, the total costs of a project could exceed our original estimates and we could experience reduced profits or a loss for that project, which could have an adverse impact on our financial position, results of operations, cash flows and liquidity.

 

WE MUST ANTICIPATE AND RESPOND TO RAPID TECHNOLOGICAL CHANGE.

 

The market for our products and services is characterized by technological developments and evolving industry standards. These factors will require us to continually improve the performance and features of our products and services and to introduce new products and services, particularly in response to offerings from our competitors, as quickly as possible. As a result, we might be required to expend substantial funds for and commit significant resources to the conduct of continuing product development. We may not be successful in developing and marketing new products and services that respond to competitive and technological developments, customer requirements, or new design and production techniques. Any significant delays in product development or introduction could have a material adverse effect on our operations.

 

FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY OR TECHNOLOGY OR OBTAIN RIGHTS TO USE OTHERS’ INTELLECTUAL PROPERTY OR TECHNOLOGY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

 

We take steps to protect our intellectual property rights such as filing for patent protection where we deem appropriate. However, there is no guarantee that any technology we seek to protect will, in fact, be granted patent protection or any other form of intellectual property protection. Consequently, if we are unable to secure exclusive rights in such technology, our competitors may be free to use such technology as well. We may at times also be subject to the risks of claims and litigation alleging infringement of the intellectual property rights of others. There is no guarantee that we will be able to resolve such claims or litigations favorably, and may, as a result, be exposed to adverse decisions in such litigations which may require us to pay damages, cease using certain technologies or products, or license certain technology, which licenses may not be available to us on commercially reasonable terms or at all. Moreover, intellectual property litigation, regardless of the ultimate outcomes, is time-consuming and expensive and can result in the distraction of management personnel and expenditure of consider resources in defending against any such infringement claims.

 

 13 

 

 

WE RELY UPON THIRD-PARTY MANUFACTURERS AND SUPPLIERS, WHICH PUTS US AT RISK FOR THIRD-PARTY BUSINESS INTERRUPTIONS.

 

We rely on third-party manufactures and suppliers for the individual products that we use to create our system which we then sell to owners. We have dozens of tufting companies to choose from in manufacturing our specific design for turf and bid them out often. We also have multiple suppliers for all of our infill contents as well as several shock pad suppliers of which we have used two to three of each historically. The success for our business depends in part on our ability to retain such third-party manufacturers and suppliers to provide subparts for our products and materials for the services we provide. If manufacturers and suppliers fail to perform, our ability to market products and to generate revenue would be adversely affected. Our failure to deliver products and services in a timely manner could lead to customer dissatisfaction and damage to our reputation, cause customers to cancel contracts and to stop doing business with us.

 

LOWER THAN EXPECTED DEMAND FOR OUR PRODUCTS AND SERVICES WILL IMPAIR OUR BUSINESS AND COULD MATERIALLY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

 

Currently there are approximately 11,000 synthetic turf fields installed in the U.S. and approximately 1,000 new fields installed every year, according to the Synthetic Turf Council. Given that there are approximately 50,000 colleges and high schools in the U.S. with athletic programs, in so far as athletic fields are concerned, at some point in the future saturation will slow the growth of the industry. If we meet a lower demand for our products and services than we are expecting, our business, results of operations and financial condition are likely to be materially adversely affected. Moreover, overall demand for synthetic turf products and services in general may grow slowly or decrease in upcoming quarters and years because of unfavorable general economic conditions, decreased spending by schools and municipalities in need of synthetic turf products or otherwise. This may reflect a saturation of the market for synthetic turf. To the extent that there is a slowdown in the overall market for synthetic turf, our business, results of operations and financial condition are likely to be materially adversely affected.

 

WE MAY BE SUBJECT TO THE RISK OF SUBSTANTIAL ENVIRONMENTAL LIABILITY AND LIMITATIONS ON OUR OPERATIONS BROUGHT ABOUT BY THE REQUIREMENTS OF ENVIRONMENTAL LAWS AND REGULATIONS.

 

We may be subject to various federal, state and local environmental, health and safety laws and regulations concerning issues such as, wastewater discharges, solid and hazardous materials and waste handling and disposal, landfill operation and closure. While Sports Field believes that it is and will continue to manufacture products in compliance with all applicable environmental laws and regulations, the risks of substantial additional costs and liabilities related to compliance with such laws and regulations are an inherent part of our business.

 

Risks Relating to Ownership of our SECURITIES

 

WE CURRENTLY DO NOT INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK. AS A RESULT, YOUR ONLY OPPORTUNITY TO ACHIEVE A RETURN ON YOUR INVESTMENT IS IF THE PRICE OF OUR COMMON STOCK APPRECIATES.

 

We currently do not expect to declare or pay dividends on our common stock. In addition, our Revolving Loan with Genlink restricts our ability to declare or pay dividends on our common stock so long as it remains outstanding. As a result, your only opportunity to achieve a return on your investment will be if the market price of our common stock appreciates and you sell your shares and shares underlying your warrants at a profit.

 

 14 

 

 

YOU MAY EXPERIENCE DILUTION OF YOUR OWNERSHIP INTEREST DUE TO THE FUTURE ISSUANCE OF ADDITIONAL SHARES OF OUR COMMON STOCK.

 

We are in a capital intensive business and we do not have sufficient funds to finance the growth of our business or to support our projected capital expenditures. As a result, we will require additional funds from future equity or debt financings, including potential sales of preferred shares or convertible debt, to complete the development of new projects and pay the general and administrative costs of our business. We may in the future issue our previously authorized and unissued securities, resulting in the dilution of the ownership interests of holders of our common stock. We are currently authorized to issue 250,000,000 shares of common stock and 20,000,000 shares of preferred stock. We may also issue additional shares of common stock or other securities that are convertible into or exercisable for common stock in future public offerings or private placements for capital raising purposes or for other business purposes. The future issuance of a substantial number of common stock into the public market, or the perception that such issuance could occur, could adversely affect the prevailing market price of our common shares. A decline in the price of our common stock could make it more difficult to raise funds through future offerings of our common stock or securities convertible into common stock.

 

Our Certificate of Incorporation allows for our board of directors to create new series of preferred stock without further approval by our stockholders, which could have an anti-takeover effect and could adversely affect holders of our common stock.

 

Our authorized capital includes preferred stock issuable in one or more series. Our board of directors has the authority to issue preferred stock and determine the price, designation, rights, preferences, privileges, restrictions and conditions, including voting and dividend rights, of those shares without any further vote or action by stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible financings and acquisitions and other corporate purposes, could make it more difficult for a third party to acquire a majority of the voting power of our outstanding voting securities, which could deprive our holders of common stock to purchase common stock at a premium that they might otherwise realize in connection with a proposed acquisition of our company.

 

IF AND WHEN A LARGER TRADING MARKET FOR OUR SECURITIES DEVELOPS, THE MARKET PRICE OF SUCH SECURITIES IS STILL LIKELY TO BE HIGHLY VOLATILE AND SUBJECT TO WIDE FLUCTUATIONS, AND YOU MAY BE UNABLE TO RESELL YOUR SECURITIES AT OR ABOVE THE PRICE AT WHICH YOU ACQUIRED THEM.

 

The stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may not be able to sell your securities that you purchase in this offering at or above the price you paid for such securities. The market price for our securities may be influenced by many factors that are beyond our control, including, but not limited to:

 

  variations in our revenue and operating expenses;

 

  market conditions in our industry and the economy as a whole;

 

  actual or expected changes in our growth rates or our competitors’ growth rates;

 

  developments in the financial markets and worldwide or regional economies;

 

  variations in our financial results or those of companies that are perceived to be similar to us;

 

  announcements by the government relating to regulations that govern our industry;

 

  sales of our common stock or other securities by us or in the open market;

 

  changes in the market valuations of other comparable companies;

 

  general economic, industry and market conditions; and

 

  the other factors described in this “Risk Factors” section.

 

 15 

 

 

The trading price of our shares might also decline in reaction to events that affect other companies in our industry, even if these events do not directly affect us. Each of these factors, among others, could harm the value of your investment in our securities. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business, operating results and financial condition.

 

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

 

The trading market for our common stock and warrants will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our securities price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

 

Item 1B. Unresolved Staff Comments.

 

Not applicable.

 

Item 2. Properties.

 

Our principal office is located at 4320 Winfield Road, Suite 200, Warrenville, IL 60555. This office has approximately 500 sq. ft. office space rented at a rate of $1,100 per month. This space is utilized for office purposes and it is our belief that the space is adequate for our immediate needs. Additional space may be required as we expand our business activities. We do not foresee any significant difficulties in obtaining additional facilities if deemed necessary.

 

Item 3. Legal Proceedings.

 

Except as set forth below, there are no material proceedings to which any director or officer, or any associate of any such director or officer, is a party that is adverse to our Company or any of our subsidiaries or has a material interest adverse to our Company or any of our subsidiaries. No director or executive officer has been a director or executive officer of any business which has filed a bankruptcy petition or had a bankruptcy petition filed against it during the past ten years.

 

During the year the Company was engaged in an administrative proceeding against a former employee who was terminated from his positions with the Company for cause on May 12, 2014. The former employee claimed he was due between $24,000 and $48,000 in unpaid wages (the “Claim”).

 

On December 30, 2016, the Company entered into a mutual general release and settlement agreement (the "Settlement Agreement") with the former employee. Pursuant to the Settlement Agreement, the Company agreed to pay the former employee $45,000, payable in six equal installments of $7,500 on the first day of each month, beginning January 1, 2017 (the “Settlement Amount”). The Settlement Agreement also contains a general release by the former employee of the Company relating to the Claim, such release however is predicated on the Company making payments pursuant to the Settlement Agreement.

 

The Company has been put on notice by Brock USA, LLC d/b/a Brock International LLC (“Brock”) of patent infringement relating to certain products acquired by the Company from NexxField, Inc. (“NexxField”), namely, NexxField’s NexxPad turf underlayment panels. In July 2016, Brock commenced a patent infringement lawsuit against NexxField alleging that NexxField’s NexxPad panels infringe certain patents owned by Brock. In February 2017, the Company was informed by NexxField that it had settled its dispute with Brock. The Company was never named as a defendant in Brock’s patent infringement action and believes this matter to be resolved with no adverse effects to its business.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

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PART II

 

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

 

(a) Market Information

 

Our shares of Common Stock are quoted on the OTCQB under the symbol “SFHI.” The OTCQB is a quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter (“OTC”) equity securities. An OTCQB equity security is not listed or traded on a national securities exchange.

 

The following table sets forth the high and low bid price for our common stock for each quarter during the 2016 and 2015 fiscal years. The prices reflect inter-dealer quotations, do not include retail mark-ups, markdowns or commissions and do not necessarily reflect actual transactions.

 

Fiscal 2016  High   Low 
First Quarter (January 1 – March 31)  $1.48   $0.11 
Second Quarter (April 1 – June 30)  $1.45   $0.35 
Third Quarter (July 1 – September 30)  $0.75   $0.31 
Fourth Quarter (October 1 – December 31)  $0.49   $0.23 

 

Fiscal 2015  High   Low 
First Quarter (January 1 – March 31)  $2.00   $1.00 
Second Quarter (April 1 – June 30)  $2.00   $1.10 
Third Quarter (July 1 – September 30)  $1.50   $1.10 
Fourth Quarter (October 1 – December 31)  $1.50   $0.11 

 

(b) Holders of Common Equity

 

As of March 31, 2017, there were 239 stockholders of record. An additional number of stockholders are beneficial holders of our Common Stock in “street name” through banks, brokers and other financial institutions that are the record holders. 

 

(c) Dividend Information

 

We have not paid any cash dividends to our shareholders. The declaration of any future cash dividends is at the discretion of our board of directors and depends upon our earnings, if any, our capital requirements and financial position, our general economic conditions, and other pertinent conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.

 

(d) Securities Authorized for Issuance under Equity Compensation Plans  

 

Below is a description of the Company’s compensation plan adopted in 2016.

 

2016 Plan

 

The purpose of awards under the 2016 Plan is to attract and retain talented employees and the services of select non-employees, further align employee and stockholder interests and closely link employee compensation with Company performance. Eligible participants under the 2016 Plan will be such full or part-time officers and other employees, directors, consultants and key persons of the Company and any Company subsidiary who are selected from time to time by the Board or committee of the Board authorized to administer the 2016 Plan, as applicable, in its sole discretion.

 

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The Plan provides for the issuance of up to 2,500,000 shares of common stock of the Company through the grant of non-qualified options (the “Non-qualified Options”), incentive options (the “Incentive Options” and together with the Non-qualified Options, the “Options”) and restricted stock (the “Restricted Stock”) and unrestricted stock (the “Unrestricted Stock”) to directors, officers, consultants, attorneys, advisors and employees. The 2,500,000 shares available under the 2016 Plan represent approximately 15% of the Company’s issued and outstanding common stock as of October 4, 2016. The Board believes the 2,500,000 shares that may be awarded under the 2016 Plan should be sufficient to cover grants through at least the end of the fiscal year 2018.

 

The 2016 Plan shall be administered by a committee consisting of two or more independent, non-employee and outside directors (the “Committee”). In the absence of such a Committee, the Board shall administer the 2016 Plan. The 2016 Plan is currently being administered by the Board but it is intended for the Compensation Committee to administer the 2016 Plan upon the completion of this offering.

 

Options are subject to the following conditions:

 

(i) The Committee determines the strike price of Incentive Options at the time the Incentive Options are granted. The assigned strike price must be no less than 100% of the Fair Market Value (as defined in the Plan) of the Company’s Common Stock. In the event that the recipient is a Ten Percent Owner (as defined in the Plan), the strike price must be no less than 110% of the Fair Market Value of the Company.

 

(ii) The strike price of each Non-qualified Option will be at least 100% of the Fair Market Value of such share of the Company’s Common Stock on the date the Non-qualified Option is granted.

 

(iii) The Committee fixes the term of Options, provided that Options may not be exercisable more than ten years from the date the Option is granted, and provided further that Incentive Options granted to a Ten Percent Owner may not be exercisable more than five years from the date the Incentive Option is granted.

 

(iv) The Committee may designate the vesting period of Options. In the event that the Committee does not designate a vesting period for Options, the Options will vest in equal amounts on each fiscal quarter of the Company through the five (5) year anniversary of the date on which the Options were granted. The vesting period accelerates upon the consummation of a Sale Event (as defined in the Plan).

 

(v) Options are not transferable and Options are exercisable only by the Options’ recipient, except upon the recipient’s death.

 

(vi) Incentive Options may not be issued in an amount or manner where the amount of Incentive Options exercisable in one year entitles the holder to Common Stock of the Company with an aggregate Fair Market value of greater than $100,000.

 

Awards of Restricted Stock are subject to the following conditions:

 

(i) The Committee grants Restricted Stock Options and determines the restrictions on each Restricted Stock Award (as defined in the Plan). Upon the grant of a Restricted Stock Award and the payment of any applicable purchase price, grantee is considered the record owner of the Restricted Stock and entitled to vote the Restricted Stock if such Restricted Stock is entitled to voting rights.

 

(ii) Restricted Stock may not be delivered to the grantee until the Restricted Stock has vested.

 

(iii) Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of except as provided in the Plan or in the Award Agreement (as defined in the Plan).

 

 18 

 

 

As of December 31, 2016, the Company issued the following stock options and grants under the Plan:

 

Equity Compensation Plan Information

 

Plan category  Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights and
number of shares
of restricted stock
   Weighted average
exercise price of outstanding
options, warrants
and rights (1)
   Number of
securities
remaining available
for future issuance
 
Equity compensation plans approved by security holders under the Plan   350,000   $1.61    1,870,000 
                
Equity compensation plans not approved by security holders   622,500   $1.02    - 
                
Total   972,500   $1.23    1,870,000 

 

(1) Excludes shares of restricted stock issued under the Plan.

 

Rule 10B-18 Transactions

 

During the year ended December 31, 2016, there were no repurchases of the Company’s common stock by the Company.

 

Recent Sales of Unregistered Securities

 

During the year ended December 31, 2016, we have issued the following securities which were not registered under the Securities Act and not previously disclosed in the Company’s Quarterly Reports on Form 10-Q or Current Reports on Form 8-K. Unless otherwise indicated, all of the share issuances described below were made in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act for transactions not involving a public offering:

 

Issuance of Common Stock in Exchange for Services 

 

On December 31, 2016, the Company issued 1,500 shares of common stock to an employee for services at a fair value of $585. The shares were valued based upon the quoted closing trading price on the date of issuance. 

 

During the period July 1, 2016 through December 31, 2016, the Company issued 131,000 shares of common stock to 4 sales consultants, for services rendered at a fair value of $54,910. The shares were valued based upon the quoted closing trading price on the date of issuance.

 

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On December 1, 2016 the Company issued 25,000 shares of its common stock at a fair value of $7,500 to an advisory board member pursuant to his agreement with the Company and service in such capacity. The shares were valued based upon the quoted closing trading price on the date of issuance. 

 

On October 1, 2016 the Company issued 7,317 shares of its common stock at a fair value of $2,414 to a consultant pursuant to his agreement with the Company and service in such capacity. The shares were valued based upon the quoted closing trading price on the date of issuance.

 

During the period July 1, 2016 through December 31, 2016 the Company issued 355,093 shares of its common stock at a fair value of $141,308 for services related to investor relations. The shares were valued based upon the quoted closing trading price on the date of issuance.

 

Issuance of Stock Options for Services

 

On November 3, 2016, the Company issued our CEO 175,000 common stock options for services pursuant to his employment agreement. 100,000 of the options vested immediately at a strike price of $1.50 and 75,000 of the options vest on December 31, 2016 at a strike price of $1.75.

 

On November 3, 2016, the Company issued Nexphase Global 175,000 common stock options for services. 100,000 of the options vested immediately at a strike price of $1.50 and 75,000 of the options vest on December 31, 2016 at a strike price of $1.75.

 

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Item 6. Selected Financial Data.

 

Not applicable.

 

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

 

Summary of Statements of Operations for the Years Ended December 31, 2016 and 2015:

 

   Year Ended 
   December 31,
2016
   December 31,
2015
 
         
Revenue  $3,225,277   $3,941,833 
Gross profit (loss)  $311,533   $(578,164)
Operating expenses  $(3,474,349)  $(2,705,568)
Loss from operations  $(3,162,816)  $(3,283,732)
Other income (expense)  $(525,246)  $(54,425)
Net loss  $(3,688,062)  $(3,338,157)
Loss per common share - basic and diluted  $(0.23)  $(0.24)

 

Revenue

 

Revenue was $3,225,277 for the year ended December 31, 2016, as compared to $3,941,833 for the year ended December 31, 2015, a decrease of $716,556. The substantial decrease in revenue was primarily due to contracts entered into during prior quarters winding down during the second quarter. New contracted projects were started late in third quarter and a portion of the associated revenue will be recognized during the first quarter of 2017.

 

Gross Profit (Loss)

 

The Company generated a gross profit (loss) of $311,533, resulting in a gross profit margin of 16.5%, during the year ended December 31, 2015 as compared to a gross profit (loss) of $(578,164) and a negative gross profit margin of (17.9%) during the year ended December 31, 2015. Gross profit percentage increased from (17.9%) for the year ended December 31, 2015 to 16.5% for the year ended December 31, 2016 due to an increase in overall estimated profit margins on jobs entered into subsequent to June 30, 2015. During the prior period projects were bid at lower than current acceptable margins in order to place fields in certain strategic geographic locations that the Company believed could be used for the purpose of marketing its products. In-addition the Company recorded a loss on write-off of obsolete inventory of $69,166 during the year ended December 31, 2015. 

 

 21 

 

 

Operating Expenses

 

Operating expenses consist primarily of compensation and related costs for personnel and facilities, and include costs related to our facilities, finance, human resources, and fees for professional services. Professional services are principally comprised of outside legal, audit, marketing, investor relations and outsourcing services.

 

Operating expenses increased by 28% during the year ended December 31, 2016, as compared to the year ended December 31, 2015. The overall $768,781 increase in operating expenses is primarily attributable to the following approximate net increases (decreases) in operating expenses:

 

An increase in stock based compensation expense of $495,000. The increase was primarily due to an increase in stock based awards issued subsequent to December 31, 2015 which are being expensed over the term of the contract. The overall increase was partially offset due to a decrease in fair value of the Company’s common stock during the third and fourth quarter of 2016. Unvested equity awards granted to consultants are revalued at the end of each reporting period until they vest and are expensed on a straight-line basis over the term of the agreement.

 

An increase of research and development expenses of $90,897. Research and development expenses consist primarily of costs incurred at our field testing sites. We expense research and development costs as incurred.

 

  An increase in professional fees of $175,000 (excluding stock based compensation). In the current period the Company incurred an increase in consulting fees related to investor relations and an increase in accounting, auditing and legal fees primarily related to work performed on the Company’s registration statement which was has been put on hold. Accordingly, all legal and professional fees incurred relating to the registration statement have been expensed during the year ended December 31, 2016. These increases were partially offset by decreases in consulting fees related to business development, financial advisory services and sales consultants.

 

A decrease in travel and travel related expenses of $87,000 as a result of decreased sales and project management travel expenses.

 

A decrease in warranty costs of $53,000. During the year ended December 31, 2016 the Company incurred warranty costs of approximately $178,100. A substantial amount of the warranty costs incurred during the year ended December 31, 2016 related to subgrade infill materials used on a 2015 project. Since then, neither this supplier nor this infill material has been used again. During the year ended December 31, 2015 the Company incurred costs of approximately $231,400 relating to the installation of materials by a subcontractor that has been released from the Company. The Company has implemented policies and procedures to avoid these costs in the future.

 

An increase in advertising, marketing and marketing related expenses of $50,000. The Company is focusing on building name recognition in the industry.

 

An increase in insurance expense of $84,000 due to increases in existing policy premiums and additional policies put in place.

 

Other Income (Expenses)

 

Other income (expense) consists primarily of interest expense related to the Company’s notes payable.

 

Other income (expenses), net for the year ended December 31, 2016, were $(525,246), as compared to $(54,425) for the year ended December 31, 2015. For the year ended December 31, 2016 other income (expenses) consisted of $(484,587) in interest expense, a loss on extinguishment of debt of $(45,000) and miscellaneous income of $4,341. For the year ended December 31, 2015 other income (expenses) consisted of $(91,759) in interest expense, a loss on abandonment of furniture, fixture and equipment of $(11,826), a gain on disposition of fabrication molds of $44,832 and miscellaneous income of $4,328. 

 

 22 

 

 

Net Loss

 

The net loss for the year ended December 31, 2016 was $(3,688,062), or a basic and diluted loss per share of $(0.23), as compared to a net loss of $(3,338,157), or a basic and diluted loss per share of $(0.24), for the year ended December 31, 2015. The increase in the loss compared to the prior year is primarily attributable to the increase in operating expenses and increase in other income (expense) items discussed above partially offset by an increase in gross profit.

 

Liquidity and Capital Resources

 

The following table summarizes total current assets, liabilities and working capital at December 31, 2016, compared to December 31, 2015:

 

   December 31,
2016
  

December 31,

2015

  

Increase/

(Decrease)

 
Current Assets  $693,613   $359,930   $333,683 
Current Liabilities  $4,263,354   $2,876,965   $1,386,389 
Working Capital (Deficit)  $(3,569,741)  $(2,517,035)  $1,052,706 

 

At December 31, 2016, we had a working capital deficit of $(3,569,741) as compared to working capital deficit of $(2,517,035) at December 31, 2015, a working capital deficit increase of $1,052,706. During the year ended December 31, 2016 the Company received approximately $1,591,407 in net proceeds from the private placement of common stock through Spartan Capital, $150,000 in proceeds from convertible notes and $1,100,000 in proceeds from promissory notes. The Company used the proceeds to pay down existing debt and vendor liabilities and to fund operations due to the Company’s continued operating losses and negative cash flows from operations during the year ended December 31, 2016.

 

Summary Cash flows for the years ended December 31, 2016 and 2015:

 

   Year Ended 
   December 31,
2016
   December 31,
2015
 
Net cash used in operating activities  $(2,266,721)  $(1,408,685)
Net cash used in investing activities  $-   $- 
Net cash provided by financing activities  $2,220,709   $946,593 

 

Cash Used in Operating Activities

 

Our primary uses of cash from operating activities include payments to contractors for project costs, consultants, legal and professional fees, marketing expenses and other general corporate expenditures.

 

Cash used in operating activities consist of net loss adjusted for certain non-cash items, primarily equity-based compensation expense, depreciation expense, loss on extinguishment of debt, gains and losses on dispositions of fixed assets, amortization of debt issuance costs and amortization of debt discount, as well as the effect of changes in working capital and other activities.

 

The adjustments for the non-cash items increased from the year ended December 31, 2015 to the year ended December 31, 2016 due primarily to an increase in equity-based compensation, a loss on extinguishment of debt and the amortization of debt discount and debt issuance costs on debt agreements entered into during the year ended December 31, 2016. In addition, the net decrease in cash from changes in working capital activities from the year ended December 31, 2015 to the year ended December 31, 2016 primarily consisted of an increase in accounts receivable primarily due to projects started during the end of the third quarter of 2016, a decrease in prepaid expenses, disregarding prepaid equity based compensation, and a decrease in accounts payable and accrued expenses primarily due to the Company paying down vendor liabilities with the proceeds received from the private placement of the Company’s common stock along with proceeds from promissory notes during the year ended December 31, 2016. 

 

 23 

 

 

Cash Provided by Financing Activities

 

Net cash provided by financing activities for the year ended December 31, 2016 and 2015 was $2,220,709 and $946,593, respectively. During the year ended December 31, 2016, the Company had the following financing transactions: i) received $150,000 in gross proceeds from the issuance of convertible notes and repaid $(150,000) towards convertible notes; ii) received $1,100,000 in gross proceeds from the issuance of promissory notes and repaid $(426,198) in promissory notes; iii) received $1,591,407 in net proceeds from common stock subscriptions; and iv) paid $(44,500) in debt issuance costs. During the year ended December 31, 2015, the Company had the following financing transactions: i) received $585,000 in gross proceeds from the issuance of convertible notes; ii) received $355,993 in gross proceeds from the issuance of promissory notes and repaid $(50,000) in promissory notes; iii) received $113,100 in net proceeds from common stock subscriptions; and iv) paid $(57,500) in debt issuance costs.

 

Going Concern

 

As reflected in the accompanying consolidated financial statements, as of December 31, 2016 the Company had a working capital deficit of $3,569,741 and net cash used in operations during the year ended December 31, 2016 of $2,266,721. Furthermore, the Company incurred net losses of approximately $3.7 million for the year ended December 31, 2016 and $3.3 million and $3.8 million for years ended December 31, 2015 and 2014, respectively, and had an accumulated deficit of $13.9 million at December 31, 2016. Substantially all of our accumulated deficit has resulted from losses incurred on construction projects, costs incurred in connection with our research and development and general and administrative costs associated with our operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

We expect that for the next 12 months, our operating cash burn will be approximately $2.5 million, excluding repayments of existing debts in the aggregate amount of $1.78 million. Our cash requirements relate primarily to working capital needed to operate and grow our business, including funding operating expenses and continued development and expansion of our products/services. Our ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including the timing and size of awarded contracts; the timing and amount of our operating expenses; the timing and costs of working capital needs; the timing and costs of expanding our sales team and business development opportunities; the timing and costs of developing a marketing program; the timing and costs of warranty and other post-implementation services; the timing and costs of hiring and training construction and administrative staff; the extent to which our brand and construction services gain market acceptance; the extent of our ongoing and any new research and development programs; and changes in our strategy or our planned activities.

 

We have experienced and continue to experience negative cash flows from operations and we expect to continue to incur net losses in the foreseeable future.

 

The Company will require additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives. The Company believes its current available cash along with anticipated revenues may be insufficient to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. If we are not able to obtain financing when needed, we may be unable to carry out our business plan. As a result, we may have to significantly limit our operations and our business, financial condition and results of operations would be materially harmed.

 

To date, we have funded our operational short-fall primarily through private offerings of common stock, convertible notes and promissory notes, our line of credit and factoring of receivables. The Company believes it has potential financing sources in order to raise the capital necessary to fund operations through fiscal year end 2017.

 

The Company’s recent capital raising transactions include the following:

 

The Company entered into an exclusive Financial Advisory and Investment Banking Agreement with Spartan Capital Securities, LLC (“Spartan”) effective October 1, 2015 (the “2015 Spartan Advisory Agreement”). Pursuant to the 2015 Spartan Advisory Agreement, Spartan acted as the Company’s financial advisor and placement agent and assisted the Company in connection with a best efforts private placement (the “2015 Financing”) of up to $3.5 million or 3,181,819 shares (the “Shares”) of the common stock of the Company at $1.10 per Share. The 2015 Spartan Advisory Agreement expires on January 1, 2019.

 

 24 

 

 

From December 28, 2015 through July 22, 2016, the Company sold 1,833,377 shares common stock to accredited investors in exchange for $2,016,712 in gross proceeds in connection with the private placement of the Company’s stock.

 

In connection with the private placement the Company incurred placement agent fees of $262,204 and legal fees of $50,000. In addition, 183,338 five year warrants with an exercise price of $1.10 were issued to the placement agent. The Company valued the warrants on the commitment date using a Black-Scholes-Merton option pricing model. The value of the warrants was a direct cost of the private placement and has been recorded as a reduction in additional paid in capital.

 

On July 14, 2016, the Company closed a Credit Agreement (the “Credit Agreement”) by and among the Company and FirstForm and Genlink Capital, LLC, as lender (“Genlink”). Pursuant to the Credit Agreement, Genlink agreed to loan the Company up to a maximum of $1 million for general operating expenses. An initial amount of $670,000 was funded by Genlink at the closing of the Credit Agreement. Any increase in the amount extended to the Company shall be at the discretion of Genlink.

 

The amounts borrowed pursuant to the Credit Agreement are evidenced by a Revolving Note (the “Revolving Note”) and the repayment of the Revolving Note is secured by a first position security interest in substantially all of the Company’s assets in favor of Genlink, as evidenced by a Security Agreement by and among the Company and Genlink (the “Security Agreement”). The Revolving Note is due and payable, along with interest thereon, on December 20, 2017, and bears interest at the rate of 15% per annum, increasing to 19% upon the occurrence of an event of default. The Company incurred loan fees of approximately $44,500 for entering into the Credit Agreement. The Company must pay a minimum of $75,000 in interest over the life of the loan. The principal balance on the note as of the date hereof is $1,000,000.

 

In addition to the aforementioned current sources of capital that will provide additional short term liquidity, the Company is currently exploring various other alternatives, including debt and equity financing vehicles, strategic partnerships, government programs that may be available to the Company, as well as trying to generate additional sales and increase margins. However, at this time the Company has no commitments to obtain any additional funds, and there can be no assurance such funds will be available on acceptable terms or at all. If the Company is unable to obtain additional funding and improve its operations, the Company’s financial condition and results of operations may be materially adversely affected and the Company may not be able to continue operations.

 

Additionally, even if we raise sufficient capital through additional equity or debt financing, strategic alternatives or otherwise, there can be no assurances that the revenue or capital infusion will be sufficient to enable us to develop our business to a level where it will be profitable or generate positive cash flow. The Company has begun work on its currently contracted jobs and anticipates recognizing that revenue and increasing its gross margin on these current projects, however, there can be no assurance that higher sales volume and increasing margins will indefinitely continue into the foreseeable future.

 

If we incur additional debt, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting funds available for our business activities. The terms of any debt securities issued could also impose significant restrictions on our operations. Broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance, and may adversely impact our ability to raise additional funds.

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern. The ability of the Company to meet its total liabilities of $4.3 million at December 31, 2016, and to continue as a going concern is dependent upon the availability of future funding, continued growth in sales along with increased profitability on sales. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. 

 

 25 

 

 

Off-Balance Sheet Arrangements

 

As of December 31, 2016 and December 31, 2015, the Company had no off-balance sheet arrangements.

 

Critical Accounting Policies

 

We believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

 

Revenue and Cost Recognition

 

Revenues from construction contracts are included in contract revenue in the condensed consolidated statements of operations and are recognized under the percentage-of-completion accounting method. The percent complete is measured by the cost incurred to date compared to the estimated total cost of each project. This method is used as management considers expended cost to be the best available measure of progress on these contracts, the majority of which are completed within one year, but may occasionally extend beyond one year. Inherent uncertainties in estimating costs make it at least reasonably possible that the estimates used will change within the near term and over the life of the contracts.

 

Contract costs include all direct material and labor costs and those indirect costs related to contract performance and completion. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. General and administrative costs are charged to expense as incurred.

 

Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income. Such revisions are recognized in the period in which they are determined.

 

Costs and estimated earnings in excess of billings are comprised principally of revenue recognized on contracts (on the percentage-of-completion method) for which billings had not been presented to customers because the amounts were not billable under the contract terms at the balance sheet date. In accordance with the contract terms, any unbilled receivables at period end will be billed subsequently. Amounts are billed based on contractual terms. Billings in excess of costs and estimated earnings represent billings in excess of revenues recognized.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. The Company’s significant estimates and assumptions include the accounts receivable allowance for doubtful accounts, warranty reserve, percentage of completion revenue recognition method, the useful life of fixed assets, assumptions used in the fair value of stock-based compensation and the valuation allowance relating to the Company’s deferred tax assets. 

 

Stock-Based Compensation

 

The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Awards granted to directors are treated on the same basis as awards granted to employees.

 

 26 

 

 

Fair Value of Financial Instruments

 

Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. The carrying value of cash and cash equivalents, accounts payable and accrued liabilities, and short-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.

 

New Accounting Pronouncements

 

For information regarding new accounting pronouncements that were adopted and new accounting pronouncements that were issued during the year ended December 31, 2016, see the "Recently Adopted Accounting Guidance" and "Recent Accounting Guidance Not Yet Adopted" sections of Note 2, “Significant Accounting Policies” to our audited consolidated financial statements included in Part II, Item 8 of this Form 10-K.

 

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

 

We do not hold any derivative instruments and do not engage in any hedging activities.

 

Item 8. Financial Statements.

 

Our consolidated financial statements are contained in pages F-1 through F-29 which appear at the end of this Annual Report.

 

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

 

There are no reportable events under this item for the year ended December 31, 2016.

 

Item 9A. Controls and Procedures.

 

(a) Evaluation of Disclosure and Control Procedures

 

Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(c) and 15d-15(e) under the Exchange Act) are not effective in order to ensure that information required to be disclosed by us in report that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b) Management’s Report on Internal Control over Financial Reporting

 

This Company’s management is responsible for establishing and maintaining internal controls over financial reporting and disclosure controls. Internal Control Over Financial Reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal 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 generally accepted accounting principles and includes those policies and procedures that:

 

(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
   
(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the registrant; and
   

 27 

 

 

(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is appropriately recorded, processed, summarized and reported within the specified time periods.

 

Management has conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016, based on the framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

Based on this assessment, management concluded that as of the period covered by this Annual Report on Form 10-K, it had material weaknesses in its internal control procedures.

 

As of period covered by this Annual Report on Form 10-K, we have concluded that our internal control over financial reporting was ineffective. The Company’s assessment identified certain material weaknesses which are set forth below:

 

Functional Controls and Segregation of Duties

 

Because of the Company’s limited resources, there are limited controls over information processing.

 

There is an inadequate segregation of duties consistent with control objectives. Our Company’s management is composed of a small number of individuals resulting in a situation where limitations on segregation of duties exist. In order to remedy this situation, we would need to hire additional staff to provide greater segregation of duties. Currently, it is not feasible to hire additional staff to obtain optimal segregation of duties. Management will reassess this matter in the following year to determine whether improvement in segregation of duty is feasible. 

 

Accordingly, as the result of identifying the above material weakness we have concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company’s internal controls.

 

Management believes that the material weaknesses set forth above were the result of the scale of our operations and are intrinsic to our small size. Management believes these weaknesses did not have a material effect on our financial results and intends to take remedial actions upon receiving funding for the Company’s business operations.

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report herein.

 

(c) Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information.

 

None.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

Directors and Executive Officers

 

The following table and biographical summaries set forth information, including principal occupation and business experience, about our directors and executive officers at March 31, 2017:

 

Name   Age   Position   Officer and/or Director Since
             
Jeromy Olson   47   Chairman, Chief Executive Officer and Director   2014
             
Tracy Burzycki   46   Director   2015
             
Glenn Appel   45   Director   2015
             
Glenn Tilley   55   Director   2016

 

Jeromy Olson, Chief Executive Officer, Chairman, Director

 

Mr. Jeromy Olson, age 47, combines over 20 years in senior management as well sales and sales training. Mr. Olson is currently an owner of NexPhase Global, a sales management and consulting firm that he founded in 2013. From 2012 to 2013, Mr. Olson was Vice President of Sales and Marketing for Precision Plating Inc., a company involved in precious metal fabrication. From 2007 to 2012, Mr. Olson was Area Sales Manager for Beckman Coulter, a Clinical Diagnostic company that focused on hospital laboratory equipment manufacturing.

 

Mr. Olson has an undergraduate degree from Northern Illinois University.

 

The Board believes that Mr. Olson's extensive experience in management, talent acquisition and development, sales strategy and implementation and market analysis will be critical in supporting the Company's growth plans. Additionally, the Board believes that Mr. Olson’s combination of financial reporting, predictive modeling and complex forecasting experience will be of great value to the Company as it continues to grow.

 

Tracy Burzycki, Director

 

Ms. Tracy Burzycki, age 46, brings over 15 years of experience in sales management, strategic planning, market evaluation and market penetration, following an eight-year career as a scientist.   From 2000 through the present, Ms. Burzycki has held various positions with Beckman Coulter, a company that develops, manufactures and markets products that simplify, automate and innovate complex biomedical testing, where she has been the Director, National Sales and Global Accounts from July 2011 through December 2014 and is currently the Director, Americas Sales-Life Sciences.

 

She has an undergraduate degree from the University of Connecticut and an MBA from Columbia University – Columbia Business School.

 

The Board believes that Ms. Burzycki’s extensive experience in sales management, strategic planning, market evaluation and market penetration will enable the Company to accelerate its growth in several key areas.

 

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Glenn Appel, Director

 

Mr. Appel, age 45, is the current Chief Executive Officer and President of Campania International, Inc. (“Campania”), one of the preeminent suppliers of garden elements in North America. For the last eleven years, as the Chief Executive Officer and President of Campania, Mr. Appel has fostered exceptional sales growth and constructed a highly effective management team. Prior to joining Campania, Mr. Appel held various management positions with Crayola, LLC.  Mr. Appel has an undergraduate degree from Lehigh University and an MBA from Columbia University.

 

In evaluating Mr. Appel’s specific experience, qualifications, attributes and skills in connection with his appointment as a member of the Board of the Company, the Board considered his expertise in human resources and business execution, as well as his extensive experience as Chief Executive Officer and President of Campania International. 

 

Glenn Tilley, Director

 

Mr. Tilley, age 55, combines over 30 years of experience in Sports Management and Sports and Entertainment Marketing leadership roles. Currently, Mr. Tilley is the Founder and CEO of The Champions Network, a business acceleration firm with a focus in the sports and health and wellness space. Previously, he was CEO of Ripken Baseball from 2010 to 2014, a baseball management and sports marketing firm where he established and expanded The Ripken Brand on a national level. Previous to his role at Ripken Baseball, Mr. Tilley, as President and CEO of Becker Group from 2001 to 2009, led the transformation of the firm into an international success as a leading entertainment and experiential marketing firm with clients such as The Walt Disney Company, Warner Brothers, The Discovery Channel, The Taubman Company, Simon Properties, and Westfield Properties. Before being promoted to President and CEO, Mr. Tilley was Vice President of Sales for Becker Group from 1992 through 2000. Previous to his role at Becker Group, Mr. Tilley was an executive at Sports Management firms Shapiro and Robinson and Eastern Athletic Services that represented and managed professional athletes in professional baseball and professional football.

 

Mr. Tilley graduated from Princeton University in 1984 with a bachelor’s degree in Political Science, where he was an All-Ivy League football player.  

 

In evaluating Mr. Tilley’s specific experience, qualifications, attributes and skills in connection with his appointment as a member of the Board of the Company, the Board considered his expertise and many roles within the sports industry, as well as his extensive management experience at different sports related companies. 

 

Key Employees

 

John Rombold, Director of Project Management

 

Mr. John Rombold, age 46, combines over 20 years of experience in Construction Management including a 10 year career in Athletic Field Construction. Previously, he had been involved in 4 companies in the Commercial Construction Industry holding positions including Director of Construction, Project Manager, Operations Manager, and Sales Engineer. From 2014 through 2016, Mr. Rombold was the Operations Manager for Northeast Turf, a Synthetic Turf Installation company. From 2007 to 2012, he held roles of Director of Construction and Project Manager for ProGrass LLC, a company involved in the construction of Athletic Facilities. From 2002 to 2006, he was a Construction Manager for the 84 Lumber Company, a Retail Company that focused on Building Materials. Previously, he held several positions of increasing responsibility with the General Electric Company. Mr. Rombold is currently an ASBA Certified Field Builder for Synthetic Turf, a LEED Green Associate, and a Licensed Pennsylvania Real Estate Agent. He is also a member of the Pittsburgh Green Building Alliance. He has an undergraduate degree in Business Administration from Clarion University of Pennsylvania.

 

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Scott Douglas Allen, Director of Architecture & Engineering

 

Mr. Scott Douglas Allen, AIA NCARB, Age 45, combines over 23 years of experience in the Architecture / Engineering / Construction Industry, including 10 years in senior management positions. In addition to his current, Director of Architecture & Engineering for FirstForm Inc., Mr. Allen has been Managing Principal at S|D|A Architects from 2005 to 2016 and is also currently a partner at SDA/3 Properties Realty Group. Concurrent to that experience, Mr. Allen performed as an Engineering Instructor for 5 years at Pennsylvania State University. Previous to his position with S|D|A Architects & Penn State University, Mr. Allen worked as an Architectural Project Manager for various A/E companies from 1996–2005, most notably, the world renowned and awarding winning firm of Bohlin Cywinski Jackson. Mr. Allen complemented his design and engineering background with onsite construction experience from 1988–1995.

 

Mr. Allen has an Associate of Specialized Technology Degree from Johnson College and a Professional Bachelor or Architecture Degree from the University of Kansas.

 

Key Consultant

 

Kort Wickenheiser, Director of Sales

 

Mr. Kort Wickenheiser, Director of Sales & Marketing, age 44, combines over 10 years of experience in professional sales and marketing, following 10 years of success in collegiate and high school athletics. Mr. Wickenheiser is a founder and owner of NexPhase Global, Inc. since 2013 through the present. Previously, he had been involved in 3 companies holding positions including regional sales manager, territory development and product specialist. In 2013, Mr. Wickenheiser was the East Zone Sales Manager for Precision a renowned engineering firm located in Chicago, IL. From 2010 to 2013, Mr. Wikenheiser was an award winning capital equipment sales specialist for Beckman Coulter, Brea, CA. Prior to that he was award winning territory development representative for GlaxoSmithKline, Philadelphia, PA where he worked from 2005 to 2010. Mr. Wickenheiser has successfully overseen the growth of 5 separate sales territories; ranging from single states, to the east coast of the U.S., to the entire United States, instituting key strategic initiatives that drove revenue and profitability.

 

Mr. Wikenheiser is a graduate of Muhlenberg College in Allentown, PA, magna cum laude, where he was captain of their Men’s Basketball Championship Team.

 

Family Relationships

 

There are no family relationships among any of our directors or executive officers. 

 

Board Composition and Director Independence

 

Our board of directors consists of four members: Mr. Jeromy Olson, Ms. Tracy Burzycki, Mr. Glenn Appel and Mr. Glenn Tilley. The directors will serve until our next annual meeting and until their successors are duly elected and qualified. The Company defines “independent” as that term is defined in Rule 5605(a)(2) of the NASDAQ listing standards.

 

In making the determination of whether a member of the board is independent, our board considers, among other things, transactions and relationships between each director and his immediate family and the Company, including those reported under the caption “Certain Relationships and Related-Party Transactions”. The purpose of this review is to determine whether any such relationships or transactions are material and, therefore, inconsistent with a determination that the directors are independent. On the basis of such review and its understanding of such relationships and transactions, our board affirmatively determined that Ms. Burzycki, Mr. Appel and Mr. Tilley are qualified as independent and that she has no material relationship with us that might interfere with his or her exercise of independent judgment.

 

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Board Committees

 

We have established an audit committee, a compensation committee and a nominating and corporate governance committee. The Board intends for each committee to have its own charter prior to the effectiveness of its registration statement. Upon effectiveness of the registration statement, each of the board committees will have the composition and responsibilities described below.

 

Audit Committee

 

Our Audit Committee was established in accordance with Section 3(a)(58)(A) of the Exchange Act of 1934, as amended (the “Exchange Act”). The members of our Audit Committee are Glenn Appel, Tracy Burzycki and Glenn Tilley. Each of these Committee members is “independent” within the meaning of Rule 10A-3 under the Exchange Act and the NASDAQ Stock Market Rules. Our board has determined that no one is currently an “audit committee financial expert”, as such term is defined in Item 407(d)(5) of Regulation S-K. The Board intends to appoint an audit committee financial expert to its audit committee prior to the effectiveness of the registration statement of which this prospectus forms a part.

 

The Audit Committee will oversee our accounting and financial reporting processes and oversee the audit of our financial statements and the effectiveness of our internal control over financial reporting. The specific functions of this Committee include, but are not limited to:

 

selecting and recommending to our board of directors the appointment of an independent registered public accounting firm and overseeing the engagement of such firm;

 

approving the fees to be paid to the independent registered public accounting firm;

 

helping to ensure the independence of the independent registered public accounting firm;

 

overseeing the integrity of our financial statements;

 

preparing an audit committee report as required by the SEC to be included in our annual proxy statement;

 

resolve any disagreements between management and the auditors regarding financial reporting;

 

reviewing with management and the independent auditors any correspondence with regulators and any published reports that raise material issues regarding the Company’s accounting policies;

 

reviewing and approving all related party transactions; and

 

overseeing compliance with legal and regulatory requirements.

 

Compensation Committee

 

The members of our Compensation Committee are Glenn Appel, Tracy Burzycki and Glenn Tilley. Each such member is “independent” within the meaning of the NASDAQ Stock Market Rules. In addition, each member of our Compensation Committee qualifies as a “non-employee director” under Rule 16b-3 of the Exchange Act. Our Compensation Committee assists the board of directors in the discharge of its responsibilities relating to the compensation of the board of directors and our executive officers. Tracy Burzycki will serve as Chairman of our Compensation Committee.

 

The Committee’s compensation-related responsibilities include, but are not limited to:

 

reviewing and approving on an annual basis the corporate goals and objectives with respect to compensation for our Chief Executive Officer;

 

reviewing, approving and recommending to our board of directors on an annual basis the evaluation process and compensation structure for our other executive officers;

 

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determining the need for an the appropriateness of employment agreements and change in control agreements for each of our executive officers and any other officers recommended by the Chief Executive Officer or board of directors;

 

providing oversight of management’s decisions concerning the performance and compensation of other company officers, employees, consultants and advisors;

 

reviewing our incentive compensation and other equity-based plans and recommending changes in such plans to our board of directors as needed, and exercising all the authority of our board of directors with respect to the administration of such plans;

 

reviewing and recommending to our board of directors the compensation of independent directors, including incentive and equity-based compensation; and

 

selecting, retaining and terminating such compensation consultants, outside counsel or other advisors as it deems necessary or appropriate.

 

Nominating and Corporate Governance Committee

 

The members of our Nominating and Corporate Governance Committee will be Glenn Appel, Tracy Burzycki and Glenn Tilley. Each such member is “independent” within the meaning of the NASDAQ Stock Market Rules. The purpose of the Nominating and Corporate Governance Committee is to recommend to the board nominees for election as directors and persons to be elected to fill any vacancies on the board, develop and recommend a set of corporate governance principles and oversee the performance of the board. Glenn Tilley will serve as Chairman of our Nominating and Corporate Governance Committee.

 

The Committee’s responsibilities include:

 

recommending to the board of directors nominees for election as directors at any meeting of stockholders and nominees to fill vacancies on the board;

 

considering candidates proposed by stockholders in accordance with the requirements in the Committee charter;

 

overseeing the administration of the Company’s Code of Ethics;

 

reviewing with the entire board of directors, on an annual basis, the requisite skills and criteria for board candidates and the composition of the board as a whole;

 

the authority to retain search firms to assist in identifying board candidates, approve the terms of the search firm’s engagement, and cause the Company to pay the engaged search firm’s engagement fee;

 

recommending to the board of directors on an annual basis the directors to be appointed to each committee of the board of directors;

 

overseeing an annual self-evaluation of the board of directors and its committees to determine whether it and its committees are functioning effectively;

 

developing and recommending to the board a set of corporate governance guidelines applicable to the Company.

 

The Nominating and Corporate Governance Committee may delegate any of its responsibilities to subcommittees as it deems appropriate. The Nominating and Corporate Governance Committee is authorized to retain independent legal and other advisors, and conduct or authorize investigations into any matter within the scope of its duties.

 

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Compliance with Section 16(a) of the Exchange Act

 

Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who beneficially own 10% or more of a class of securities registered under Section 12 of the Exchange Act to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Directors, executive officers and greater than 10% stockholders are required by the rules and regulations of the SEC to furnish the Company with copies of all reports filed by them in compliance with Section 16(a).

 

Based solely on our review of certain reports filed with the Securities and Exchange Commission pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, the reports required to be filed with respect to transactions in our common stock during the fiscal year ended December 31, 2016, were timely.

 

Code of Ethics

 

The Company does not currently maintain a Code of Ethics but plans to adopt one in the near future.  

 

Item 11. Executive Compensation.

 

The following table provides each element of compensation paid or granted to our sole Executive officer, for service rendered during the fiscal years ended December 31, 2016 and 2015.

 

Name and Principal Position  Year   Salary
($)
   Bonus
($)
  

Stock Awards ($)(2)(3)

   Option
Awards ($)
   Non-Equity Incentive Plan Compensation ($)   Non-Qualified Deferred Compensation Earnings
($)
   All Other Compensation ($)   Totals
($)
 
Jeromy Olson(2) (4)   2016   $120,000           0   $275,000   $30           0           0           0   $395,030 
Chief Executive Officer(1)   2015   $120,000    0    0    0    0    0    0   $120,000 

 

 

1.Mr. Olson was appointed Chief Executive Officer of the Company on September 18, 2014. NexPhase Global, a consulting firm owned in part by Mr. Olson, invoices the Company $20,000 per month, $10,000 of which pertains to consulting services, and the other $10,000 pertains to Mr. Olson’s services as the Chief Executive Officer of the Company.

 

2.Mr. Olson was issued 250,000 shares of common stock on the date of his employment agreement in 2014 and received 250,000 shares of common stock on January 1, 2016.

 

3.NexPhase Global was issued 50,000 shares of common stock at the onset of the consulting agreement and will receive 10,000 shares of common stock at the beginning of each three month period for the term of the agreement and any renewal periods thereafter.

 

4.On November 3, 2016, the Board, pursuant to the Mr. Olson’s Employment Agreement (as defined above), approved the issuance of (i) qualified options to purchase 100,000 shares of the Company’s Common Stock at a price of $1.50 vesting immediately with a grant date of November 3, 2016 and (ii) qualified options to purchase 75,000 shares of the Company’s Common Stock at a price of $1.75 vesting on December 31, 2016. Mr. Olson is due additional option grants pursuant to the Olson Employment Agreement, however, those grants are being deferred until 2017 to comply with the terms of the issuance of incentive options in the 2016 Plan.

 

5.On November 3, 2016, the Board, pursuant to the NexPhase Global consulting agreement, approved the issuance of (i) qualified options to purchase 100,000 shares of the Company’s Common Stock at a price of $1.50 vesting immediately with a grant date of November 3, 2016 and (ii) qualified options to purchase 75,000 shares of the Company’s Common Stock at a price of $1.75 vesting on December 31, 2016. NexPhase Global is due additional option grants pursuant to the consulting agreement, however, those grants are being deferred until 2017 to comply with the terms of the issuance of incentive options in the 2016 Plan.

 

Compensation-Setting Process/Role of Our Compensation Committee

 

During 2016 we had not yet established our compensation committee and our board of directors was responsible for overseeing our executive compensation program, establishing our executive compensation philosophy and programs, and determining specific executive compensation, including cash and equity. These responsibilities will be handled by our compensation committee moving forward. Unless otherwise stated, the discussion and analysis below is based on decisions by the board of directors.

 

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During 2016, our board of directors considered one or more of the following factors when setting executive compensation, as further explained in the discussions of each compensation element below:

 

the experiences and individual knowledge of the members of our board of directors regarding executive compensation, as we believe this approach helps us to compete in hiring and retaining the best possible talent while at the same time maintaining a reasonable and responsible cost structure;

 

corporate and/or individual performance, as we believe this encourages our executive officer to focus on achieving our business objectives; and

 

the Chief Executive Officer’s existing equity award and stock holdings.

 

We plan to hire additional executive officers and our compensation program following this offering may, over time, vary significantly from our historical practices. For example, we expect that following this offering, in setting executive compensation, the new compensation committee may review and consider, in addition to the items above, factors such as the achievement of predefined milestones, tax deductibility of compensation, the total compensation that may become payable to executive officers in various hypothetical scenarios, the performance of our common stock and compensation levels at public peer companies.

 

Executive Compensation Program Components

 

Base Salary

 

We provide base salary as a fixed source of compensation for our executive officer, allowing him a degree of certainty when having a meaningful portion of his compensation “at risk” in the form of equity awards covering the shares of a company for whose shares there have been limited liquidity to date. We plan to hire additional officers and the board of directors recognizes the importance of base salaries as an element of compensation that helps to attract highly qualified executive talent.

 

The base salary for our executive officer was established primarily based on individual negotiations with the executive officer when they joined us and reflect the scope of his anticipated responsibilities, the individual experience he brings, the board members’ experiences and knowledge in compensating similarly situated individuals at other companies, and our then-current cash constraints.

 

The board does not apply specific formulas in determining base salary increases. In determining base salaries for 2015 for our continuing named executive officer, no adjustments were made to the base salary of our named executive officer as the board determined, in its independent judgment and without reliance on any survey data, that existing base salary for our executive officer, provided sufficient fixed compensation for retention purposes.

 

Outstanding Equity Awards at December 31, 2016

 

The Company had no outstanding equity awards at the end of the most recent completed fiscal year. Our Chief Executive Officer, Mr. Jeromy Olson, is due options pursuant to his employment agreement upon the Company’s creation of a qualified stock plan. On October 4, 2016 the Board approved the 2016 Plan providing for the issuance of up to 2,500,000 shares. On November 3, 2016, the Board, pursuant to the Olson Employment Agreement (as defined below), approved the issuance of (i) qualified options to purchase 100,000 shares of the Company’s Common Stock at a price of $1.50 vesting immediately with a grant date of November 3, 2016 and (ii) qualified options to purchase 75,000 shares of the Company’s Common Stock at a price of $1.75 vesting on December 31, 2016. Mr. Olson is due additional option grants pursuant to the Olson Employment Agreement, however, those grants are being deferred until 2017 to comply with the terms of the issuance of incentive options in the 2016 Plan.

 

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Director Compensation

 

The following table provides information regarding the compensation of the Company’s non-employee directors for the year ended December 31, 2016:

 

Name  Fees
Earned or Paid in Cash
($)
   Stock Awards
($)
   Option Awards
($)
   Non-Equity Incentive Plan Compensation ($)   Non-Qualified Deferred Compensation Earnings
($)
   All Other Compensation ($)   Total
($)
 
Tracy Burzycki(1)         —          —    41,068          —          —          —    41,068 
Glenn Appel(2)           43,824                43,824 
Glenn Tilley(3)           55,669                55,669 

 

 

1.Tracy Burzycki was appointed as a director on January 29, 2015. Mrs. Burzycki received non-qualified stock options to purchase Two Hundred Thousand (200,000) shares of the Company’s common stock. The exercise price of the Options shall be One Dollar ($1.00) per share. The Options shall vest in equal amounts over a period of Two (2) years at the rate of Twenty Five Thousand (25,000) shares per fiscal quarter on the last day of each such quarter, commencing in the first fiscal quarter of 2015.

 

2.Glenn Appel was appointed as a director on August 27, 2015. Mr. Appel received non-qualified stock options to purchase Two Hundred Thousand (200,000) shares of the Company’s common stock. The exercise price of the Options shall be One Dollar ($1.00) per share. The Options shall vest in equal amounts over a period of Two (2) years at the rate of Twenty Five Thousand (25,000) shares per fiscal quarter on the last day of each such quarter, commencing in the third fiscal quarter of 2015.

 

3.Glenn Tilley was appointed as a director on January 4, 2016. Mr. Tilley received non-qualified stock options to purchase Two Hundred Thousand (200,000) shares of the Company’s common stock. The exercise price of the Options shall be One Dollar ($1.00) per share. 25,000 Options vest on January 4, 2016 and the remaining Options shall vest in equal amounts over a period of 1.75 years at the rate of Twenty Five Thousand (25,000) shares per fiscal quarter on the last day of each such quarter, commencing in the first fiscal quarter of 2016.

 

Director Agreements

 

On January 29, 2015, the Company entered into a director agreement (the “Burzycki Director Agreement”) with Tracy Burzycki, concurrent with Ms. Burzycki’s appointment to the Board effective January 29, 2015. Pursuant to the Burzycki Director Agreement, Ms. Burzycki is to be paid a stipend of one thousand dollars ($1,000) per meeting of the Board, which shall be contingent upon her attendance at the meetings being in person, rather than via telephone or some other electronic medium. Additionally, Ms. Burzycki shall receive options (the “Burzycki Options”) to purchase two hundred thousand (200,000) shares of the Company’s common stock provided she continues to serve on the board through December 31, 2016. The exercise price of the Burzycki Options shall be one dollar ($1.00) per share and will be exercisable for 5 years from the date of grant. The Burzycki Options shall vest in equal amounts over a period of two (2) years at the rate of twenty-five thousand (25,000) shares per fiscal quarter on the last day of each such quarter, commencing in the first fiscal quarter of 2015.

 

On August 27, 2015, the Company entered into a director agreement (the “Appel Director Agreement”) with Glenn Appel, concurrent with Mr. Appel’s appointment to the Board effective August 27, 2015. Pursuant to the Appel Director Agreement, Mr. Appel is to be paid a stipend of One Thousand Dollars ($1,000) per meeting of the Board, which shall be contingent upon his attendance at the meetings being in person, rather than via telephone or some other electronic medium. Additionally, Mr. Appel shall receive non-qualified stock options (the “Appel Options”) to purchase Two Hundred Thousand (200,000) shares of the Company’s common stock provided he continues to serve on the board through June 30, 2017. The exercise price of the Appel Options shall be One Dollar ($1.00) per share and will be exercisable for 5 years from the date of grant. The Appel Options shall vest in equal amounts over a period of Two (2) years at the rate of Twenty Five Thousand (25,000) shares per fiscal quarter on the last day of each such quarter, commencing in the third fiscal quarter of 2015.

 

On January 4, 2016, the Company entered into a director agreement (the “Tilley Director Agreement”) with Glenn Tilley, concurrent with Mr. Tilley’s appointment to the Board effective January 4, 2016. Pursuant to the Tilley Director Agreement, Mr. Tilley is to be paid a stipend of One Thousand Dollars ($1,000) per meeting of the Board, which shall be contingent upon his attendance at the meetings being in person, rather than via telephone or some other electronic medium. Additionally, Mr. Tilley shall receive non-qualified stock options (the “Tilley Options”) to purchase Two Hundred Thousand (200,000) shares of the Company’s common stock provided he continues to serve on the board through September 30, 2017. The exercise price of the Tilley Options shall be One Dollar ($1.00) per share and are exercisable for 5 years. 25,000 Options vest on January 4, 2017 and the remaining Options shall vest in equal amounts over a period of 1.75 years at the rate of Twenty Five Thousand (25,000) shares per fiscal quarter on the last day of each such quarter, commencing in the first fiscal quarter of 2016.

 

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Employment Agreements

 

Jeromy Olson, Chief Executive Officer

 

On September 18, 2014, Sports Field Holdings, Inc. (the “Company”) entered into an employment agreement (the “Employment Agreement”) with Mr. Jeromy Olson pursuant to which Mr. Olson will serve as the Company’s Chief Executive Officer, effective September 19, 2014. Under the terms of the Employment Agreement, Mr. Olson shall have such duties, responsibilities and authority as are commensurate and consistent with the position of Chief Executive Officer of a public company. The term of the Employment Agreement is for forty months (the “Initial Term”), provided however, that in the event that neither party has provided the other party with written notice by the date that is sixty days prior to the last day of the Initial Term or, if applicable, the Renewal Term (as hereinafter defined), of such party’s intent that the Employment Agreement terminate immediately upon expiration of such term, then the Employment Agreement shall be extended for subsequent six-month terms (each a “Renewal Term”).

 

The Company shall pay Mr. Olson a salary at a rate of Ten Thousand and 00/100 Dollars ($10,000) per month that (1) will increase to $13,000 upon the Company achieving gross revenues of at least $10,000,000, as amended, and an operating margin of at least 15%, and (2) will increase to $16,000 per month upon the Company achieving gross revenues of at least $15,000,000 and an operating margin of at least 15%. In addition, Mr. Olson will be eligible to earn an annual bonus (the “Bonus”) equal to the following, calculated cumulatively: (i) when the Company achieves annual Adjusted EBITDA (as defined below) of between $1.00 and $1,000,000, the Mr. Olson shall receive a cash bonus of 15.0% of such annual Adjusted EBITDA; (ii) when the Company achieves annual Adjusted EBITDA of between $1,000,001 and $2,000,000, Mr. Olson shall receive an additional cash bonus of 10.0% of such annual Adjusted EBITDA which exceeds $1,000,000; and (iii) when the Company achieves annual Adjusted EBITDA greater than $2,000,000, Mr. Olson shall receive an additional cash bonus of 5.0% of such annual Adjusted EBITDA which exceeds $2,000,000. “Adjusted EBITDA” shall mean earnings before interest, taxes, depreciation and amortization, the components of which shall be calculated in accordance with generally accepted accounting principles and as such components traditionally appear on the Company’s audited financial statements, excluding any and all expenses associated with (i) any share-based payment; (ii) any gain or loss related to derivative instruments; and (iii) any other non-cash expenses reasonably approved by the Board of Directors of the Company (the “Board”).

 

As further inducement for Mr. Olson to enter into the Employment Agreement, the Company shall issue Mr. Olson (i) 250,000 shares of common stock of the Company, par value $0.00001 per share (the “Common Stock”) upon the execution of the Employment Agreement; (ii) an additional 250,000 shares of Common Stock on January 1, 2016, provided the Employment Agreement has not been terminated; (iii) qualified options to purchase 100,000 shares of Common Stock at $1.50 per share, which shall vest on December 31, 2015, under the employee qualified incentive option plan that will be established by the Company (the “Plan”), (iv) qualified options to purchase 100,000 shares of Common Stock at $1.75 per share, which shall vest on December 31, 2016, pursuant to the Plan and (v) qualified options to purchase 100,000 shares of Common Stock at $2.50 per share, which shall vest on December 31, 2017, pursuant to the Plan.

 

On November 3, 2016, the Board, pursuant to the Olson Employment Agreement (as elsewhere in this document), approved the issuance of (i) qualified options to purchase 100,000 shares of the Company’s Common Stock at a price of $1.50 vesting immediately with a grant date of November 3, 2016 and (ii) qualified options to purchase 75,000 shares of the Company’s Common Stock at a price of $1.75 vesting on December 31, 2016. Mr. Olson is due additional option grants pursuant to the Olson Employment Agreement, however, those grants are being deferred until 2017 to comply with the terms of the issuance of incentive options in the 2016 Plan.

 

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Pursuant to the merger clause set forth in Section 13(a) of the Employment Agreement, all prior agreements between Mr. Olson and the Company, including that certain Consulting Agreement dated August 29, 2014, are superseded by the Employment Agreement and are of no further effect.

 

Termination and Change of Control Provisions.

 

Pursuant to the Olson Employment Agreement, upon a Change of Control (as defined in the Olson Employment Agreement), in addition to the accrued but unpaid compensation and vacation pay through the date of termination and any other benefits accrued to him under any benefit plans outstanding at such time and the reimbursement of documented, unreimbursed expenses incurred prior to such date, Mr. Olson shall be entitled to the following severance benefits: (i) the greater of twelve (12) months’ Base Salary (as defined in the Olson Employment Agreement) at the then current rate or the remainder of the Base Salary due under Olson Employment Agreement, to be paid in equal bi-weekly installments, less withholding of all applicable taxes, at such times he would have received them if there was no termination; (ii) continued provision for a period of twelve (12) months after the date of termination of the benefits under any benefit plans extended from time to time by the Company to its senior executives; and (iii) payment on a pro-rated basis of any bonus or other payments earned in connection with any bonus plan to which Executive was a participant as of the date of Executive’s termination of employment.

 

Outstanding Equity Awards at Fiscal Year-End 2016

 

The Company had 972,500 stock options outstanding at the end of the most recent completed fiscal year.

 

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

 

The following table sets forth certain information regarding the beneficial ownership of our Common Stock as of March 31, 2017 by (a) each stockholder who is known to us to own beneficially 5% or more of our outstanding Common Stock; (b) all directors; (c) our executive officers, and (d) all executive officers and directors as a group. Except as otherwise indicated, all persons listed below have (i) sole voting power and investment power with respect to their shares of Common Stock, except to the extent that authority is shared by spouses under applicable law, and (ii) record and beneficial ownership with respect to their shares of Common Stock.

 

For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of Common Stock that such person has the right to acquire within 60 days of March 31, 2017. For purposes of computing the percentage of outstanding shares of our Common Stock held by each person or group of persons named above, any shares that such person or persons has the right to acquire within 60 days of March 31, 2017 is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership. Unless otherwise identified, the address of our directors and officers is c/o Sports Field Holdings, Inc., at 4320 Winfield Road, Suite 200, Warrenville, IL 60555. 

 

The following table assumes 17,095,083 shares are outstanding as of March 31, 2017.

 

Name and Address of Beneficial Owner   Outstanding
Common
Stock
    Percentage of
Ownership of
Common Stock
 
5% Beneficial Shareholders            
One Equity Research, LLC(1)   1,103,563     6.06 %
Officers and Directors            
Jeromy Olson(2)     897,500       5.17 %
Tracy Burzycki(3)     200,000       1.16 %
Glenn Appel(4)     175,000       1.01 %
Glenn Tilley(5)     806,064       4.52 %
                 
Officers and Directors as a Group (4 persons)     2,078,564       11.72 %

  

* denotes less than 1%

 

 38 

 

 

(1)Represents 1,103,563 shares of common stock upon the conversion of notes held by such holder.

 

(2)Represents (i) 635,000 shares of common stock, (ii) 150,000 shares of common stock underlying vested options with an exercise price of $1.50 per share and (iii) 112,500 shares of common stock underlying vested options with an exercise price of $1.75 per share

 

(3)Represents 200,000 shares of common stock underlying vested options with an exercise price of $1.00 per share.

 

(4)Represents 175,000 shares of common stock underlying vested options with an exercise price of $1.00 per share.

 

(5)Represents (i) 85,000 shares of common stock, (ii) 571,064 shares of common stock upon the conversion of notes held by such holder and (iii) 150,000 shares of common stock underlying vested options with an exercise price of $1.00 per share.

 

DESCRIPTION OF SECURITIES

 

In the discussion that follows, we have summarized selected provisions of our certificate of incorporation, bylaws and the Nevada General Corporation Law relating to our capital stock. This summary is not complete. This discussion is subject to the relevant provisions of Nevada law and is qualified by reference to our certificate of incorporation and our bylaws. You should read the provisions of our certificate of incorporation and our bylaws as currently in effect for provisions that may be important to you.

 

General

 

The Company is authorized to issue an aggregate number of 270,000,000 shares of capital stock, of which 20,000,000 shares are blank check preferred stock, $0.00001 par value per share and 250,000,000 shares are common stock, $0.00001 par value per share.

 

Preferred Stock

 

The Company is authorized to issue 20,000,000 shares of blank check preferred stock, $0.00001 par value per share. Currently we have no shares of preferred stock issued and outstanding.

 

Common Stock

 

The Company is authorized to issue 250,000,000 shares of common stock, $0.00001 par value per share. We currently have 17,095,083, shares of common stock issued and outstanding.

 

Each share of common stock shall have one (1) vote per share for all purpose. Our common stock does not provide a preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions or rights. Our common stock holders are not entitled to cumulative voting for purposes of electing members to our board of directors.

 

Dividends

 

We have not paid any cash dividends to our shareholders. The declaration of any future cash dividends is at the discretion of our board of directors and depends upon our earnings, if any, our capital requirements and financial position, our general economic conditions, and other pertinent conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.

 

Warrants

 

As of March 31, 2017, there are 679,588, outstanding warrants to purchase our common shares. The warrants are exercisable for a term ranging from 2 to 4.5 years with an exercise price range of $1.00 - $1.10. 

 

Options

 

There are 972,500, outstanding options to purchase our securities.

 

 39 

 

 

Market for our Securities

 

While there is no established public trading market for our Common Stock, our Common Stock is quoted on the OTC Markets OTCQB under the symbol “SFHI”.

 

The market price of our Common Stock is subject to significant fluctuations in response to variations in our quarterly operating results, general trends in the market and other factors, over many of which we have little or no control. In addition, broad market fluctuations, as well as general economic, business and political conditions, may adversely affect the market for our Common Stock, regardless of our actual or projected performance.

 

Anti-Takeover Provisions

 

Our charter and bylaws contain provisions that may make it more difficult for a third party to acquire or may discourage acquisition bids for us. Our Board may, without action of our stockholders, issue authorized but unissued shares of preferred stock. The existence of unissued preferred stock may enable the Board, without further action by the stockholders, to issue such stock to persons friendly to current management or to issue such stock with terms that could render more difficult or discourage an attempt to obtain control of us, thereby protecting the continuity of our management. Our shares of preferred stock could therefore be issued quickly with terms that could delay, defer, or prevent a change in control of us, or make removal of management more difficult.

 

Item 13. Certain Relationships and Related Transactions.

 

Jeromy Olson, the Chief Executive Officer of the Company, owns 50.0% of a sales management and consulting firm, NexPhase Global that provides sales services to the Company. These services include the retention of two full-time senior sales representatives including the current National Sales Director of the Company. Consulting expenses pertaining to the firm’s services were $248,413 for the year ended December 31, 2016. Included in consulting expense for the year ended December 31, 2016 were 40,000 shares of common stock valued at $27,800, and 175,000 common stock options valued at $613 issued to Nexphase Global.

 

Consulting expenses pertaining to the firm’s services were $161,000 for the year ended December 31, 2015. Included in consulting expense for the year ended December 31, 2015 were 40,000 shares of common stock valued at $41,000 issued to Nexphase Global.

 

On May 7, 2015, the Company issued an unsecured promissory note in the principal amount of $150,000 (the “Tilley Note”) to Glenn Tilley. The Tilley Note pays interest equal to 9% of the principal amount of the Tilley Note, payable in one lump sum. On March 31, 2016, Mr. Tilley entered into a letter agreement whereby, effective as of February 1, 2016, Mr. Tilley waived any and all defaults that may or may not have occurred prior to the date thereof (the “Waiver”). As consideration for the Waiver, the Company issued Mr. Tilley an additional 15,000 shares of the Company’s common stock. The principal amount of the Tilley Note increased from $150,000 to $163,500 as the initial interest amount, $13,500 as of February 1, 2016, was added to the principal amount of the Tilley Note. Pursuant to the Waiver, the maturity date of the Tilley Note was extended to July 1, 2016, and the Tilley Note shall pay interest as of February 1, 2016, at a rate of 9% per annum, payable in one lump sum on July 1, 2016 (the “Maturity Date”). Mr. Tilley and the Company are currently engaged in good faith negotiations to amend the Maturity Date of the Tilley Note.

 

On October 21, 2016, Glenn Tilley entered into a letter agreement, whereby effective August 1, 2016, Glenn Tilley waived any and all defaults that may or may not have occurred prior to the date thereof. As consideration for entering into the Second Waiver, the Company issued Glen Tilley an additional 30,000 shares of the Company’s restricted common stock. As additional consideration for entering into the Second Waiver, the interest amount of $7,357.50 was added to the Principal Amount of the Tilley Note. As of August 1, 2016, the principal of the Tilley Note was $170,857.50. Pursuant to the Second Waiver, the maturity date of the Tilley Note was extended to January 1, 2017, at a rate of 15% per annum, payable in one lump sum on the maturity date.

 

 40 

 

 

The Tilley Note is convertible into shares of the Company’s common stock at a conversion price of $1.00 per share through January 1, 2017, and after January 1, 2017, the Tilley Note is convertible into shares of the Company’s common stock at a conversion price that is the lower of (i) $1.00 per share or (ii) the volume-weighted average price for the last five trading days preceding the conversion date.

 

Mr. Tilley was appointed as a director of the Company on January 4, 2016.

 

Policy on Future Related Party Transactions

 

All future transactions between us and our officers, directors, principal stockholders and their affiliates will be approved by the audit committee, or a similar committee consisting of entirely independent directors, according to the terms of our Code of Business Conduct and committee charters.

 

Director Independence

 

The common stock of the Company is currently quoted on the OTCQB, quotation system which currently do not have director independence requirements. On an annual basis, each director and executive officer will be obligated to disclose any transactions with the Company in which a director or executive officer, or any member of his or her immediate family, have a direct or indirect material interest in accordance with Item 407(a) of Regulation S-K. Following completion of these disclosures, the Board will make an annual determination as to the independence of each director using the current standards for “independence” that satisfy the criteria as that term is defined in Rule 5605(a)(2) of the NASDAQ listing standards.

 

As of March 31, 2017, the Board determined that the following directors are independent under these standards:

 

Tracy Burzycki

Glenn Tilley

Glenn Appel

 

Item 14. Principal Accountant Fees and Services.

 

The following table sets forth the aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the Company's annual financial statements and review of financial statements included in the Company's quarterly reports or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years.

 

Services  2016   2015 
         
Audit Fees  $44,500   $40,000 
           
Audit - Related Fees   -    - 
           
Tax fees  $5,000   $4,500 
           
All Other Fees – Review of S-1   6,900    - 
           
Total  $56,400   $44,500 

 

 41 

 

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules.

 

Exhibit No.   Description
2.1   Acquisition and Plan of Merger Agreement dated June 16, 2014 by and among Anglesea Enterprises, Inc., Anglesea Enterprises Acquisition Corp., and Sports Field Holdings, Inc. (Incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 18, 2014).
     
2.2   Short Form Merger Agreement dated June 16, 2014 by and between Anglesea Enterprises, Inc. and Sports Field Holdings, Inc. (Incorporated by reference to Exhibit 2.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 18, 2014).
     
3.1   Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Company’s Form S-1 filed with the Securities and Exchange Commission on January 24, 2012).
     
3.2   By-Laws (incorporated herein by reference to Exhibit 3.2 to the Company’s Form S-1 filed with the Securities and Exchange Commission on January 24, 2012).
     
3.3   Certificate of Incorporation of Sports Field Holdings, Inc. (Incorporated by reference to Exhibit 3.3 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 18, 2014).
     
3.4   By-Laws of Sports Field Holdings, Inc. (Incorporated by reference to Exhibit 3.4 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 18, 2014).
     
4.1   Form of Convertible Debenture (Incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 12, 2015).
     
4.2   Form of Private Placement Warrant (Incorporated by reference to Exhibit 4.4 of the Company’s Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on November 4, 2016).
     
10.1   Consulting Agreement, dated August 29, 2014, between the Company and Jeromy Olson (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 2, 2014).
     
10.2   Employment Agreement, dated September 18, 2014, between the Company and Jeromy Olson (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 23, 2014).
     
10.3   Director Agreement, dated January 29, 2015, between the Company and Tracy Burzycki (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 4, 2015).
     
10.4   Director Agreement, dated August 27, 2015, between the Company and Glenn Appel (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 3, 2015).
     
10.5   Form of Subscription Agreement (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 12, 2015).
     

 42 

 

 

10.6   Director Agreement, dated January 4, 2014, between the Company and Glenn Tilley (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 1, 2016).
     
10.7   Business Loan Agreement by and between the Company and Genlink (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 22, 2016).
     
10.8   Promissory Note issued in favor of Genlink (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 22, 2016).
     
10.9   Security Agreement by and between the Company and Genlink (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 22, 2016).
     
10.10   Consulting Agreement by and between the Company and Nexphase Global, dated March 10, 2014 (Incorporated by reference to Exhibit 10.9 of the Company’s Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on November 4, 2016).
     
10.11   Letter Agreement by and between the Company and Brothers Consulting, dated (incorporated by reference to the exhibit 10.6 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 4, 2016).
     
10.12   Letter Agreement by and between the Company and Glenn Tilley, dated October 21, 2016 (incorporated by reference to the exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 27, 2016).
     
10.13   Consulting Agreement by and between the Company and Nexphase Global, dated March 15, 2016 (Incorporated by reference to Exhibit 10.9 of the Company’s Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on November 4, 2016).
     
10.14   Commercial Premium Finance Agreement by and between the Company and First Insurance Funding (Incorporated by reference to Exhibit 10.9 of the Company’s Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on November 4, 2016).
     
10.15   Premium Funding Agreement by and between the Company and IPFS Corporation (Incorporated by reference to Exhibit 10.9 of the Company’s Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on November 4, 2016).
     
10.16   Form of Ambassador Program Representative Agreement (Incorporated by reference to Exhibit 10.9 of the Company’s Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on November 4, 2016).
     
10.17   Sports Field Holdings, Inc., 2016 Incentive Stock Option Plan (incorporated by reference to the exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 12, 2016).
     
10.18   Form of Restricted Stock Agreement (incorporated by reference to the exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 12, 2016).
     
10.19   Form of Nonqualified Stock Option Agreement (Non-Employee) (incorporated by reference to the exhibit 10.3 of the company’s current report on form 8-k filed with the Securities and Exchange Commission on October 12, 2016).
     
10.20   Form of Nonqualified Stock Option Agreement (Employee) (incorporated by reference to the exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 12, 2016).
     
10.21   Form of Incentive Stock Option Agreement (incorporated by reference to the exhibit 10.5 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 12, 2016).
     
10.22   Letter Agreement Extending the Maturity Date of the Brothers Note (incorporated by reference to the exhibit 10.5 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 12, 2016).
     
21.1   List of Subsidiaries (incorporated by reference to exhibit 21.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 30, 2016)
     
23.1   Consent of Rosenberg Rich Baker Berman & Company (Incorporated by reference to Exhibit 10.9 of the Company’s Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on November 4, 2016).
     

 43 

 

 

31.1   Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)) *
     
31.2   Certification by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)) *
     
32.1   Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
     
32.2   Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
     
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 Taxonomy Extension Presentation Linkbase *

 

* filed herewith

 

 44 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  SPORTS FIELD HOLDINGS, INC.
     
Date: March 31, 2017 By: /s/ Jeromy Olson
    Name: Jeromy Olson
    Title: Chief Executive Officer
(Principal Executive Officer and Principal Accounting Officer and Financial Officer),
Chairman of the Board

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ Jeromy Olson   Chief Executive Officer     March 31, 2017
Jeromy Olson   (Principal Executive Officer and Principal Accounting and Financial Officer),
Chairman of the Board
   
         
/s/ Tracy Burzycki   Director   March 31, 2017
Tracy Burzycki        
         
/s/ Glenn Appel   Director   March 31, 2017
Glenn Appel        
         
/s/ Glenn Tilley   Director   March 31, 2017
Glenn Tilley        

  

 45 

 

 

SPORTS FIELD HOLDINGS, INC

 

CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2016 and 2015

 

SPORTS FIELD HOLDINGS, INC.

 

Report of Independent Registered Public Accounting Firm F-2
   
Consolidated balance sheets as of December 31, 2016 and 2015 F-3
   
Consolidated statements of operations for the year ended December 31, 2016 and 2015 F-4
   
Consolidated statements of stockholders’ equity (deficit) for the years ended December 31, 2016 and 2015 F-5
   
Consolidated statements of cash flows for the year ended December 31, 2016 and 2015 F-6
   
Notes to consolidated financial statements F-7 – F-29

 

F-1
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Sports Field Holdings, Inc.

 

We have audited the accompanying consolidated balance sheets of Sports Field Holdings, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years ended December 31, 2016 and 2015. Sports Field Holdings, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, 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 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 Sports Field Holdings, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years ended December 31, 2016 and 2015 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company had a working capital deficit, a net loss and net cash used in operations of $3,569,741, $3,688,062 and $2,266,721, respectively and has an accumulated deficit totaling $13,957,580. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 

 

/s/ Rosenberg Rich Baker Berman & Company

Somerset, New Jersey

March 31, 2017

 

 F-2 

 

SPORTS FIELD HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

 

   December 31,   December 31, 
   2016   2015 
ASSETS        
Current assets        
Cash  $15,388   $61,400 
Accounts receivable   354,159    151,168 
Costs and estimated earnings in excess of billings   75,624    137,016 
Inventory   110,000    - 
Prepaid expenses and other current assets   138,442    10,346 
Total current assets   693,613    359,930 
           
Property, plant and equipment, net   10,193    14,249 
Deposits   2,090    2,090 
           
Total assets  $705,896   $376,269 
           
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)          
Current liabilities          
Accounts payable and accrued expenses  $1,872,981   $1,896,557 
Billings in excess of costs and estimated earnings   374,916    - 
Provision for estimated  losses on uncompleted contracts   66,079    130,046 
Promissory notes, net of debt discount of $30,090 and $0, respectively   1,052,410    313,993 
Derivative liability   204,300    - 
Convertible notes payable, net of debt discount of $0 and $63,631   692,668    536,369 
Total current liabilities   4,263,354    2,876,965 
           
Total liabilities   4,263,354    2,876,965 
           
Commitments and Contingencies          
           
Stockholders' equity          
Preferred stock, $0.00001 par value; 20,000,000 shares authorized, none issued and outstanding   -    - 
Common stock, $0.00001 par value; 250,000,000 shares authorized, 17,074,470 and 13,915,331 issued and outstanding as of December 31, 2016 and December 31, 2015, respectively   171    138 
Additional paid in capital   10,404,451    7,773,184 
Common stock subscription receivable   (4,500)   (4,500)
Accumulated deficit   (13,957,580)   (10,269,518)
Total stockholders' equity (deficit)   (3,557,458)   (2,500,696)
           
Total liabilities and stockholders' equity (deficit)  $705,896   $376,269 

 

See the accompanying notes to these consolidated financial statements

 

 F-3 

 

SPORTS FIELD HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Year Ended
December 31,
 
   2016   2015 
Revenue        
Contract revenue  $3,225,277   $3,941,833 
Total revenue   3,225,277    3,941,833 
           
Cost of sales          
Contract cost of sales   2,913,744    4,450,831 
Loss on write-off of obsolete inventory   -    69,166 
Total cost of sales   2,913,744    4,519,997 
           
Gross profit (loss)   311,533    (578,164)
           
Operating expenses          
Selling, general and administrative   3,334,396    2,677,524 
Research & development   90,897    - 
Depreciation   4,056    28,044 
Separation expense   45,000    - 
Total operating expenses   3,474,349    2,705,568 
           
Net loss from operations   (3,162,816)   (3,283,732)
           
Other income (expense), net          
Interest, net   (484,587)   (91,759)
Loss on extinguishment of debt   (45,000)   - 
Miscellaneous income   4,341    4,328 
Loss on abandonment of furniture, fixture and equipment   -    (11,826)
Gain on disposition of  fabrication molds   -    44,832 
Total other income (expense), net   (525,246)   (54,425)
           
Net loss before income taxes   (3,688,062)   (3,338,157)
           
Provision for income taxes   -    - 
           
Net loss  $(3,688,062)  $(3,338,157)
           
Net loss per common share, basic and diluted  $(0.23)  $(0.24)
           
Weighted average common shares outstanding, basic and diluted   16,128,804    13,698,354 

 

See the accompanying notes to these consolidated financial statements

 

 F-4 

 

SPORTS FIELD HOLDINGS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

 

                            Additional     Common              
    Preferred stock     Common stock     Paid in     Stock     Accumulated        
    Shares     Amount     Shares     Amount     Capital     Subscription     Deficit     Total  
Balance, December 31, 2014     -     $ -       13,545,275     $ 135       7,301,003     $ (4,500 )   $ (6,931,361 )   $ 365,277  
                                                                 
Shares issued for services     -       -       225,000       2       225,998       -       -       226,000  
Shares issued in an offering- net proceeds     -       -       118,182       1       113,099       -       -       113,100  
Stock options issued for services     -       -       -       -       63,084       -       -       63,084  
Shares issued with convertible promissory notes     -       -       25,000       -       70,000       -       -       70,000  
Shares issued for cashless warrant exercise     -       -       1,874       -       -       -       -       -  
Net loss     -       -       -       -       -       -       (3,338,157 )     (3,338,157 )
Balance, December 31, 2015     -       -       13,915,331       138       7,773,184       (4,500 )     (10,269,518 )     (2,500,696 )
                                                                 
Shares issued for services     -       -       1,293,944       14       925,201       -       -       925,215  
Shares issued in an offering- net proceeds     -       -       1,715,195       18       1,591,389       -       -       1,591,407  
Stock options issued for services     -       -       -       -       141,204       -       -       141,204  
Shares issued with convertible promissory notes     -       -       35,000       -       30,637       -       -       30,637  
Shares issued with convertible promissory note amendments     -       -       115,000       1       79,499       -       -       79,500  
Derivative liability - convertible promissory note     -       -       -       -       (204,300 )     -       -       (204,300 )
Beneficial conversion feature                                     67,637                       67,637  
Net loss     -       -       -       -       -       -       (3,688,062 )     (3,688,062 )
Balance, December 31, 2016     -     $ -       17,074,470     $ 171     $ 10,404,451     $ (4,500 )   $ (13,957,580 )   $ (3,557,458 )

 

See the accompanying notes to these consolidated financial statements

 

 F-5 

 

SPORTS FIELD HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Year Ended
December 31,
 
   2016   2015 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(3,688,062)  $(3,338,157)
           
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   4,056    28,044 
Loss on write-off of obsolete inventory   -    69,166 
Gain on disposition of  fabrication molds   -    (44,832)
Loss on abandonment of furniture, fixture and equipment   -    11,826 
Amortization of debt issuance costs   37,446    51,963 
Amortization of debt discount   175,200    42,574 
Accretion of original issue discount   33,168    9,832 
Loss on extinguishment of debt   45,000    - 
Forfeit on deposit of office lease   -    6,417 
Common stock and options issued to consultants and employees   961,386    289,084 
Changes in operating assets and liabilities:          
Accounts receivable   (202,991)   (151,168)
Prepaid expenses   71,643    (7,706)
Inventory   (110,000)   62,289 
Accounts payable and accrued expenses   34,092    1,589,453 
Costs and estimated earnings in excess of billings   61,392    (137,016)
Billings in excess of costs and estimated earnings   374,916    (20,500)
Provision for estimated  losses on uncompleted contracts   (63,967)   130,046 
Net cash used in operating activities   (2,266,721)   (1,408,685)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds of convertible notes   150,000    585,000 
Repayments of convertible notes   (150,000)   - 
Debt issuance costs   (44,500)   (57,500)
Proceeds of promissory notes   1,100,000    355,993 
Repayments of promissory notes   (426,198)   (50,000)
Proceeds from common stock subscriptions   1,591,407    113,100 
Net cash provided by financing activities   2,220,709    946,593 
           
Decrease in cash   (46,012)   (462,092)
Cash, beginning of year   61,400    523,492 
           
Cash, end of year  $15,388   $61,400 
           
Supplemental disclosures of cash flow information:          
Cash paid during the year for:          
Interest  $115,015   $- 
Taxes  $-   $- 
           
Non cash investing and financing activities:          
Notes issued for insurance premiums  $94,706   $- 
Original issue discount on promissory notes  $-   $8,000 
Original issue discount on convertible notes  $-   $15,000 
Debt discount - beneficial conversion feature  $67,637   $- 
Debt discount paid in the form of common shares  $80,137   $70,000 
Debt issuance costs accrued  $-   $17,500 
Stock issuance costs paid in the form of warrants  $76,927   $5,257 
Increase in principal amount of convertible notes in conjunction with debt modification  $57,668   $- 
Derivative liability - convertible promissory notes  $204,300   $- 
Fabrication molds given in settlement agreement  $-   $59,983 

 

See the accompanying notes to these consolidated financial statements

 

 F-6 

 

SPORTS FIELD HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016 AND 2015

 

NOTE 1 – DESCRIPTION OF BUSINESS

 

Sports Field Holdings, Inc. (“the Company”, “Sports Field Holdings”, “we”, “our”, or “us”) is a Nevada corporation engaged in product development, engineering, manufacturing, and the construction, design and building of athletic facilities, as well as supplying its own proprietary high end synthetic turf products to the sports industry. The Company is headquartered at 4320 Winfield Road, Suite 200, Warrenville, IL 60555.

 

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of Sports Field Holdings, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. The Company’s significant estimates and assumptions include the accounts receivable allowance for doubtful accounts, warranty reserve, percentage of completion revenue recognition method, the useful life of fixed assets, assumptions used in the fair value of stock-based compensation, valuation of derivative liabilities and the valuation allowance relating to the Company’s deferred tax assets.

 

Revenues and Cost Recognition

 

Revenues from construction contracts are included in contract revenue in the consolidated statements of operations and are recognized under the percentage-of-completion accounting method. The percent complete is measured by the cost incurred to date compared to the estimated total cost of each project. This method is used as management considers expended cost to be the best available measure of progress on these contracts, the majority of which are completed within one year, but may occasionally extend beyond one year. Inherent uncertainties in estimating costs make it at least reasonably possible that the estimates used will change within the near term and over the life of the contracts.

 

Contract costs include all direct material and labor costs and those indirect costs related to contract performance and completion. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. General and administrative costs are charged to expense as incurred.

 

Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income. Such revisions are recognized in the period in which they are determined.

 

Costs and estimated earnings in excess of billings are comprised principally of revenue recognized on contracts (on the percentage-of-completion method) for which billings had not been presented to customers because the amounts were not billable under the contract terms at the balance sheet date. In accordance with the contract terms, any unbilled receivables at period end will be billed subsequently. Amounts are billed based on contractual terms. Billings in excess of costs and estimated earnings represent billings in excess of revenues recognized.  

 

 F-7 

 

Inventory

 

Inventory is stated at the lower of cost (first-in, first out) or market and consists primarily of construction materials.

 

Property, Plant and Equipment

 

Property, plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets, which generally range from 3 to 5 years. Gains and losses from the retirement or disposition of property and equipment are included in operations in the period incurred. Maintenance and repairs are expensed as incurred.

 

Income Taxes 

 

Deferred income tax assets and liabilities are determined based on the estimated future tax effects of net operating loss and credit carry-forwards and temporary differences between the tax basis of assets and liabilities and their respective financial reporting amounts measured at the current enacted tax rates. The differences relate primarily to net operating loss carryforward from date of acquisition and to the use of the cash basis of accounting for income tax purposes. The Company records an estimated valuation allowance on its deferred income tax assets if it is more likely than not that these deferred income tax assets will not be realized.

 

The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company has not recorded any unrecognized tax benefits.

 

Stock-Based Compensation

 

The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Awards granted to directors are treated on the same basis as awards granted to employees. 

 

Concentrations of Credit Risk

 

Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. The Company places its cash and temporary cash investments with credit quality institutions. At times, such amounts may be in excess of the FDIC insurance limit.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management. The maximum accounting loss from the credit risk associated with accounts receivable is the amount of the receivable recorded, which is the face amount of the receivable, net of the allowance for doubtful accounts. As of December 31, 2016 and 2015, the Company’s accounts receivable balance was $354,159 and $151,168, respectively, and the allowance for doubtful accounts is $0 in each period.

 

Research and Development

 

Research and development expenses are charged to operations as incurred. For the year ended December 31, 2016 and 2015, the Company incurred research and development expenses of $90,897 and $0, respectively.

 

Warranty Costs

 

The Company generally provides a warranty on the products installed for up to 8 years with certain limitations and exclusions based upon the manufacturer’s product warranty. The Company’s subcontractors provide a 1 year warranty to the Company against defects in material or workmanship. The Company has accrued a warranty reserve of $50,000 and $0 as of December 31, 2016 and 2015, respectively which is included in accounts payable and accrued expenses on the consolidated balance sheets. See Note 6 for warranty expenses incurred during the year ended December 31, 2016 and 2015.

 

 F-8 

 

Fair Value of Financial Instruments

 

The Company follows ASC 820-10 of the FASB Accounting Standards Codification to measure the fair value of its financial instruments and disclosures about fair value of its financial instruments. ASC 820-10 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820-10 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The three (3) levels of fair value hierarchy defined by ASC 820-10 are described below:

 

Level 1   Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
     
Level 2   Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
     
Level 3   Pricing inputs that are generally unobservable inputs and not corroborated by market data.

 

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

 

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, inventory, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values because of the short maturity of these instruments.

 

We have determined that it is not practical to estimate the fair value of our notes payable because of their unique nature and the costs that would be incurred to obtain an independent valuation. We do not have comparable outstanding debt on which to base an estimated current borrowing rate or other discount rate for purposes of estimating the fair value of the notes payable and we have not been able to develop a valuation model that can be applied consistently in a cost efficient manner. These factors all contribute to the impracticability of estimating the fair value of the notes payable. At December 31, 2016 and December 31, 2015, the carrying value of the notes payable and accrued interest was $1,815,442 and $891,330. Accrued interest is included on the Balance Sheets in the accounts payable and accrued expenses line item.

 

Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free-market dealings may not exist.

 

The Company’s Level 3 financial liabilities consist of the derivative conversion features issued in 2016. The Company valued the conversion features using a black scholes model. These models incorporate transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, and volatility as of the date of issuance and each balance sheet date.

 

The Company utilized the following management assumptions in valuing the derivative conversion feature during the year ended December 31, 2016:

 

Exercise price  $0.19 
Expected dividends   0%
Expected volatility   44.24%
Risk fee interest rate   0.85%
Term   1.0 year 

 

 F-9 

 

Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis

 

The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative liability at every reporting period and recognizes gains or losses in the statements of operations that are attributable to the change in the fair value of the derivative liability.

 

Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the balance sheets as follows:

 

December 31, 2016      Fair Value Measurement Using 
   Carrying Value   Level 1   Level 2   Level 3   Total 
Derivative conversion features  $204,300   $       -   $       -   $204,300   $204,300 

  

The unobservable level 3 inputs used by the Company was the expected volatility assumption used in the option pricing model. Expected volatility is based on the historical stock price volatility of comparable companies’ common stock, as our stock does not have sufficient historical trading activity.

 

The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period December 31, 2015 through December 31, 2016:

 

   Fair Value
Measurement Using
Level 3 Inputs
 
   Derivative
conversion
features
   Total 
         
Balance, December 31, 2015  $-   $- 
Purchases, issuances, reassessments and settlements   204,300    204,300 
Change in fair value   -    - 
Balance, December 31, 2016  $204,300   $204,300 

 

Changes in the unobservable input values could potentially cause material changes in the fair value of the Company’s Level 3 financial instruments. The significant unobservable inputs used in the fair value measurements is the expected volatility assumption. A significant increase (decrease) in the expected volatility assumption could potentially result in a higher (lower) fair value measurement.

 

Beneficial Conversion Feature

 

For conventional convertible debt where the rate of conversion is below market value, the Company records a “beneficial conversion feature” (“BCF”) and related debt discount.

 

When the Company records a BCF the intrinsic value of the BCF would be recorded as a debt discount against the face amount of the respective debt instrument. The debt discount attributable to the BCF is amortized over the period from issuance to the date that the debt matures.

 

 F-10 

 

Derivative Instruments

 

The Company evaluates its convertible debt, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-15. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.

 

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

 

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date.

 

Net Loss Per Common Share

 

The Company computes basic net loss per share by dividing net loss per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. The computation of basic and diluted loss per share excludes potentially dilutive securities because their inclusion would be anti-dilutive.  Anti-dilutive securities excluded from the computation of basic and diluted net loss per share for the years ended December 31, 2016 and 2015, respectively, are as follows: 

 

   December 31, 
   2016   2015 
         
Warrants to purchase common stock   679,588    508,068 
Options to purchase common stock   972,500    430,000 
Unvested restricted common shares   75,000    - 
Convertible Notes   2,716,006    626,775 
Totals   4,443,094    1,564,843 

 

Shares outstanding

 

Shares outstanding include shares of unvested restricted stock. Unvested restricted stock included in reportable shares outstanding was 75,000 and 0 shares as of December 31, 2016 and 2015, respectively. Shares of unvested restricted stock are excluded from our calculation of basic weighted average shares outstanding. Their dilutive impact was not added back in the calculation of diluted weighted average shares outstanding since the Company had a net loss during both years.

 

Significant Customers

 

The Company’s business focuses on securing a smaller number of high quality, highly profitable projects, which sometimes results in having a concentration of sales and accounts receivable among a few customers. This concentration is customary among the design and build industry for a company of our size. As we continue to grow and are awarded more projects, this concentration will continue to decrease. 

 

At December 31, 2016, the Company had one customer representing 91% of the total accounts receivable balance.

 

At December 31, 2015, the Company had two customers representing 94% of the total accounts receivable balance.  

 

For the year ended December 31, 2016, the Company had three customers that represented 22%, 18%, and 45% of the total revenue and for the year ended December 31, 2015, the Company had four customers that represented 16%, 25%, 41%, and 15% of the total revenue.

 

 F-11 

 

Reclassifications

 

Certain items in the prior year financial statements have been reclassified to conform to the current year presentation.

 

Recently Adopted Accounting Guidance

 

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, or ASU 2015-03. ASU 2015-03 amends current presentation guidance by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented as an asset in the balance sheet. We adopted the provisions of ASU 2015-03 on January 1, 2016 and prior period amounts have been reclassified to conform to the current period presentation. As of December 31, 2015, $23,037 of debt issuance costs were reclassified in the consolidated balance sheet from current assets to convertible notes payable, net of discounts. The adoption of ASU 2015-03 did not materially impact our consolidated financial position, results of operations or cash flows.

 

In June 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-12, Compensation-Stock Compensation. The amendments in this update apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period. This Accounting Standards Update is the final version of Proposed Accounting Standards Update EITF-13D-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, which has been deleted. The amendments 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 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that 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. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and early adoption is permitted.  We adopted the provisions of ASU 2014-12 on January 1, 2016. The adoption of ASU 2014-12 did not impact our consolidated financial position, results of operations or cash flows.

 

In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-15,  Presentation of Financial Statements-Going Concern.  The Update provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2013-300-Presentation of Financial Statements (Topic 205): Disclosure of Uncertainties about an Entity’s Going Concern Presumption, which has been deleted. The amendments in this update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The adoption of ASU 2014-15 did not impact our consolidated financial position, results of operations or cash flows.

 

Recent Accounting Guidance Not Yet Adopted

 

During May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance also requires 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. In July 2015, the FASB voted to delay the effective date of ASU 2014-09 by one year to the first quarter of 2018 to provide companies sufficient time to implement the standards. Early Adoption will be permitted, but not before the first quarter of 2017. Adoption can occur using one of two prescribed transition methods. The adoption of ASU 2014-09 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

 

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, “Leases” (topic 842). The FASB issued this update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard on our consolidated financial statements.

 

 F-12 

 

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-06, “Derivatives and Hedging” (topic 815). The FASB issued this update to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The updated guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard on our consolidated financial statements.

 

In April 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, “Compensation – Stock Compensation” (topic 718). The FASB issued this update to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard on our consolidated financial statements.

 

In April 2016, the Financial Accounting Standards Board (‘FASB”) issued Accounting Standards Update (“ASU”) No. 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing” (topic 606). In March 2016, the Financial Accounting Standards Board (‘FASB”) issued Accounting Standards Update (“ASU”) No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross verses Net)” (topic 606). These amendments provide additional clarification and implementation guidance on the previously issued ASU 2014-09, “Revenue from Contracts with Customers”. The amendments in ASU 2016-10 provide clarifying guidance on materiality of performance obligations; evaluating distinct performance obligations; treatment of shipping and handling costs; and determining whether an entity's promise to grant a license provides a customer with either a right to use an entity's intellectual property or a right to access an entity's intellectual property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The adoption of ASU 2016-10 and ASU 2016-08 is to coincide with an entity's adoption of ASU 2014-09, which we intend to adopt for interim and annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of the new standard on our consolidated financial statements.

 

In August 2016, the Financial Accounting Standards Board (‘FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments."  ASU No. 2016-15 addresses specific cash flow classification issues where there is currently diversity in practice including debt prepayment and proceeds from the settlement of insurance claims. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of the new standard on our consolidated financial statements.

 

In November 2016, the FASB issued ASU No. 2016-18 “Statement of Cash Flows (Topic 230), Restricted Cash” which provides guidance on the presentation of restricted cash and restricted cash equivalents in the statements of cash flows. The new guidance requires restricted cash and restricted cash equivalents to be included within the cash and cash equivalents balances when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The ASU is effective for reporting periods beginning after December 15, 2017 with early adoption permitted. The Company is currently evaluating the impact of the new standard on our consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04 “Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment” which eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this ASU an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The ASU also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The ASU is effective for reporting periods beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the new standard on our consolidated financial statements.

 

 F-13 

 

There were no other new accounting pronouncements that were issued or became effective since the issuance of our 2015 Annual Report on Form 10-K that had, or are expected to have, a material impact on our consolidated financial position, results of operations or cash flows. 

 

Subsequent Events

 

Management has evaluated subsequent events or transactions occurring through the date on which the financial statements were issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements, except as disclosed.

 

NOTE 3 – GOING CONCERN

 

As reflected in the accompanying consolidated financial statements, as of December 31, 2016 the Company had a working capital deficit of $3,569,741 and net cash used in operations during the year ended December 31, 2016 of $2,266,721. Furthermore, the Company incurred net losses of approximately $3.7 million for the year ended December 31, 2016 and $3.3 million and $3.8 million for years ended December 31, 2015 and 2014, respectively, and had an accumulated deficit of $13.9 million at December 31, 2016. Substantially all of our accumulated deficit has resulted from losses incurred on construction projects, costs incurred in connection with our research and development and general and administrative costs associated with our operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern through March 31, 2018.

 

We expect that for the next 12 months, our operating cash burn will be approximately $2.5 million, excluding repayments of existing debts in the aggregate amount of $1.78 million. Our cash requirements relate primarily to working capital needed to operate and grow our business, including funding operating expenses and continued development and expansion of our products/services. Our ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including the timing and size of awarded contracts; the timing and amount of our operating expenses; the timing and costs of working capital needs; the timing and costs of expanding our sales team and business development opportunities; the timing and costs of developing a marketing program; the timing and costs of warranty and other post-implementation services; the timing and costs of hiring and training construction and administrative staff; the extent to which our brand and construction services gain market acceptance; the extent of our ongoing and any new research and development programs; and changes in our strategy or our planned activities.

 

We have experienced and continue to experience negative cash flows from operations and we expect to continue to incur net losses in the foreseeable future.

 

The Company will require additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives. The Company believes its current available cash along with anticipated revenues may be insufficient to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. If we are not able to obtain financing when needed, we may be unable to carry out our business plan. As a result, we may have to significantly limit our operations and our business, financial condition and results of operations would be materially harmed.

 

To date, we have funded our operational short-fall primarily through private offerings of common stock, convertible notes and promissory notes, our line of credit and factoring of receivables.

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

 

NOTE 4 – COSTS AND ESTIMATED EARNINGS ON CONTRACTS IN PROCESS

 

Following is a summary of costs, billings, and estimated earnings on contracts in process as of December 31, 2016 and December 31, 2015:

  

   December 31,   December 31, 
   2016   2015 
Costs incurred on contracts in progress  $6,299,675   $5,395,046 
Estimated earnings (losses)   (320,450)   (863,259)
    5,979,225    4,531,787 
Less billings to date   (6,344,596)   (4,524,817)
   $(365,371)  $6,970 

 

The above accounts are shown in the accompanying consolidated balance sheet under these captions at December 31, 2016 and December 31, 2015:

 

   December 31,   December 31, 
   2016   2015 
Costs and estimated earnings in excess of billings  $75,624   $137,016 
Billings in excess of costs and estimated earnings   (374,916)   - 
Provision for estimated  losses on uncompleted contracts   (66,079)   (130,046 
   $(365,371)  $6,970 

 

 F-14 

 

Warranty Costs

 

During the year ended December 31, 2016 the Company incurred costs of approximately $178,100. A substantial amount of the warranty costs incurred during the year ended December 31, 2016 related to subgrade infill materials used on a 2015 project. Since then, neither this supplier nor this infill material has been used again. During the year ended December 31, 2015 the Company incurred costs of approximately $231,400 relating to the installation of materials by a subcontractor that has been released from the Company. The Company has implemented policies and procedures to avoid these costs in the future. The Company generally provides a warranty on the products installed for up to 8 years with certain limitations and exclusions based upon the manufacturer’s product warranty. The Company’s subcontractors provide a 1 year warranty to the Company against defects in material or workmanship. The Company has accrued a warranty reserve of $50,000 and $0 as of December 31, 2016 and 2015, respectively which is included in accounts payable and accrued expenses on the consolidated balance sheets.

 

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consists of the following:

 

   December 31,
2016
   December 31,
2015
 
Furniture and equipment  $20,278   $20,278 
Total   20,278    20,278 
Less:  accumulated depreciation   (10,085)   (6,029)
   $10,193   $14,249 

  

Depreciation expense for the years ended December 31, 2016 and 2015 was $4,056 and $28,044, respectively.

 

On October 21, 2015, the Company and East Point Crossing, LLC (the “Landlord”) entered into a settlement and release agreement (the “East Point Settlement Agreement”). Pursuant to the East Point Settlement Agreement, the Company agreed to the transfer of all right, title and interest in and to the furniture, fixtures and equipment in the premises to the Landlord. (See Note 11 - Litigation) As a result, the Company recorded an abandonment of furniture, fixtures and equipment having a net book value of $11,826, resulting in a loss on abandonment of furniture, fixtures and equipment of $11,826.

 

On December 17, 2015, the Company and 308, LLC entered into a settlement and release agreement (the “Settlement Agreement”). As mutual consideration for entering into the Settlement Agreement with 308, LLC the Company assigned title and ownership of various fabrication molds held by the Company to 308,LLC and 308, LLC wrote down to $0 all past due royalties and/or any other amounts owed pursuant to the License Agreement. (See Note 11 - Litigation) As a result, the Company recorded a disposal of fabrication molds having a net book value of $59,983 and a termination of royalties due on the License Agreement totaling $104,815, resulting in a gain on disposition of fabrication molds of $44,832. 

 

NOTE 6 – DEPOSITS

 

Deposits at December 31, 2016 and 2015 were comprised of a $2,090 security deposit on an Illinois office lease (See Note 11).

 

NOTE 7 – DEBT

 

Convertible Notes

 

On May 7, 2015, the Company issued unsecured convertible promissory notes (each a “Note” and collectively the “Notes”) in an aggregate principal amount of $450,000 to three accredited investors (collectively the “Note Holders”) through a private placement. The notes pay interest equal to 9% of the principal amount of the notes, payable in one lump sum, and mature on February 1, 2016 unless the notes are converted into common stock if the Company undertakes a qualified offering of securities of at least $2,000,000 (the “Qualified Offering”). The principal of the notes are convertible into shares of common stock at a conversion price that is the lower of $1.00 per share or the price per share offered in a Qualified Offering. In order to induce the investors to invest in the notes, one of the Company’s shareholders assigned an aggregate of 45,000 shares of his common stock to such investors. The Company recorded a $45,000 debt discount relating to the 45,000 shares of common stock issued with an offsetting entry to additional paid in capital. The debt discount shall be amortized to interest expense over the life of the notes. As part of the transaction, we incurred placement agent fees of $22,500 and legal fees of $22,500 which were recorded as debt issue costs and shall be amortized over the life of the notes. The outstanding principal balance on the notes at December 31, 2016 and 2015 was $522,668 and $450,000, respectively.

 

The notes matured on February 1, 2016. On March 31, 2016, the Note Holders entered into a letter agreement whereby, effective as of February 1, 2016, they waived any and all defaults that may or may not have occurred prior to the date thereof (the “First Waiver”). As consideration for the First Waiver, the Company issued the Note Holders an aggregate of 45,000 shares of the Company’s common stock. The principal amount on the Notes increased from $450,000 to $490,500 as the initial interest amount, $40,500 as of February 1, 2016, was added to the principal amount of the Notes. The maturity date of the Notes was extended to July 1, 2016 and the Notes shall pay interest as of February 1, 2016 at a rate of 9% per annum, payable in one lump sum on the maturity date. In addition, on any note conversion date from February 1, 2016 through July 1, 2016, the Notes are convertible into shares of the Company’s common stock at a conversion price of $1.00 per share. On any Note conversion after July 1, 2016, the Notes are convertible into shares of the Company’s common stock at a conversion price that is the lower of (i) $1.00 per share and (ii) the volume-weighted average price for the last five trading days preceding the conversion date. All remaining terms of the Notes remained the same.

 

 F-15 

 

Subsequent to the First Waiver, the Notes matured on July 1, 2016. On September 7, 2016, one Note Holder entered into a letter agreement whereby, effective as of August 1, 2016, they waived any and all defaults that may or may not have occurred prior to the date thereof (the “Second Waiver”). As consideration for the Second Waiver, the Company issued the Note Holder an aggregate of 40,000 shares of the Company’s common stock and added $15,000 to the principal amount of the note. The principal amount on the Note increased from $218,000 to $242,810 as the accrued interest amount, $9,810 as of August 1, 2016 and the aforementioned $15,000 of consideration, was added to the principal amount of the Note. The maturity date of the Note was extended to January 1, 2017 and the Note shall pay interest as of August 1, 2016 at a rate of 15% per annum, payable in one lump sum on the maturity date. In addition, on any note conversion date from August 9, 2016 through January 1, 2017, the Note is convertible into shares of the Company’s common stock at a conversion price of $1.00 per share. On any Note conversion after January 1, 2017, the Note is convertible into shares of the Company’s common stock at a conversion price that is the lower of (i) $1.00 per share and (ii) the volume-weighted average price for the last five trading days preceding the conversion date. All remaining terms of the Note remained the same.

 

On October 21, 2016, a second Note Holder entered into a letter agreement whereby, effective as of August 1, 2016, they waived any and all defaults that may or may not have occurred prior to the date thereof (the “Second Waiver”). As consideration for the Second Waiver, the Company issued the Note Holder an aggregate of 30,000 shares of the Company’s common stock. The principal amount on the Note increased from $163,500 to $170,858 as the accrued interest amount, $7,358 as of August 1, 2016, was added to the principal amount of the Note. The maturity date of the Note was extended to January 1, 2017 and the Note shall pay interest as of August 1, 2016 at a rate of 15% per annum, payable in one lump sum on the maturity date. In addition, on any note conversion date from August 9, 2016 through January 1, 2017, the Note is convertible into shares of the Company’s common stock at a conversion price of $1.00 per share. On any Note conversion after January 1, 2017, the Note is convertible into shares of the Company’s common stock at a conversion price that is the lower of (i) $1.00 per share and (ii) the volume-weighted average price for the last five trading days preceding the conversion date. All remaining terms of the Note remained the same.

 

Glenn Tilley, a director of the Company, is the holder of $170,858 of principal as of December 31, 2016 of the aforementioned Notes.

 

As of July 1, 2016, the Company was not compliant with the repayment terms of one of the Notes. As of December 31, 2016, the outstanding principal balance on the Note was $109,000.

 

As of January 1, 2017, the Company was not compliant with the repayment terms of all of the Notes but no defaults under the Note have been called by the Note Holders. As of January 1, 2017, the outstanding principal balance on the Notes was $522,668. The Company is currently conducting good faith negotiations with the Note Holders to further extend the maturity date, however, there can be no assurance that a further extension will be granted. The Company is currently accruing interest on the Notes at the default interest rate of 15% per annum.

 

First Waiver

 

In accordance with ASC 470, since the present value of the cash flows under the new debt instrument was not at least ten percent different from the present value of the remaining cash flows under the terms of the original debt instrument, the Company accounted for the First Waiver as a debt modification. Accordingly, the Company recorded a debt discount of $49,500 in the consolidated balance sheet. The debt discount shall be amortized to interest expense over the life of the note.

  

Second Waiver

 

In accordance with ASC 470, since the present value of the cash flows under the new debt instrument was at least ten percent different from the present value of the remaining cash flows under the terms of the original debt instrument, the Company accounted for the Second Waiver as a debt extinguishment. Accordingly, the Company recorded a loss on extinguishment of debt of $45,000 in the consolidated statement of operations.

 

The Company assessed the conversion feature of the Note in default at the end of the reporting period and concluded that the conversion feature of the Note did not qualify as a derivative because the settlement terms indicate that the Note is indexed to the entity’s underlying stock. The Company will reassess the conversion feature of the Note for derivative treatment at the end of each subsequent reporting period.

 

On August 19, 2015, we entered into a Securities Purchase Agreement (the “Agreement”) with a private investor (the “Investor”). Under the Agreement, the Investor agreed to purchase convertible debentures in the aggregate principal amount of up to $450,000 (together the “Debentures” and each individual issuance a “Debenture”), bearing interest at a rate of 0% per annum, with maturity on the thirty-six (36) month anniversary of the respective date of issuance.

 

 F-16 

 

On the Initial Closing Date, we issued and sold to the Investor, and the Investor purchased from us, a first Debenture in the principal amount of $150,000 for a purchase price of $135,000. $15,000 was recorded as an original issue discount and will be accreted over the life of the note to interest expense. The Agreement provides that, subject to our compliance with certain conditions to closing, at the request of the Company and approval by the Investor, (i) we will issue and sell to the Investor, and the Investor will purchase from us, a second Debenture in the principal amount of $150,000 for a purchase price of $135,000 and (ii) thereafter, we will issue and sell to the Investor, and the Investor will purchase from us, a third Debenture in the principal amount of $150,000 for a purchase price of $135,000. 

   

The principal amount of the Debentures can be converted at the option of the Investor into shares of our common stock at a conversion price per share of $1.00 until the six month anniversary of each closing date.  If the Debenture is not repaid within six months, the Investor will be able to convert such Debenture at a conversion price equal to 65% of the lowest closing bid price for our common stock during the previous 20 trading days, subject to the terms and conditions contained in the Debenture. If the Debentures are repaid within 90 days of the date of issuance, there is no prepayment penalty or premium.  Following such time, a prepayment penalty or premium will apply.  As part of the transaction, we agreed to pay the Investor $5,000 and issue 25,000 shares of our Common Stock for certain due diligence and other transaction related costs. In-addition the Company incurred placement agent fees of $7,500 and legal fees of $7,500. The Company recorded a $25,000 debt discount relating to the 25,000 shares of common stock issued. The debt discount shall be amortized to interest expense over the life of the note. The remaining fees were recorded as debt issue costs and shall be amortized over the life of the note.

 

The Company assessed the conversion feature of the Debentures on the date of issuance and at end of each subsequent reporting period through the repayment date and concluded the conversion feature of the Debentures do not qualify as a derivative because there was no market mechanism for net settlement and it was not readily convertible to cash.. 

 

The outstanding principal balance on the Debentures at December 31, 2015 was $150,000. On February 19, 2016, the Company paid the Debentures in full along with a prepayment penalty in the amount of $45,000.

 

On February 22, 2016 (the “Effective Date”), the Company issued a convertible note in the principal aggregate amount of $170,000 to a private investor. The note pays interest at a rate of 12% per annum and matures on August 19, 2016 (the “Maturity Date”). The Note is convertible into shares of the Company’s common stock at a conversion price equal to: (i) from the Effective Date through the Maturity Date at $1.00 per share; and (ii) beginning one day after the Maturity Date, or notwithstanding the foregoing, at any time after the Company has registered shares of its common stock underlying the Note in a registration statement on Form S-1 or any other form applicable thereto, the lower of i) $1.00 per share and ii) 65% of the volume-weighted average price for the last twenty trading days preceding the conversion date.

 

The Company used the proceeds of the note to pay off a debenture issued in favor of a private investor on August 19, 2015. The debenture was in the principal amount of $150,000 and as of the date of this filing the investor has been paid all principal and interest due in full satisfaction thereof.

 

As additional consideration for issuing the note, on the Effective Date the Company issued to the investor 35,000 shares of the Company’s restricted common stock. The Company recorded a $30,637 debt discount relating to the 35,000 shares of common stock issued. The debt discount was amortized to interest expense over the life of the convertible note.

 

The intrinsic value of the convertible note, when issued, gave rise to a beneficial conversion feature which was recorded as a discount to the note of $67,637 and was amortized over the period from issuance to the date that the debt matured.

 

The Company assessed the conversion feature of the note on the date of issuance, on the date of default and at the end of each subsequent reporting period through September 30, 2016 and concluded the conversion feature of the note did not qualify as a derivative because there was no market mechanism for net settlement and it was not readily convertible to cash.

 

The Company reassessed the conversion feature of the note for derivative treatment on December 31, 2016. Due to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC No. 815, due to the potential for settlement in a variable quantity of shares. The conversion feature has been measured at fair value using a black scholes model at period end. The conversion feature, when reassessed, gave rise to a derivative liability of $204,300. In accordance with ASC 815 the $204,300 was charged to paid in-capital due to the fact a beneficial conversion feature was recorded on the original issue date. Gains and losses in future reporting periods from the change in fair value of the derivative liability will be recognized on the statements of operations.

 

The outstanding principal balance on the convertible note at December 31, 2016 was $170,000.

 

 F-17 

 

As of August 19, 2016, the Company was not compliant with the repayment terms of this note but no defaults under the note have been called by the note holder. The Company is currently conducting good faith negotiations with the note holder to further extend the maturity date, however, there can be no assurance that a further extension will be granted. The Company recorded $17,850 in penalty interest during the year ended December 31, 2016 as a result of the default. Accrued interest on this note is $23,667 as of December 31, 2016.

 

Promissory Notes

 

On September 15, 2015, the Company entered into a short term loan agreement with an investor. The principal amount of the loan was $200,000. The first $100,000 of the loan was payable upon the Company raising $500,000 in a qualified offering (as defined therein). The remaining balance was payable upon the Company raising $1,000,000 in a qualified offering. The loan bears interest at a rate of 8%. As part of the transaction, we incurred placement agent fees of $10,000 which were recorded as debt issue costs and amortized over the life of the loan. On May 3, 2016, the Company paid 10,000 in note principal and $10,000 of accrued interest on the loan and the Company entered into a promissory note with the lender for the remaining principal amount of $190,000. Pursuant to the terms of the promissory note agreement, the note bears interest at a rate of 8% and requires the Company to make one monthly principal payment of $10,000, one monthly principal payment of $12,500, eleven monthly principal payments of $15,000 and one monthly principal payment of $2,500, all along with interest starting on June 1, 2016. The note matures on July 1, 2017 and is unsecured. The outstanding principal balance on the note at December 31, 2016 and 2015 was $82,500 and $200,000, respectively.

 

On September 21, 2015, the Company entered into a promissory note with an investor in the principal amount of $163,993. The Company received proceeds of $155,993 and $8,000 was recorded as an original issue discount which will be accreted over the life of the note to interest expense. The promissory note is due on demand and carries a 5.0% interest rate. The promissory note is secured by all assets of the Company. On November 17, 2015, the Company paid $50,000 of principal on the note. The outstanding principal balance on the note at December 31, 2015 was $113,993. During the year ended December 31, 2016, the Company paid the remaining note principal of $113,993 in full.

 

On January 26, 2016, the Company entered into a finance agreement with IPFS Corporation (“IPFS”). Pursuant to the terms of the agreement, IPFS loaned the Company the principal amount of $65,006, which would accrue interest at 3.5% per annum, to partially fund the payment of the premium of the Company’s general liability insurance. The agreement requires the Company to make nine monthly payments of $7,328, including interest starting on February 27, 2016. As of December 31, 2016, the loan was paid in full.

  

On November 30, 2015, the Company entered into a finance agreement with First Insurance Funding (“FIF”). Pursuant to the terms of the agreement, FIF loaned the Company the principal amount of $29,700, which would accrue interest at 3.8% per annum, to partially fund the payment of the premium of the Company’s directors and officers insurance. The agreement requires the Company to make nine monthly payments of $3,352, including interest starting on January 3, 2016. As of December 31, 2016, the loan was paid in full.

 

On July 14, 2016, the Company closed a Credit Agreement (the “Credit Agreement”) by and among the Company and First Form, Inc. (the “Borrowers”) and Genlink Capital, LLC, as lender (“Genlink”). Pursuant to the Credit Agreement, Genlink agreed to loan the Company up to a maximum of $1 million for general operating expenses. An initial amount of $670,000 was funded by Genlink at the closing of the Credit Agreement. Any increase in the amount extended to the Borrowers shall be at the discretion of Genlink.

 

The amounts borrowed pursuant to the Credit Agreement are evidenced by a Revolving Note (the “Revolving Note”) and the repayment of the Revolving Note is secured by a first position security interest in substantially all of the Company’s assets in favor of Genlink, as evidenced by a Security Agreement by and among the Borrowers and Genlink (the “Security Agreement”). The Revolving Note is due and payable, along with interest thereon, on December 20, 2017, and bears interest at the rate of 15% per annum, increasing to 19% upon the occurrence of an event of default. The Company incurred loan fees of $44,500 for entering into the Credit Agreement. The loan fees shall be amortized to interest expense over the life of the notes. The Company must pay a minimum of $75,000 in interest over the life of the loan. The principal balance on the note as of December 31, 2016 was $1,000,000. The principal balance on the note as of the date of this filing was $1,000,000. 

 

NOTE 8 – STOCKHOLDERS EQUITY (DEFICIT)

 

Preferred Stock

 

The Company has authorized 20,000,000 shares of preferred stock, with a par value of $0.00001 per share. As of December 31, 2016 and 2015, the Company has -0- shares of preferred stock issued and outstanding.

 

Common Stock

 

The Company has authorized 250,000,000 shares of common stock, with a par value of $0.00001 per share. As of December 31, 2016 and 2015, the Company has 17,074,470 and 13,915,331 shares of common stock issued and outstanding, respectively.

 

 F-18 

 

Common stock issued in placement of debt

 

As part of a securities purchase agreement entered into on August 19, 2015, we agreed to issue an investor 25,000 shares of our common stock for certain due diligence and other transaction related costs.

 

As part of a securities purchase agreement entered into on February 19, 2016, we agreed to issue an investor 35,000 shares of our common stock.

 

Common stock issued in cashless exercise of warrants

 

On June 17, 2015, a warrant holder elected their cash-less exercise provision and exercised 3,750 warrants. Accordingly, the Company issued 1,874 shares of common stock in connection with such exercise.

 

 Common stock issued in debt modification

 

As part of a debt modification entered into on March 31, 2016, we agreed to issue three investors an aggregate of 45,000 shares of our common stock.

 

As part of a debt modification entered into on September 7, 2016, the Company agreed to issue an investor 40,000 shares of our common stock. 

 

As part of a debt modification entered into on October 21, 2016, the Company agreed to issue an investor 30,000 shares of our common stock. 

 

Common stock issued for services

 

On April 1, 2015, 20,000 restricted shares were granted to a certain employee with a fair value of $20,000. The restricted shares vest over a one year period - 25% three months from the date of issue and the remaining shares vesting quarterly until the end of the term. The Company has recorded $15,000 in stock-based compensation expense for the year ended December 31, 2015 for the shares that have vested, which is a component of general and administrative expenses in the Consolidated Statement of Operations.

 

During the year ended December 31, 2015, 210,000 shares of common stock valued at $211,000 were issued for professional services provided to the Company.

 

On March 31, 2016, 1,000 shares of common stock were granted to a certain employee with a fair value of $1,100.

 

On June 30, 2016, 1,500 shares of common stock were granted to a certain employee with a fair value of $1,650.

 

On September 30, 2016, 1,500 shares of common stock were granted to a certain employee with a fair value of $495.

 

On December 31, 2016, 1,500 shares of common stock were granted to a certain employee with a fair value of $585.

 

During the year ended December 31, 2016, 1,038,444 shares of common stock valued at $646,385 were issued to various consultants for professional services provided to the Company.

 

As discussed in Note 11, Jeromy Olson was issued 250,000 shares of common stock valued at $275,000 as per the terms of his employment agreement with the company as Chief Executive Officer. 

 

Sale of common stock

 

During the year ended December 31, 2015, the Company sold 118,182 shares of common stock to investors in exchange for $130,000 in gross proceeds in connection with the private placement of the Company’s stock.

 

In connection with the private placement the Company incurred placement agent fees of $16,900. In addition, 11,818 five year warrants with an exercise price of $1.10 were issued to the placement agent. The Company valued the warrants at $5,257 on the commitment date using a Black-Scholes-Merton option pricing model. The value of the warrants was a direct cost of the private placement and has been recorded as a reduction in additional paid in capital.

 

During the year ended December 31, 2016, the Company sold 1,715,195 shares of common stock to investors in exchange for $1,886,712 in gross proceeds in connection with the private placement of the Company’s common stock.

 

 F-19 

 

In connection with the private placement the Company incurred placement agent fees of $245,305 and legal fees of $50,000. In addition, 171,520 five year warrants with an exercise price of $1.10 were issued to the placement agent. The Company valued the warrants at $76,927 on the commitment date using a Black-Scholes-Merton option pricing model. The value of the warrants was a direct cost of the private placement and has been recorded as a reduction in additional paid in capital.

 

2016 Incentive Stock Option Plan

 

On October 4, 2016, the Board approved the Sports Field 2016 Incentive Stock Option Plan (the “2016 Plan”). The Plan provides for the issuance of up to 2,500,000 shares of common stock of the Company through the grant of non-qualified options (the “Non-qualified Options”), incentive options (the “Incentive Options” and together with the Non-qualified Options, the “Options”) and restricted stock (the “Restricted Stock”) and unrestricted stock (the “Unrestricted Stock”) to directors, officers, consultants, attorneys, advisors and employees. The 2,500,000 shares available under the 2016 Plan represent approximately 15% of the Company’s issued and outstanding common stock as of October 4, 2016. The Board believes the 2,500,000 shares that may be awarded under the 2016 Plan should be sufficient to cover grants through at least the end of the fiscal year 2018.

 

The 2016 Plan shall be administered by a committee consisting of two or more independent, non-employee and outside directors (the “Committee”). In the absence of such a Committee, the Board shall administer the 2016 Plan. The 2016 Plan is currently being administered by the Board.

 

Options are subject to the following conditions:

 

(i) The Committee determines the strike price of Incentive Options at the time the Incentive Options are granted. The assigned strike price must be no less than 100% of the Fair Market Value (as defined in the Plan) of the Company’s Common Stock. In the event that the recipient is a Ten Percent Owner (as defined in the Plan), the strike price must be no less than 110% of the Fair Market Value of the Company.

 

(ii) The strike price of each Non-qualified Option will be at least 100% of the Fair Market Value of such share of the Company’s Common Stock on the date the Non-qualified Option is granted.

 

(iii) The Committee fixes the term of Options, provided that Options may not be exercisable more than ten years from the date the Option is granted, and provided further that Incentive Options granted to a Ten Percent Owner may not be exercisable more than five years from the date the Incentive Option is granted.

 

(iv) The Committee may designate the vesting period of Options. In the event that the Committee does not designate a vesting period for Options, the Options will vest in equal amounts on each fiscal quarter of the Company through the five (5) year anniversary of the date on which the Options were granted. The vesting period accelerates upon the consummation of a Sale Event (as defined in the Plan).

 

(v) Options are not transferable and Options are exercisable only by the Options’ recipient, except upon the recipient’s death.

 

(vi) Incentive Options may not be issued in an amount or manner where the amount of Incentive Options exercisable in one year entitles the holder to Common Stock of the Company with an aggregate Fair Market value of greater than $100,000.

 

Awards of Restricted Stock are subject to the following conditions:

 

(i) The Committee grants Restricted Stock Options and determines the restrictions on each Restricted Stock Award (as defined in the Plan). Upon the grant of a Restricted Stock Award and the payment of any applicable purchase price, grantee is considered the record owner of the Restricted Stock and entitled to vote the Restricted Stock if such Restricted Stock is entitled to voting rights.

 

(ii) Restricted Stock may not be delivered to the grantee until the Restricted Stock has vested.

 

(iii) Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of except as provided in the Plan or in the Award Agreement (as defined in the Plan).

 

Stock options issued for services

 

During the year ended December 31, 2015, the Company's board of directors authorized the grant of 430,000 stock options, having a total fair value of approximately $171,881, with a vesting period ranging from 1.00 year to 1.84 years. These options expire between January 29, 2020 and August 27, 2020.

 

On January 4, 2016, the Company issued a board member 200,000 common stock options for services, having a total fair value of approximately $97,500, with a vesting period of 2.00 years. These options expire on January 4, 2021. 

 

 F-20 

 

On November 3, 2016, the Company issued our CEO 175,000 common stock options for services, having a total fair value of approximately $30. 100,000 of the options vested immediately and 75,000 of the options vest on December 31, 2016. These options expire on November 3, 2021. 

 

On November 3, 2016, the Company issued Nexphase Global 175,000 common stock options for services, having a total fair value of approximately $613. 100,000 of the options vested immediately and 75,000 of the options vest on December 31, 2016. These options expire on November 3, 2021. 

 

The Company uses the Black-Scholes option pricing model to determine the fair value of the options granted. In applying the Black-Scholes option pricing model to options granted, the Company used the following weighted average assumptions:

 

   For The Year Ended December 31, 
   2016   2015 
Risk free interest rate   1.26-1.73%    1.47-1.83%
Dividend yield   0.00%   0.00%
Expected volatility    40% - 45%     44% - 45%
Expected life in years    2.5 - 5    5 
Forfeiture Rate   0.00%   0.00%

 

Since the Company has limited trading history, volatility was determined by averaging volatilities of comparable companies.

 

The expected term of the option, taking into account both the contractual term of the option and the effects of employees’ expected exercise and post-vesting employment termination behavior: The expected life of options and similar instruments represents the period of time the option and/or warrant are expected to be outstanding. Pursuant to paragraph 718-10-S99-1, it may be appropriate to use the simplified method , i.e., expected term = ((vesting term + original contractual term) / 2) , if (i) A company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded; (ii) A company significantly changes the terms of its share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term; or (iii) A company has or expects to have significant structural changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses the simplified method to calculate expected term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The contractual term is used as the expected term for share options and similar instruments that do not qualify to use the simplified method.

 

The following is a summary of the Company’s stock option activity during the years ended December 31, 2016 and 2015:

 

   Number of Options   Weighted Average Exercise Price   Weighted Average Remaining Contractual Life 
Outstanding - December 31, 2014   -   $-    - 
Granted   430,000    1.03    5.00 
Exercised   -    -    - 
Forfeited/Cancelled   -    -    - 
Outstanding - December 31, 2015   430,000   $1.03    4.36 
Exercisable - December 31, 2015   172,500   $1.07    4.26 
Granted   550,000    1.39    4.95 
Exercised   -    -    - 
Forfeited/Cancelled   (7,500)   1.50    - 
Outstanding - December 31, 2016   972,500   $1.23    4.00 
Exercisable - December 31, 2016   847,500   $1.26    4.02 

 

At December 31, 2016 and 2015, the total intrinsic value of options outstanding was $0 and $40,000, respectively.

 

At December 31, 2016 and 2015, the total intrinsic value of options exercisable was $0 and $15,000, respectively. 

 

 F-21 

 

Stock-based compensation for stock options has been recorded in the consolidated statements of operations and totaled $141,204 for the year ended December 31, 2016 and $63,084 for the year ended December 31, 2015. As of December 31, 2016, the remaining balance of unamortized expense is $63,724 and is expected to be amortized over a remaining period of 0.75 years. 

 

Stock Warrants

 

The following is a summary of the Company’s stock warrant activity during the years ended December 31, 2016 and 2015:

 

   Number of Warrants   Weighted Average Exercise Price   Weighted Average Remaining Contractual Life 
Outstanding - December 31, 2014   500,000   $1.00    4.09 
Granted   11,818    1.10    5.00 
Exercised   (3,750)   -      
Forfeited/Cancelled   -    -      
Outstanding - December 31, 2015   508,068   $1.00    3.13 
Exercisable - December 31, 2015   508,068   $1.00    3.13 
Granted   171,520    1.10    5.00 
Exercised   -    -      
Forfeited/Cancelled   -    -      
Outstanding - December 31, 2015   679,588   $1.03    2.66 
Exercisable - December 31, 2015   679,588   $1.03    2.66 

 

At December 31, 2016 and 2015, the total intrinsic value of warrants outstanding and exercisable was $0 and $49,625, respectively.

 

NOTE 9 – RELATED PARTY TRANSACTIONS

  

Sports Field Contractors LLC, a subsidiary of the Company, is a grantor under a commercial security agreement issued in favor of Illini Bank, as lender, by The AllSynthetic Group, Inc., as borrower, on November 26, 2012, in connection with a loan made by Illini Bank to The AllSynthetic Group, Inc. in the amount of $249,314 (the “Illini Loan”).  Jeremy Strawn, a former officer of the Company, executed the Illini Loan on behalf of The AllSynthetic Group, Inc. in his capacity as such company’s President/CEO.  The Illini Loan appears to have matured on November 26, 2013 and appears to currently be in default.  The Illini Loan is collateralized by all of the assets of Sports Field Contractors LLC; however, because Sports Field Contractors LLC is an inactive subsidiary of the Company and had no assets at December 31, 2016, the Company believes that it does not have any financial exposure in connection with the Illini Loan.

  

Jeromy Olson, the Chief Executive Officer of the Company, owns 50.0% of a sales management and consulting firm, NexPhase Global that provides sales services to the Company. These services include the retention of two full-time senior sales representatives including the current National Sales Director of the Company. Consulting expenses pertaining to the firm’s services were $248,413 for the year ended December 31, 2016. Included in consulting expense for the year ended December 31, 2016 were 40,000 shares of common stock valued at $27,800, and 175,000 common stock options valued at $613 issued to Nexphase Global.

 

Consulting expenses pertaining to the firm’s services were $161,000 for the year ended December 31, 2015. Included in consulting expense for the year ended December 31, 2015 were 40,000 shares of common stock valued at $41,000 issued to Nexphase Global.

 

Glenn Tilley, a director of the Company, was issued 15,000 shares of our common stock as part of a Waiver entered into with Mr. Tilley on March 31, 2016. Mr. Tilley was issued an additional 30,000 shares of our common stock as part of a Second Waiver entered into with Mr. Tilley on October 21, 2016.(See Note 7 - Convertible Notes - May 7, 2015 Notes).

 

NOTE 10 – EMPLOYEE SEPARATION

 

During the year the Company was engaged in an administrative proceeding against a former employee who was terminated from his positions with the Company for cause on May 12, 2014. The former employee claimed he was due between $24,000 and $48,000 in unpaid wages (the “Claim”).

 

 F-22 

 

On December 30, 2016, the Company entered into a mutual general release and settlement agreement (the "Settlement Agreement") with the former employee. Pursuant to the Settlement Agreement, the Company agreed to pay the former employee $45,000, payable in six equal installments of $7,500 on the first day of each month, beginning January 1, 2017 (the “Settlement Amount”). The Settlement Agreement also contains a general release by the former employee of the Company relating to the Claim, such release however is predicated on the Company making payments pursuant to the Settlement Agreement. As of December 31, 2016 the Company had accrued a liability of $45,000 related to the Settlement Agreement which has been included in accounts payable and accrued expenses at December 31, 2016 in the accompanying consolidated Balance Sheet.

 

NOTE 11 – COMMITMENTS AND CONTINGENCIES

 

Services Agreements

 

On August 12, 2015, the Company entered into a Services Agreement with Aranea Partners. Aranea Partners agreed to provide investor relations services to the Company for a period of 12 months. As compensation for the services, the Company issued 50,000 shares of the Company common stock on August 12, 2015. On August 12, 2016, the Company issued an additional 100,000 shares of the Company’s common stock as per the terms of the agreement. Unvested shares are revalued at the end of each reporting period until they vest and are expensed on a straight-line basis over the term of the agreement. The Company has recorded compensation expense relating to the agreement of $28,361 and $61,639 during the years ended December 31, 2016 and 2015, respectively.

 

On August 4, 2015, the Company entered into a Services Agreement with a consultant. The consultant agreed to provide investor relations services to the Company for a period of 12 months. As compensation for the services, the Company issued 62,500 shares of the Company common stock on August 16, 2015. The contract was terminated during the second quarter of 2016. Unvested shares are revalued at the end of each reporting period until they vest and are expensed on a straight-line basis over the term of the agreement. The Company has recorded compensation expense relating to the agreement of $9,068 and $53,432 during the years ended December 31, 2016 and 2015, respectively.

 

On February 19, 2016 (the “Effective Date”), the Company entered into a Services Agreement with a consultant. The consultant agreed to provide investor relations services to the Company for a period of 12 months. As compensation for the services, the Company shall pay the consultant $12,000 per month and is obligated to issue 62,500 shares of the Company common stock upon the 90-day anniversary of the Effective Date and on the 180-day, 270-day and 360-day anniversary of the Effective Date, if the agreement is renewed as outline in the terms of the service. The Company may terminate this agreement by providing 5 days advance written notice in the first 60 days of entering into this agreement and with 30 days advance written notice thereafter for the duration of the agreement. The contract was terminated during the fourth quarter of 2016. Unvested shares are revalued at the end of each reporting period until they vest and are expensed on a straight-line basis over the term of the agreement. The Company has recorded compensation expense relating to the equity portion of the agreement of $98,506 during the year ended December 31, 2016.

 

On April 14, 2016 (the “Effective Date”), the Company entered into a Services Agreement with a consultant. The consultant agreed to provide financial and operational services to the Company. The agreement terminates on March 31, 2017. As compensation for the services, the Company shall pay the consultant $2,400 per month and is obligated to issue $1,000 in shares of the Company common stock to be issued quarterly in arrears based on a share price equal to the 30-day moving average share price. The Company may terminate this agreement by providing 21 days advance written notice for the duration of the agreement. The Company has recorded compensation expense relating to the equity portion of the agreement of $8,397 during the year ended December 31, 2016.

 

On August 9, 2016, the Company entered into a Services Agreement with RedChip Companies Inc. (“RedChip”). RedChip agreed to provide investor relations services to the Company for a period of 12 months. As compensation for the services, the Company shall pay the consultant $5,000 per month and is obligated to issue $50,000 in shares of the Company common stock to be issued upon execution of the agreement based on a share price equal to the average closing price of the preceding 10 trading days. On February 9, 2017, the Company is obligated to issue an additional $50,000 in shares of the Company common stock based on a share price equal to the average closing price of the preceding 10 trading days. The Company may terminate the agreement during the month of February 2017 by providing written notice. The first tranche of shares vest on February 8, 2017 and the second tranche of shares vest on August 8, 2017. The Company agrees to increase the monthly consulting fee to $10,000 per month for the remaining months under the current term upon the closing of a capital raise in excess of $3,000,000. The contract was terminated during the fourth quarter of 2016. Unvested shares are revalued at the end of each reporting period until they vest and are expensed on a straight-line basis over the term of the agreement. The Company has recorded compensation expense relating to the equity portion of the agreement of $45,371 during the year ended December 31, 2016.

 

On December 20, 2016, the Company entered into a Services Agreement with a consulting firm. The consulting firm agreed to provide investor relations services to the Company for a period of 6 months. As compensation for the services, the Company shall pay the consultant $6,500 per month and is obligated to issue 100,000 fully vested shares of the Company common stock to be issued within 30 days of execution of the agreement. The Company may terminate the agreement during the first 2 months of the term with or without reason by providing 7 days written notice. The Company has recorded compensation expense relating to the equity portion of the agreement of $8,379 during the year ended December 31, 2016.

 

 F-23 

 

Consulting Agreements

 

In March 2014, the Company reached an agreement with a consulting firm owned by the CEO of the Company to provide non-exclusive sales services. The consulting firm will receive between 3.5% and 5% commissions on sales referred to the Company. In addition, the consulting firm will receive a monthly fee of $6,000, 50,000 shares of common stock upon execution of the agreement, and 10,000 shares of common stock at the beginning of each three month period for the term of the agreement and any renewal periods thereafter. The agreement is for 18 months, and is renewable for successive 18 month terms. On December 10, 2014, the consulting agreement was amended. The monthly fee was increased to $10,000 per month retroactive to September 1, 2014 and 50,000 additional shares of common stock were issued. In addition, the consulting firm will be issued qualified stock options as follows:

 

  100,000 stock options at an exercise price of $1.50 per share that vest on December 31, 2015

 

  100,000 stock options at an exercise price of $1.75 per share that vest on December 31, 2016

 

  100,000 stock options at an exercise price of $2.50 per share that vest on December 31, 2017

  

On November 3, 2016, the Board, pursuant to the consulting agreement, approved the issuance of (i) qualified options to purchase 100,000 shares of the Company’s Common Stock at a price of $1.50 vesting immediately with a grant date of November 3, 2016 and (ii) qualified options to purchase 75,000 shares of the Company’s Common Stock at a price of $1.75 vesting on December 31, 2016. The consultant is due additional option grants pursuant to the consulting agreement, however, those grants are being deferred until 2017 to comply with the terms of the issuance of incentive options in the 2016 Plan.

 

On March 14, 2016, the consulting agreement was further amended. The monthly fee was increased to $20,000 per month for a period of twelve months. At the end of the twelve month period the monthly payment reverts back to $10,000.

  

In March 2014, the Company reached an agreement with a consulting firm to provide non-exclusive sales services. The consulting firm will receive up to 5% commissions on sales referred to the Company. The term of the agreement is for one year, and automatically renews for successive one year terms unless either party notifies the other, in writing, of its intention not to renew at least 60 days before the end of the initial term of this agreement or any renewal term. As compensation for the services, the Company shall pay the consultant $2,500 per month and is obligated to issue 50,000 shares of the Company common stock upon execution of the agreement and 10,000 shares of the Company common stock at the beginning of each three month period for the term of the agreement and any renewal periods thereafter. The Company may terminate this agreement by providing 5 days advance written notice in the first 60 days of entering into this agreement and with 30 days advance written notice thereafter for the duration of the agreement. The Company has recorded stock based compensation relating to this agreement of $36,300 and $120,000 during the years ended December 31, 2016 and 2015, respectively.

 

In February 2015, the Company reached an agreement with a consulting firm to provide non-exclusive sales services with an effective date of February 10, 2015 (the “Effective Date