Business context and reporting period
Safety Quick Lighting & Fans Corp. (the company named in this filing; the request metadata names SKYX Platforms Corp.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The company develops quick-connect electrical-fixture technology and sells GE-branded lighting and ceiling fans. After manufacturer approval in late 2014, it began selling under a new model in 2015; the reported sales were initial orders from two large retailers.
Key financial metrics
| Metric | Three months ended June 30, 2015 | Six months ended June 30, 2015 |
|---|---|---|
| Revenue | $799,922 | $2,219,138 |
| Gross profit / margin | $92,670 / 11.6% | $272,157 / 12.3% |
| Operating loss | $(1,187,168) | $(2,255,054) |
| Net loss attributable to company | $(1,469,506) | $(3,012,922) |
| Basic and diluted loss per share | $(0.04) | $(0.08) |
| Cash used in operating activities | — | $(1,919,798) |
At June 30, 2015, cash was $919,397; current assets were $2,767,710 and current liabilities were $9,519,614, resulting in a working-capital deficit of $6,751,904. Total liabilities were $21,612,814 and total stockholders’ deficit was $10,118,513. Convertible debt, net of discounts, was $3,011,796 and classified as current; the filing states that $4,270,100 of note principal remained outstanding, a different measure. The GE royalty obligation was $11,844,661. Six-month financing cash flow was $1,618,499; investing cash flow was $(20,791).
Changes versus the prior comparable period
- Revenue rose from zero in the 2014 quarter and first half as the company began sales under its new business model. Gross profit was also newly reported.
- First-half net loss increased to $3.0 million from $2.3 million in 2014, while operating loss increased to $2.3 million from $0.9 million. Higher general and administrative expenses, including GE license amortization, commissions, public-company consulting and China operating costs, outweighed initial gross profit.
- First-half operating cash use increased to $1.9 million from $0.9 million. Cash declined by $322,090 during the period, compared with an increase of $1,103,077 in the prior-year period.
- Accounts receivable and inventory grew to $1,414,141 and $409,980, respectively, from zero at year-end 2014. The company reported that its largest customer’s $1,414,141 balance was subsequently collected.
Outlook, risks and unusual items
- Management said initial test orders carried lower margins and expected opportunities to improve margins on future orders; follow-on orders were anticipated but not assured. E-commerce sales were expected to commence in the third quarter of 2015. No quantified revenue or earnings guidance was provided.
- The filing states that substantial doubt exists about the company’s ability to continue as a going concern. Management expected to seek debt or equity financing, but had no financing commitments and cautioned that available cash and anticipated revenue might not meet near-term needs.
- The GE license amendment requires a minimum $12 million in cumulative licensing fees by November 2018, with any shortfall due in December 2018. The obligation is tied to sales, but the minimum commitment remains material; substantial license amortization also weighs on reported results.
- Convertible notes bear 12% or 15% interest, include ratchet provisions and are secured; the filing says $3.0 million net carrying value was payable within 12 months. Conversion features and warrants are accounted for as Level 3 derivative liabilities, valued at $4,016,073 at June 30. Conversion and warrant terms create potential dilution.
- The 2015 stock offering targeted up to $4 million at $0.60 per share. The initial closing raised $1.28 million; a subsequent August 14, 2015 closing raised a further $729,600. The company also issued 1,718,585 shares during the first half in exchange for interest and penalties.
- Sales were concentrated: one national retailer represented approximately 64% of first-half revenue. The company also identified commercialization, competition, general economic conditions and product-cost volatility as risks.
- The filing contains apparent internal inconsistencies: its statements report second-quarter sales of $799,922, while MD&A says $799,992; the MD&A narrative gives second-quarter G&A of $1,187,168 although the statements show $1,279,838. The first-half MD&A narrative also gives G&A of $2,257,211, versus $2,527,211 in the statements and MD&A table. These figures should be checked against the filed financial statements and any amendments.
Important facts for investors to verify
- Confirm the issuer identity and relationship, if any, between Safety Quick Lighting & Fans Corp. and SKYX Platforms Corp.; the filing itself names Safety Quick Lighting & Fans Corp.
- Reconcile the reported revenue and general and administrative expense discrepancies noted above.
- Assess cash runway, financing availability, near-term note maturities and the potential dilution from convertible debt, warrants and equity offerings.
- Verify the sustainability and economics of retailer orders, customer concentration, expected margin improvement and the launch of e-commerce sales.
- Review the GE minimum royalty commitment, payment terms and effect of license amortization on earnings and liquidity.