SKYX Platforms Corp. 10-K

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information On September 15, 2015, the Financial Industry Regulatory Authority (“FINRA”) cleared a request to establish a market in shares of our Common Stock. On October 8, 2015, OTC Markets Group announced that the Company was verified for trading on the OTCQB® Venture Market, and shares of our Common Stock are currently quoted under the symbol “SQFL”. Presently, shares of our Common Stock not subject to restriction are eligible for trading in the OTCQB® Venture Market. However, to the Company's knowledge, only a small percentage of our total issued, and outstanding shares of Common Stock have been deposited with broker/dealers as of the date of this prospectus, and only a small number of shares of our Common Stock have been offered for sale. Therefore, while our shares of Common Stock are eligible for trading, a liquid public market has not yet developed. We cannot predict the future prices at which our shares will trade, or the liquidity of a public market for our shares of Common Stock, should one develop. Holders As of March 30, 2018, there were 116 holders of record of the Common Stock. This number does not include beneficial owners whose shares may be held in the names of various security brokers, dealers, and registered clearing agencies. Dividend Policy We have not paid any cash dividends on our Common Stock and have no present intention of paying any dividends on the shares of our Common Stock. Holders of our Series A Preferred Stock receive dividends paid quarterly, at a rate of six percent (6%) per year, and rank senior with respect to interest on junior securities, dividends, distributions or liquidation preference. Our current policy is to retain earnings, if any, for use in our operations and in the development of our business. Our future dividend policy will be determined from time to time by our Board. Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities On March 23, 2018, the Company issued 120,000 shares of Common Stock to Mr. Campi, which vested on December 31, 2017, pursuant to the Campi Agreement On March 23, 2018, the Company issued 120,000 shares of Common Stock to Mr. Wells, which vested on January 1, 2018, pursuant to the Wells Agreement. Stock Incentive Plan Information The following table sets forth equity compensation plan information as of December 31, 2017: 11 Plan category (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights (b) Weighted-average exercise price of outstanding options, warrants and rights (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) Equity compensation plans approved by security holders: 2015 Stock Incentive Plan (1) 4,110,000 $ 1.09 815,000 Equity compensation plans not approved by security holders — — — Total 4,110,000 $ 1.09 815,000 (1) The November 2015 Grants and April 2017 Grants are discussed in more detail below in the subsection entitled “Issued and Outstanding Equity Awards.” For the purposes of calculating the weighted-average exercise price, the exercise prices of issued and outstanding options range from $0.60 per share to $4.00 per share. The 2015 Stock Incentive Plan On April 27, 2015 and on June 8, 2016, our Board and the holders of a majority of our issued and outstanding shares of Common Stock, respectively, approved the Company’s 2015 Stock Incentive Plan (the “Incentive Plan”). Under the Incentive Plan, the Board has the sole authority to implement, interpret, and/or administer the Incentive Plan unless the Board delegates (i) all or any portion of its authority to implement, interpret, and/or administer the Incentive Plan to a committee of the Board, or (ii) the authority to grant and administer awards under the Incentive Plan to an officer of the Company. The Incentive Plan relates to the issuance of up to 5,000,000 shares of Common Stock, subject to adjustment, and shall be effective for ten (10) years, unless earlier terminated. No single participant under the Incentive Plan may receive more than 25% of all options awarded in a single year. Any employee of the Company or an affiliate, a director, or a consultant to the Company or an affiliate may be an “Eligible Person” under the Incentive Plan. The Incentive Plan provides Eligible Persons the opportunity to participate in the enhancement of shareholder value by the award of options and Common Stock, granted as stock bonus awards, restricted stock awards, deferred share awards and performance-based awards, under the Incentive Plan. The Company may make payment of bonuses and/or consulting fees to certain Eligible Persons in options and Common Stock, or any combination thereof. Certain options to be granted to employees under the Incentive Plan are intended to qualify as Incentive Stock Options (“ISOs”) pursuant to Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), while other options granted under the Incentive Plan will be nonqualified options not intended to qualify as Incentive Stock Options ISOs (“Nonqualified Options”), either or both as provided in the agreements evidencing the options described. 12 Stock Options The Board, or the appointed committee, shall have sole and absolute discretionary authority (i) to determine, authorize, and designate those persons pursuant to the Incentive Plan who are to receive options under the Incentive Plan, (ii) to determine the number of shares of Common Stock to be covered by such options and the terms thereof, (iii) to determine the type of option granted (ISO or Nonqualified Option), and (iv) to determine other such details concerning the vesting, termination, exercise, transferability and payment of such options. The Committee shall thereupon grant options in accordance with such determinations as evidenced by a written option agreement. Subject to the express provisions of the Incentive Plan, the committee shall have discretionary authority to prescribe, amend and rescind rules and regulations relating to the Incentive Plan, to interpret the Incentive Plan, to prescribe and amend the terms of the option agreements and to make all other determinations deemed necessary or advisable for the administration of the Incentive Plan. The exercise price per share for Common Stock of options granted under the Incentive Plan shall be determined by the Committee, but in no case shall be less than one hundred percent (100%) of the fair market value of Common Stock (determined in accordance with the Incentive Plan at the time the option is granted), provided that, with respect to ISOs granted to a person who holds ten percent (10%) or more of the total combined voting power of all classes of stock of the Company, the exercise price per share for Common Stock shall not be less than 110% of the fair market value of the Common Stock. The fair market value of the Common Stock with respect to which ISOs may be exercisable for the first time by any Eligible Person during any calendar year under all such plans of the Company and its affiliates shall not exceed $100,000, or such other amount provided in Section 422 of the Code. Bonus and Restricted Stock Awards The Board, or the applicable committee, may, in its sole discretion, grant awards of Common Stock in the form of bonus awards and restricted stock awards. Each stock award agreement shall be in such form and shall contain such terms and conditions as the Board, or the committee, deems appropriate. The terms and conditions of each stock award agreement may change from time to time and need not be uniform with respect to Eligible Persons, and the terms and conditions of separate stock award agreements need not be identical. Deferred Stock Awards The Board, or the committee, may authorize grants of shares of Common Stock to be awarded at a future date upon such terms and conditions as the Board, or the committee, may determine. Such awards shall be conferred upon the Eligible Person as consideration for the performance of services and subject to the fulfillment of specified conditions during the deferral period. Each deferred stock award agreement shall be in such form and shall contain such terms and conditions as the Board, or the committee, deems appropriate. The terms and conditions of each deferred stock award agreement may change from time to time and need not be uniform with respect to Eligible Persons, and the terms and conditions of separate deferred stock award agreements need not be identical. Performance Share Awards The Board, or the committee, may authorize grants of shares of Common Stock to be awarded upon the achievement of specified performance objectives, upon such terms and conditions as the Board, or the committee, may determine. Such awards shall be conferred upon the Eligible Person upon the achievement of specified performance objectives during a specified performance period, such objectives being set forth in the grant and including a minimum acceptable level of achievement and, optionally, a formula for measuring and determining the number of performance shares to be issued. Each performance share award agreement shall be in such form and shall contain such terms and conditions as the Board, or the committee, deems appropriate. The terms and conditions of each performance share award may change from time to time and need not be uniform with respect to Eligible Persons, and the terms and conditions of separate performance share award agreements need not be identical. 13 Adjustments If the Company shall effect a subdivision or consolidation of shares or other capital readjustment, the payment of a stock dividend, or other increase or reduction of the number of shares of the Common Stock outstanding, without receiving consideration therefore in money, services or property, then (i) the number, class, and per share price of shares of Common Stock subject to outstanding options and other awards under the Incentive Plan and (ii) the number of and class of shares then reserved for issuance under the Incentive Plan and the maximum number of shares for which awards may be granted to an Eligible Person during a specified time period shall be appropriately and proportionately adjusted. The Board, or a committee, shall make such adjustments, and its determinations shall be final, binding and conclusive. Change in Control If the Company is merged or consolidated with another entity or sells or otherwise disposes of substantially all of its assets to another company while options or stock awards remain outstanding under the Incentive Plan, unless provisions are made in connection with such transaction for the continuance of the Incentive Plan and/or the assumption or substitution of such options or stock awards with new options or stock awards covering the stock of the successor company, or parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices, then all outstanding options and stock awards which have not been continued, assumed or for which a substituted award has not been granted shall, whether or not vested or then exercisable, unless otherwise specified in the stock option or stock award agreement, will terminate immediately as of the effective date of any such merger, consolidation or sale. Federal Income Tax Consequences Subject to other customary terms, the Company may, prior to certificating any Common Stock, deduct or withhold from any payment pursuant to a stock option or stock award agreement an amount that is necessary to satisfy any withholding requirement of the Company in which it believes, in good faith, is necessary in connection with U.S. federal, state, local or transfer taxes as a consequence of the issuance or lapse of restrictions on such Common Stock. Issued and Outstanding Equity Awards On November 15, 2015, the Board authorized the Company to grant certain securities under the Incentive Plan and Directors Compensation Plan, in the aggregate amount of up to 3,810,000 options to purchase shares of Common Stock at exercise prices ranging from $0.60 per share to $1.80 per share, vesting entirely in two years from the date of the grant, and up to 75,000 shares of Common Stock, which vested immediately (collectively, the “November 2015 Grants”). As of March 30, 2018, the Company has entered into Option Award Agreements with thirteen grantees of the November 2015 Grants, pursuant to awards granted on November 15, 2015 under the Incentive Plan, consisting of up to 3,660,000 options to purchase shares of Common Stock, of which options to purchase up to 2,010,000 shares of Common Stock vested on November 15, 2015, options to purchase up to 950,000 shares of Common Stock vested on November 15, 2016, and options to purchase up to 700,000 shares of Common Stock vested on November 15, 2017. In addition, the Company entered into Stock Award Agreements with two grantees of the November 2015 Grants to issue 75,000 shares of Common Stock, which vested immediately and were issued by the Company in 2016. In addition, the Board terminated November 2015 Grants of options to purchase up to 150,000 shares of Common Stock. On April 19, 2017, the Company’s Board of Directors authorized the Company to grant certain securities under the Incentive Plan, or any successor plan , consisting of, in the aggregate, options to purchase up to 2,150,000 shares of our Common Stock at exercise prices ranging from $3.00 per share to $5.00 per share, vesting on June 30, 2017, December 31, 2017, December 31, 2018 and December 31, 2019 (collectively, the “April 2017 Grants”). As of March 30, 2018, the Company has entered into Stock Option Agreements with three grantees of the April 2017 Grants, thereby issuing, in the aggregate, options to purchase up to 450,000 shares of our Common Stock, with 225,000 of such options having vested on June 30, 2017 with an exercise price of $3.00 per share and 225,000 of such options having vested on December 31, 2017 with an exercise price of $4.00 per share. As of March 30, 2018, the Company had not yet entered into Stock Option Agreements with the other grantees of the April 2017 Grants, and therefore had not issued up to 1,700,000 options to purchase shares of our Common Stock pursuant to the April 2017 Grants. ITEM 6. SELECTED FINANCIAL DATA As a “smaller reporting company”, we are not required to provide the information required by this Item. 14 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated audited financial statements and notes thereto included in Part II, Item 8 of this Form 10-K. The following discussion contains forward-looking statements. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed under the explanatory note labeled “Forward-Looking Statements” found at the beginning of this report. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law. US Dollars are denoted herein by “USD”, “$” and “dollars”. Overview We are a company engaged in the business of developing proprietary technology that enables a quick and safe installation by the use of a weight bearing power plug for electrical fixtures, such as light fixtures and ceiling fans, into ceiling and wall electrical junction boxes. Our patented technology consists of a fixable socket and a revolving plug for conducting electric power and supporting an electrical appliance attached to a wall or ceiling. The socket is comprised of a non-conductive body that houses conductive rings connectable to an electric power supply through terminals in its side exterior. The plug, also comprised of a non-conductive body that houses corresponding conductive rings, attaches to the socket via a male post and is capable of feeding electric power to an appliance. The plug also includes a second structural element allowing it to revolve with a releasable latching which, when engaged, provides a retention force between the socket and the plug to prevent disengagement. The socket and plug can be detached by releasing the latch, disengaging the electric power from the plug. The socket is designed to replace the support bar incorporated in electric junction boxes, and the plug can be installed in light fixtures, ceiling fans and wall sconce fixtures. We currently manufacture and sell ceiling fans and lighting fixtures branded with the General Electric logo and manufactured under General Electric’s strict guidance, pursuant to the License Agreement between us and General Electric. Our ceiling fans and lighting fixtures are manufactured by several well-established factories in the Peoples Republic of China. Most, if not all, of these factories have been in business for over 20 years and follow strict human rights and sustainability protocols. In December 2016, the SQL Technology was in included the 2017 National Electrical Code (NEC). The Company is currently in the process of transitioning its product portfolio to advanced technologies, along with a new sales methods and marketing strategy, which will include unique, innovative advanced technologies (the “Smart SQL”). 15 Results of Operations Year Ended December 31, 2017 2016 $ Change % Change Revenue $ 7,700,948 $ 7,014,978 $ 685,970 9.78 % Cost of sales (6,379,728 ) (6,136,395 ) 243.333 3.97 % Gross Profit 1,321,220 878,583 442,637 50.38 % Selling, general and administrative expenses (5,126,302 ) (4,383,751 ) 742,551 16.94 % Depreciation and amortization (2,497,408 ) (2,482,604 ) 14,804 0 .60 % Loss on impairment (600,000 ) 600,000 Total operating expenses 8,223,710 6,866,355 1,357,355 19.77 % Loss from Operations (6,902,490 ) (5,987,772 ) 914,718 5.28 % Other Income / (Expense) (19,816,195 ) (92,460,086 ) (72,643,892 ) (78.57 )% Net Loss $ (26,718,685 ) $ (98,447,858 ) $ (71,729,174 ) (72.86 )% Net loss per share - basic and diluted (0.55 ) (2.60 ) (2.05 ) (78.89 )% Revenue Net revenue increased to $7,700,948 for the year ended December 31, 2017, from revenue of $7,014,978 for the year ended December 31, 2016. This increase in revenues is associated with steady market acceptance and resulting sales. Cost of Sales We had a cost of sales of $6,379,728 for the year ended December 31, 2017, as compared to a cost of sales of $6,136,395 for the year ended December 31, 2016. The increase is associated with the increase in sales and increased product offering. Gross Profit We had gross profit of $1,321,220 for the year ended December 31, 2017 as compared to gross profit of $878,583 for the year ended December 31, 2016. As a percent of sales, gross profit was 17.16% and 12.52% for the years ended December 31, 2017 and 2016, respectively. The increase in gross profit as a percent of sales is attributable to improved pricing and better volume vendor discounts on the cost of sales and the introduction of new items with higher profit margins. Selling, General and Administrative Expenses Selling, general and administrative expense (SG&A) increased $1,357,355 to $8,223,710 during the year ended December 31, 2017, from $6,866,355 for the year ended December 31, 2016. For the year ended December 31, 2017, SG&A includes depreciation and amortization expenses of $2,497,408, plus a $600,000 loss resulting from an asset impairment. For the year ended December 31, 2016 SG&A included Depreciation and Amortization expense of $2,482,604. The increase in SG&A in 2017 was primarily due to the increase in personnel and additional product development. 16 Loss from Operations Loss from operations increased $914,718 to $6,902,490 during the year ended December 31, 2017, from $5,987,772 for the year ended December 31, 2016. The increase was due to an increase in SG&A, which was partially offset by an increase in gross profit on sale. Loss from operations includes Depreciation and Amortization expenses of $2,497,708 and $2,482,604 for the years ended December 31, 2017 and 2016, respectively. It also includes a $600,000 loss on the impairment of an asset for the year ended December 31, 2017. Other Income (Expense ) Total other expenses, mostly non-cash charges, decreased $72,643,892 to $19,816,195 for the year ended December 31. The decline in other expenses was due to decreases in non-cash amortization of derivative liabilities and derivative expenses, as a result of an exercise of Note Warrants held by the Company’s holders of Series A Preferred Stock, and a non-cash charge in 2016 of $41,129,336 related to the conversion of Convertible Notes into the Company’s Series A Preferred Stock and Common Stock. Additionally, the Company's interest expense was reduced by $686,133 to $294,735 for the year ended December 31, 2017, from $980,867 for the year ended December 31, 2016. Net Loss and Net Loss per Share The Company incurred a net loss for the year period ended December 31, 2017 of $26,718,685 and $0.55 per share, as compared to the year period ended December 31, 2016, where the net loss was approximately $98,447,858 or $2.60 per share. Liquidity and Capital Resources As of December 31, 2017, the Company had $4,877,720 in cash on hand. To date, the Company has not generated sufficient revenue to cover its operating costs and continues to operate with negative cash flow. As a result, the Company has raised additional funds through the sale of its Common Stock. The Company maintains a Line of Credit with a third party which will supply it with $10,000,000 to support its purchase orders, inventory and other working capital needs. As of December 31, 2017, the Company had $6,543,268 available under the Line of Credit, which expires January 10, 2019. For the Company to achieve sufficient working capital to support its operations and sales growth, the Company may be required to find additional financing to replace the expiring facility or raise additional capital to fund its working capital needs. It currently has no such financing commitment in place. For the year ended December 31, 2017, the Company used $4,349,173 of cash for operations as compared with $6,166,446 used for the same period in 2016. The decrease in cash used for operations was primarily due to the establishing of inventory levels in 2016 that remained stable in 2017, while increased general and administrative costs in 2017 were partially offset by increased gross profit. 17 For the year ended December 31, 2017, cash flows used was $241,653 for investing activities as compared with $43,694 used for the same period in 2016. The investments were for patents costs and fixed assets. Cash flows provided from financing activities amounted to $5,342,658 in cash equivalents for the years ended December 31, 2017, as compared with $9,855,160 during the same period in 2016. The company received $5,365,000 from the proceeds of Common Stock, which includes the exercise of $3.00 stock purchase warrants generating $5,000,000 in cash equivalents, $100,000 from the conversion of Convertible Notes and interest into shares of Common Stock and Series A Preferred Stock, $227,395 in proceeds from the Line of Credit, net of repayments. These amounts were partially offset by $200,000 in repayment of the convertible notes at maturity and $149,737 in Series A Preferred Stock dividend payments. As a result of the above operating, investing and financing activities, the Company provided $751,832 in cash equivalents for the year ended December 31, 2017, as compared with $3,675,020 used during the same period in 2016. The Company had $4,877,720 in cash and cash equivalents at December 31, 2017, as compared to $4,125,888 at December 31, 2016. The Company had a working capital deficit of $23,271,348 as of December 31, 2017, which includes $19,175,754 in non-cash derivative liabilities, as compared to a working deficit of $21,419,526 as of December 31, 2016, which included $24,083,314 in non-cash derivative liabilities. A majority of the Company’s sales do not require the Company to take delivery of inventory. Production of the SQL Technology and fixtures will be originated upon receipt of FOB (free on board) purchase contracts from customers. Upon the completion of each purchase contract, the finished products will be transported from the manufacturer directly to the ports and loaded on vessels secured by the customer, upon which the products become the property of the customer. Non-GAAP Financial Measures To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, management uses adjusted net income (loss) to evaluate operating and financial performance and believes the measure is useful to investors because it eliminates the impact of certain noncash and/or other items that management does not consider to be indicative of the Company’s performance from period to period. Management also believes this non-GAAP measure is useful to investors to evaluate and compare the Company’s operating and financial performance across periods, as well as facilitating comparisons to others in the Company’s industry. We use the non-GAAP financial measure of Adjusted EBITDA, which is defined as net income (loss), plus interest income; interest expense; depreciation and amortization; unrealized derivative gains and losses, non-recurring income and expenses, and stock-based compensation expense. We believe that Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in Adjusted EBITDA. These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with generally accepted accounting principles in the United States of America. These non-GAAP financial measures exclude significant expenses and income that are required by accounting principles generally accepted in the United States of America (“GAAP”) to be recorded in the company’s financial statements and are subject to inherent limitations. Investors should review the reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures that are included below. 18 The following table presents a reconciliation of Adjusted EBITDA to net loss, the most comparable GAAP financial measure, for each of the periods presented: Year Ended December 31, 2017 2016 Adjusted EBITDA reconciliation to Net Income (Loss): Net (loss) income $ (26,718,684 ) $ (98,447,858 ) Other Income / (Expense) Depreciation and amortization (2,497,408 ) (2,482,604 ) Loss on impairment (600,000) Interest expense (294,734 ) (980,867 ) Derivative expenses 0 (9,678,390 ) Change in fair value of embedded derivative liabilities (14,413,192 ) (43,634,482 ) Loss on debt extinguishment - net (1,260,000 ) (41,129,336 ) Warrant expense (1,869,358 ) 0 Option expense (2,003,593 ) 0 Amortization of Debt Discount 0 0 Gain on debt settlement 0 0 Gain on exchange 6,843 0 Other income 17,840 13,275 Gain on Debt Extinguishment 0 2,949,714 Total adjustment (22,913,603 ) (94,942,690 ) Adjusted EBITDA (3,805,082 ) (3,505,168 ) — — Net Income (Loss) per share - basic and diluted $ (0.078 ) $ (0.077 ) The following table presents a reconciliation of Adjusted Accumulated deficit reconciliation for each of the periods presented: Year Ended December 31, 2017 2016 2015 2014 2013 Adjusted Accumulated deficit reconciliation to Net Income (Loss): Accumulated deficit $ (168,050,716 ) $ (141,182,294 ) $ (42,703,470 ) $ (15,813,260 ) $ (8,519,517 ) Other Income / (Expense) Depreciation and amortization¹ (9,906,965 ) (7,409,379 ) (4,926,776 ) (2,457,705 ) (2,719 ) Loss on impairment (600.000 ) Interest expense (6,442,195 ) (6,147,461 ) (5,166,594 ) (2,311,075 ) (171,590 ) Derivative expenses (11,403,137 ) (11,403,137 ) (1,724,747 ) (1,724,747 ) (1,156,193 ) Change in fair value of embedded derivative liabilities (77,215,799 ) (62,802,607 ) (19,168,125 ) 248,171 34,250 Loss on debt extinguishment - net (42,402,067 ) (41,142,067 )² (12,731 ) (12,731 ) (12,731 ) Warrant expense (1,869,358 ) Option expense (2,003,593 ) Amortization of Debt Discount (4,200,374 ) (4,200,374 ) (4,200,374 ) (1,742,620 ) (92,304 ) Common stock issued for service (298,688 ) (298,688 ) (298,688 ) (125,000 ) (125,000 ) Founder shareholders (562,500 ) (562,500 ) (562,500 ) (562,500 ) (562,500 ) Gain on debt settlement (66,785 ) (66,785 ) (66,785 ) (66,785 ) (66,785 ) Gain on exchange Gain on Debt Extinguishment 3,169,298 3,169,298 219,584 9,995 88014 Other income 140,598 115,915 102,640 101,814 0 Total adjustment (153,661,387 ) (130,747,784 ) (35,805,096 ) (8,643,006 ) (2,067,627 ) Total Adjusted Accumulated deficit $ (14,389,329 ) $ ( 10,55,620 ) (6,898,374 ) (7,170,254 ) $ (6,451,890 ) (1) Includes amortization of the GE License agreement of $9,755,534; $7,324,415; $4,865,901; $2,424,160; and $0 for the years 2017 through 2013, respectively. (2) Primarily represents conversion of Convertible Notes into the Company’s Preferred Stock and Common Stock resulting in a $41,310,119 non-cash loss due to the difference between the conversion rate and the market value at the time of conversion, and a gain of $3,288,909 reflecting the cost basis of the Convertible Notes that were converted into Common Stock during the fourth quarter of 2016. 19 Off Balance Sheet Arrangements We do not have any off-balance sheet arrangements Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience, as appropriate, and on various other assumptions that we believe to be reasonable under the circumstances. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the following critical accounting policies involve a greater degree of judgment and complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations. Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Such estimates and assumptions impact both assets and liabilities, including but not limited to: net realizable value of accounts receivable and inventory, estimated useful lives and potential impairment of property and equipment, the valuation of intangible assets, estimate of fair value of share based payments and derivative liabilities, estimates of fair value of warrants issued and recorded as debt discount, estimates of tax liabilities and estimates of the probability and potential magnitude of contingent liabilities. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future non-conforming events. Accordingly, actual results could differ significantly from estimates. Recent Accounting Pronouncements See Notes to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for recent accounting pronouncements. 20 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a “smaller reporting company”, we are not required to provide the information required by this Item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required to be included in this report appear as indexed in the appendix to this report beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.