SKYX Platforms Corp. annual report, FY2014

Business Context and Reporting Period

Annual report for the fiscal year ended December 31, 2014, filed March 31, 2015. The filing identifies the registrant as Safety Quick Lighting & Fans Corp.; the request metadata names SKYX Platforms Corp. The filing describes a pre-revenue lighting and ceiling-fan business developing its patented quick-connect SQL Technology and selling GE-branded fixtures under license.

The company was transitioning to a model focused on fixtures manufactured with SQL Technology embedded. At year-end, it had no inventory or accounts receivable and had generated no revenue in 2014 or 2013.

Financial Results and Liquidity

With no sales or cost of sales, gross profit and gross margin were not applicable. Cash used in investing activities was $169,000, mainly for equipment and patent costs; financing activities provided $2.08 million, principally from convertible notes. The filing reports total liabilities of $20.12 million, including a $12.0 million GE royalty obligation and $4.65 million in derivative liabilities. Convertible notes had $4.27 million aggregate principal outstanding as of March 15, 2015; their reported carrying value is reduced by substantial debt discounts.

Material Changes Versus 2013

• Net loss rose by $4.20 million, or 161%, and operating expenses increased by $3.40 million.
• Management attributed major expense increases to a $2.0 million GE license-related amount, $381,000 in note-registration penalties, higher payroll and public-company costs, and China operations.
• Interest expense increased to $2.14 million from $172,000, reflecting the convertible-note financing and related accounting.
• The company recorded the $12.0 million GE royalty obligation and a related GE trademark license intangible asset; the license asset was amortized by $2.43 million during 2014.
• Cash provided by financing increased as the company issued an additional $2.27 million of convertible notes in 2014. The working capital deficit worsened substantially.

Outlook, Risks, Contingencies, and Unusual Items

• After year-end, the company reported its first sales under the new strategy: GE-branded ceiling fans sold to a large retailer, but those fans did not contain SQL Technology. It said it was marketing SQL-enabled products in 2015; no revenue or earnings guidance was provided.
• The GE agreement requires at least $12.0 million in royalties by 2018, generally payable from a percentage of sales, with any unpaid balance due at the end of the term. The company had no established sales history for forecasting this obligation.
• The independent auditor and management disclosed substantial doubt about the company’s ability to continue as a going concern, citing recurring losses, insufficient working capital, and negative operating cash flow. Additional financing may be needed; no financing commitment was in place, and management warned of possible debt default or reduced operations if financing and sales growth do not materialize.
• Convertible notes generally bear 12% interest (some 15%), are convertible at $0.25 per share, and mature 24 months after issuance. Registration delays triggered damages and increased interest rates; the filing reports rates of 24% and 27% on certain November 2013 notes when registration became effective. Investors later agreed to convert approximately $400,000 of interest and damages into about 1.60 million shares, subject to the reported elections.
• Derivative liabilities are measured using Level 3 inputs, and their valuation contributed significant non-cash expense. Potential share issuance from notes, warrants, and other instruments creates dilution risk.
• Management concluded internal control over financial reporting was ineffective due to a material weakness in segregation of duties. The filing reports disclosure controls were effective. No auditor attestation on internal controls was provided.
• The filing reports no material pending legal proceedings. It also states the common stock had no public market and an OTC quotation application was pending, with no assurance of approval or liquidity.

Most Important Facts for Investors to Verify

1. Confirm the registrant’s identity and relationship, if any, to SKYX Platforms Corp.; the supplied filing names Safety Quick Lighting & Fans Corp.
2. Verify whether the post-year-end retail shipments led to recurring orders, and whether SQL-enabled products gained retailer acceptance and generated sales.
3. Assess the company’s ability to fund operations and meet note maturities, interest, and the GE minimum royalty commitment; the filing reports substantial going-concern doubt.
4. Reconcile debt principal, carrying values, derivative liabilities, registration damages, and subsequent conversions, including the resulting dilution and any remaining cash obligations.
5. Track remediation of the internal-control material weakness and verify the status of the OTC quotation application and trading liquidity.