Business context and reporting period
This is SQL Technologies Corp.’s Form 10-K for the fiscal year ended December 31, 2016, not a quarterly report. The filing describes a company developing patented quick-connect electrical fittings and selling GE-branded ceiling fans and lighting fixtures, manufactured by third parties in China. The filing does not identify SKYX Platforms Corp. as the registrant; investors should confirm the issuer and filing match the requested company.
The company was developing Smart SQL products with Bluetooth and Wi-Fi features. It reported that its technology was included in the 2017 National Electrical Code. Its GE trademark license runs through November 2018.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $7.015 million | $2.885 million |
| Gross profit / margin | $0.879 million / 12.5% | $0.408 million / 14.1% |
| Operating loss | $5.988 million | $4.829 million |
| Net loss | $98.448 million | $26.890 million |
| Basic and diluted loss per share | $2.60 | $0.76 |
| Cash and cash equivalents, year-end | $4.126 million | $0.451 million |
| Cash used in operating activities | $6.166 million | $3.767 million |
Revenue rose 143.2%, attributed to additional product SKUs and increased sales through existing customers and channels. Gross margin declined, which management attributed primarily to new SKUs, although it said margin improved as the year progressed. General and administrative expense increased 31.1% to $6.866 million.
The 2016 net loss included substantial noncash charges: $43.634 million from changes in fair value of embedded derivative liabilities, $9.678 million in derivative expense, and a reported $41.129 million loss on debt extinguishment. The statements also show a $2.950 million gain on debt extinguishment. These items, rather than operating performance alone, drove the sharply higher reported loss.
At December 31, 2016, total assets were $12.463 million and total liabilities were $40.161 million. Current liabilities were $28.785 million, including $24.083 million of derivative liabilities; working capital deficit was reported as $21.420 million. The company had $3.113 million outstanding on a secured $10 million line of credit bearing 8% interest and due December 31, 2017; it reported $6.887 million available. A $200,000 related-party demand note was outstanding at year-end. The balance sheet also included an $11.302 million long-term GE royalty obligation and $44.394 million of redeemable preferred stock classified outside permanent equity.
Financing activities provided $9.885 million of cash in 2016, primarily through stock sales and borrowing, partly offset by debt repayments. The filing reports a $5 million exercise of a warrant on March 24, 2017, after year-end. It also reports $3.367 million of cash deposits above FDIC-insured limits.
Material changes, outlook and risks
- Convertible debt was substantially resolved through repayment or conversion to common and Series A preferred shares. At year-end, $200,000 of convertible debt remained; subsequent events describe further repayment and conversion activity.
- The company states it had not generated enough revenue to cover operating costs and continued to have negative operating cash flow. Management said additional financing might be needed to replace the line of credit when it expires or meet working-capital needs, and reported no committed replacement financing. No quantified revenue or earnings guidance is provided.
- The GE license requires royalties based on sales and at least $12 million in aggregate over its term; any shortfall is payable at the end of the term. This obligation, the license’s expiration, and the company’s ability to meet the minimum are significant considerations.
- Risks include uncertain customer adoption and commercialization, competition from larger lighting companies, reliance on third-party manufacturing in China, seasonal and variable sales, limited liquidity in the OTCQB market, and dependence on outside financing. The company reported no material pending legal proceedings.
- Management concluded disclosure controls were effective, but internal control over financial reporting was not effective because limited staffing prevented adequate segregation of duties. The auditor did not attest to internal control effectiveness.
- Series A preferred stock carries 6% quarterly interest, is convertible at the holder’s election, and has put and company repurchase provisions. Equity incentives, warrants and convertible securities also create potential dilution.
Important facts for investors to verify
- Confirm that this SQL Technologies Corp. 2016 filing is the intended issuer and reporting period for the request concerning SKYX Platforms Corp.
- Reconcile cash-flow amounts: MD&A cites $6.460 million used in operations and $9.855 million from financing, while the audited cash-flow statement reports $6.166 million and $9.885 million, respectively.
- Review the large noncash debt and derivative charges, their accounting treatment, and the conflicting descriptions and amounts for debt extinguishment in the filing.
- Confirm the outstanding debt, available credit, maturity and repayment terms, and the company’s financing plan following the line-of-credit expiration.
- Assess the $12 million minimum GE royalty commitment, amounts paid to date, and potential payment due at license end; also confirm the license’s remaining term and renewal prospects.
- Check the preferred-stock terms, derivative-liability valuation, potential dilution, and discrepancies in reported equity/share figures against the complete audited statements and subsequent filings.