Business context and reporting period
Safety Quick Lighting & Fans Corp. (the registrant named in this filing; the request metadata identifies SKYX Platforms Corp.) filed this Form 10-K for the fiscal year ended December 31, 2015. The company develops patented quick-connect electrical fittings and sells GE-branded ceiling fans and lighting fixtures, with and without its SQL Technology. This was its first year reporting product revenue, following manufacturing approvals and initial retailer launches.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $2.885 million | $0 |
| Gross profit / margin | $407,755 / 14.1% | $0 |
| Operating loss | $4.829 million | $4.800 million |
| Net loss | $26.890 million | $7.294 million |
| Basic and diluted loss per share | $0.76 | $0.22 |
| Cash used in operations | $3.767 million | $1.800 million |
| Cash at year-end | $450,868 | $1.241 million |
Gross margin reflects early, test orders; management said future orders could produce better margins, but provided no quantified expectation. General and administrative expense was $5.237 million, up from $4.800 million. Interest expense was $2.856 million. A $19.416 million non-cash charge from remeasuring embedded derivative liabilities was the principal driver of the larger net loss.
At year-end, current assets were $985,028 and current liabilities were $29.160 million, yielding a working-capital deficit of $28.175 million. Total liabilities were $41.149 million and total stockholders’ deficit was $32.749 million. Current convertible debt, net of discounts, was approximately $4.040 million; the notes had $4.270 million aggregate principal outstanding and carried interest of 12%–15%. Derivative liabilities were $24.158 million, versus $5.141 million in restated 2014. Financing activities provided $3.036 million, including $2.710 million from stock issuance; investing activities used $59,478.
Changes versus the prior comparable period
- Revenue began in 2015 after there was no revenue in 2014. Three big-box retailers each accounted for more than 10% of 2015 sales.
- Operating loss increased modestly despite first-year gross profit; net loss rose substantially, mainly because of the derivative fair-value charge and higher interest expense.
- Cash used in operations more than doubled, and year-end cash declined by $790,621. The working-capital deficit widened substantially, principally due to higher derivative liabilities and current convertible debt.
- The company restated 2014 financial statements for errors in derivative-liability and equity accounting. Restated 2014 derivative liabilities increased by $488,996.
Outlook, risks, contingencies, and unusual items
The independent auditor stated that recurring losses, insufficient working capital, and stockholders’ deficit raise substantial doubt about the company’s ability to continue as a going concern. Management’s plans include raising additional debt or equity financing; no financing commitments were in place, and the filing gives no assurance that funding will be available on acceptable terms. The company disclosed no numerical revenue or earnings guidance.
- The GE trademark agreement requires a minimum $12 million in licensing fees, generally paid as a percentage of sales, with any remaining balance due in 2018. The related long-term liability was $11.796 million at year-end; the license is amortized through its stated November 2018 expiration.
- Convertible notes and warrants include price-reset provisions and are secured, with maturities extended for some holders through forbearance. The company issued shares in payment of interest and registration penalties; further conversions or exercises could dilute shareholders.
- Commercialization depends on market acceptance, retailer orders, competition, and improved margins. Sales are concentrated among a small number of retailers; manufacturing is outsourced to China and subject to GE approval and quality requirements.
- The company reported a material weakness in internal control over financial reporting because limited staffing prevents adequate segregation of duties. Management separately concluded disclosure controls were effective; the auditor did not attest to internal-control effectiveness.
- Shares were quoted on OTCQB, but the filing said a liquid public market had not developed. As of March 25, 2016, 43.653 million common shares were outstanding, with additional potential shares from notes, warrants, and awards.
After year-end, the company raised $300,000 gross in a February 2016 stock offering and issued shares for interest and penalties. It also reported that most 2013 noteholders extended their forbearance period. The filing reports no material pending legal proceedings.
Key facts for investors to verify
- Whether the company can secure enough financing to meet near-term obligations and address the auditor’s going-concern concern.
- Convertible-note principal, accrued interest, maturity extensions, derivative-liability valuation assumptions, and potential dilution.
- Actual sales, repeat orders, retailer concentration, and whether gross margins improve beyond the initial 14.1%.
- Cash payments and remaining obligations under the $12 million GE licensing commitment, including the 2018 residual due date.
- The effect of the 2014 restatement and the remediation, if any, of the disclosed segregation-of-duties weakness.