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EX-32.1 - Ciralight Global, Inc.ex32-1.txt
EX-32.2 - Ciralight Global, Inc.ex32-2.txt
EX-31.2 - Ciralight Global, Inc.ex31-2.txt
EX-31.1 - Ciralight Global, Inc.ex31-1.txt

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                AMENDMENT NO. 1
                                       to
                                    FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                 For the fiscal year ended December 31, 2011

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

              For the transition period from _________ to _________

                         Commission File Number 0-54036


                              CIRALIGHT GLOBAL, INC
             (Exact name of registrant as specified in its charter)

         Nevada                                          26-4549003
(State of Incorporation)                    (I.R.S. Employer Identification No.)

         15303 Ventura Blvd., 9th Floor, Sherman Oaks, California 91403
                    (Address of principal executive offices)

                                 (877) 520-5005
              (Registrant's telephone number, including area code)

                  670 E. Parkridge, Suite 112, Corona, CA 92879
                 (Former address of principal executive offices)

           Securities registered pursuant to Section 12(b) of the Act:

                                      None

          Securities registered pursuant to Section 12(g) of the Act:

                               Title of Each Class
                          Common Stock, $.001 par value

Indicate by check mark if the  registrant  is a  well-known  seasoned  issuer as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required by Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during
the  preceding  12 months (or for such  shorter  period that he  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted  electronically  and
posted on its corporate Website, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.  232.405 of
this chapter)  during the  preceding 12 months (or for such shorter  period that
the registrant was required to submit or post such files). Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S- K is not contained  herein,  and will not be contained,  to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated filer, a non-accelerated  filer or a smaller reporting company.  See
definitions  of "large  accelerated  filer,"  "accelerated  filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]                        Accelerated filer [ ]

Non-accelerated filer [ ]                          Smaller reporting company [X]

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X]

The aggregate  market value of the voting and  non-voting  common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common  equity,  as of the
last  business day of the  Registrant's  most recently  completed  second fiscal
quarter (June 30, 2011) was approximately $4,534,995.

As of  March  19,  2012,  there  were  14,322,567  shares  of our  common  stock
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Portions  of the  Definitive  Proxy  Statement  for the 2012  Annual  Meeting of
Shareholders are incorporated by reference in Part III hereof.

EXPLANATORY NOTE This Amendment No. 1 on Form 10-K/A ("Amendment") amends the Form 10-K Annual Report for Ciralight Global, Inc. ("Company") for the fiscal year ended December 31, 2011 ("Original Form 10-K"). This Amendment is being filed in response to SEC Staff comments and is being filed to revise language in Exhibits 31.1, 31.2, 32.1 and 32.2. This Amendment may be relied on as the final Annual Report on Form 10-K for the fiscal year ended December 31, 2012, and should be read in conjunction with the Company's other filings with the SEC. This Amendment does not change any textural or financial information contained in the body of the Original Form 10-K. The filing of this Amendment is not an admission that our Original Form 10-K included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein not misleading. TABLE OF CONTENTS ITEMS PAGE ----- ---- PART I Item 1. Business 4 Item 1A. Risk Factors 14 Item 1B. Unresolved Staff Comments 14 Item 2. Properties 14 Item 3. Legal Proceedings 14 Item 4. (Removed and Reserved) 15 PART II Item 5. Market For Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities 15 Item 6. Selected Financial Data 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 7A. Quantitative and Qualitative Disclosure About Market Risks 24 Item 8. Financial Statements and Supplementary Data 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 24 Item 9A. Controls and Procedures 24 Item 9B. Other Information 25 PART III Item 10. Directors, Executive Officers and Corporate Governance 25 Item 11. Executive Compensation 25 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 25 Item 13 Certain Relationships and Related Transactions, and Director Independence 26 Item 14. Principal Accounting Fees and Services 26 PART IV Item 15. Exhibits, Financial Statement Schedules 26 2
CAUTION REGARDING FORWARD-LOOKING STATEMENTS This 2011 Annual Report on Form 10-K ("2011 Annual Report"), including the accompanying financial statements of the Company and the notes thereto appearing in Item 8 herein ("Financial Statements"), the Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in Item 7 herein ("MD&A") and the other Exhibits and Financial Statement Schedules filed as a part hereof or incorporated by reference herein may contain or incorporate by reference information that includes or is based on "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements give expectations or forecasts of future events. The reader can indentify these forward-looking statements by the fact that they do not relate strictly to historical or current facts. They use words such as "believe(s)," "goal(s)," "target(s)," "estimate(s)," "anticipate(s)," "forecast(s)," "project(s)," (plan(s)," "intend(s)," "expect(s)," "might," may" and other words and terms of similar meaning in connection with a discussion of future operating, financial performance or financial condition. Forward-looking statements, in particular, include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends of operations and financial results. Any or all forward-looking statements may turn out to be wrong, and, accordingly, readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this 2011 Annual Report. These statements are based on current expectations and current the current economic environment. They involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance; actual results could differ materially from those expressed or implied in the forward-looking statements. Forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining the Company's actual results and financial condition. The reader should consider the following list of general factors that could affect the Company's future results and financial condition. Among the general factors that could cause actual results and financial condition to differ materially from estimated results and financial condition are: * the success or failure of management's efforts to implement their business strategy; * the ability of the Company to raise sufficient capital to meet operating requirements; * the uncertainty of consumer demand for our products, services and technologies; * the ability of the Company to protect our intellectual property rights; * the ability of the Company to compete with major established companies; * the level of success and costs expended in realizing economies of scale and implementing significant business consolidations and technology initiatives; * heightened competition, including, with respect to pricing, entry of new competitors and the development of new products by new and existing competitors; * absolute and relative performance of our products and services; * the effect of changing economic conditions; * the ability of the Company to attract and retain quality employees and management; * the current global recession and financial uncertainty; and * other risks which may be described in future filings with the U.S. Securities and Exchange Commission ("SEC"). No assurances can be given that the results contemplated in any forward-looking statements will be achieved or will be achieved in any particular timetable. We assume no obligation to publicly correct or update any forward-looking statements as a result of events or developments subsequent to the date of this 2011 Annual Report. The reader is advised, however, to consult any further disclosures we make on related subjects in our filings with the SEC. 3
PART I ITEM 1. BUSINESS. GENERAL Ciralight (referred to in this Report as the "company", "we", "our" and "us") manufactures patented SunTracker(TM) lighting solutions that enable commercial and industrial buildings to utilize sunlight to illuminate indoor spaces. The SunTracker(TM) unit utilizes a solar powered GPS controller and mirrors to direct sunlight through a skylight diffuser. The result is a self contained, completely sustainable lighting solution that can offer up to 10.5 hours of free indoor light. Using Sun-tracking technology allows our skylights to illuminate buildings longer and more effectively than traditional skylights. Furthermore, the natural diffused light is high quality, more conducive to retail, educational, and industrial purposes. SunTracker(TM) skylights provide the illumination of a 1,000 watt metal halide light fixture. These units are entirely Solar Powered so they do not require any electricity or electrical hookup. Smart SunTrackers(TM) are designed with two heat traps so they prevent the heat gain associated with traditional skylights. Ciralight SunTrackers(TM) are used by Staples, Office Depot, IKEA, Google, Whole Foods, Johnson and Johnson, Caterpillar, Emerson, Frito Lay, Schiphol Amsterdam Airport, Boeing, Eaton, and others. ADVANTAGES OF CIRALIGHT SMART SUNTRACKER(TM) 1. Save Energy by shutting of electric lights during daytime "peak" hours 2. Save on Air-Conditioning costs by reducing need to run Air-Conditioning to offset heat generated from Electric light fixtures or standard skylights 3. Save on maintenance costs associated with electric lights 4. High light quality provides better illumination, color rendition and less shadows 5. Does not flicker or hum 6. Receive certain Federal, State & Local Tax benefits & Utility incentives as a Green Energy product 7. Operates when sun is low in the sky, a critical advantage over passive skylights "DAYLIGHTING" DESCRIBED Daylighting is the practice of using natural light to illuminate building space. Using natural light from the sun to illuminate buildings costs nothing and the result is a compelling, efficient lighting solution that protects the environment. By consuming less energy, daylit buildings reduce fossil fuel use and carbon dioxide emissions associated with global warming and climate change. Studies show that people thrive in naturally lit environments. Studies show that shoppers linger longer and buy more in stores that use daylighting. Sales in day lit stores are on average six percent higher and as high as 40% more than stores without daylighting. In addition, students learn better in daylight classrooms. Students in classrooms with advanced daylighting performed 20% higher on test scores than students in classrooms without daylighting. In the workplace, business that use daylighting find that workers are more productive, with less absenteeism, less turnover and higher moral among employees. The U.S. Department of Energy statistics show that 29% of energy use in commercial buildings is for lighting. This amount is 40% to 50% in schools. The DOE projects that electricity consumption between 2010 and 2030 will grow from 14.85 quadrillion BTUs to 20.30 quadrillion BTUs. This is expected to significantly increase electrical utility costs for retailers, schools. industrial, and commercial users . According to the Sustainable Building Technical Manual, chapter IV.7, page 90, a well-designed daylit building is estimated to reduce lighting energy use from 50% to as much as 80%. 4
Day lit buildings make a statement about their owners and occupants; they are socially and fiscally responsible. "ADVANCED SKYLIGHTS" DESCRIBED Standard skylights are typically either shaped plastic skylights or flat glass skylights that are open below and provide direct sunlight into the building space. Standard skylights typically provide the most light when the sun is high in the sky but ineffective when the sun is low in the sky, such as in the morning or late afternoon hours. Standard skylights provide uneven light that varies throughout the day depending on the sun's angle and direct sunlight creates glare and heat for the occupants. Standard skylights provide usable light for a limited number of hours a day and, therefore, provide only limited energy savings. Advanced skylights are defined as skylights incorporating technology which enables optical redirection of sunlight into a building. Advanced skylights use either "active" or "passive" technology. An advanced skylight with active technology employs the use of moving parts such as rotating mirrors inside the skylight dome, while advanced skylights with passive technology have no moving parts and use prismatic materials incorporated into the skylight dome surface. Active advanced skylights claim better overall daylighting performance by increasing the number of daylight hours available by tracking and re-directing the sunlight into buildings even at the extremes of the day when the sun is low on the horizon. Passive advanced skylights are not able to capture the sunlight during the extreme hours of the day when the sun is low in the sky. PRODUCTS AND TECHNOLOGY Our Ciralight Suntrackers(TM)are classified as Active Advanced Skylights. Our products are an energy saving, cost saving lighting solution. We are a viable sustainable energy solution Our SunTracker(TM) systems have successfully passed life cycle test wherein they were subjected to harsh weather conditions in an environmental chamber for a period equivalent to 30 years. The tests showed that our Smart Skylights have a 30 year life expectancy. Users of our SunTracker(TM) units are entitled to certain tax benefits and utility company incentives that are not available to passive skylights. This provides us with a competitive advantage. SunTrackers(TM) are completely solar powered and while they are powered by only a 5 watt solar panel, they provide the illumination of a 1,000 watt metal halide light fixture. Currently our SunTrackers(TM) are offered in the size of 4ft x 4 ft and 4ft x 8ft. We have released a 4 x 8 version of SunTracker(TM) that we believe will be popular for retrofitting existing passive skylights that are already in place at warehouses and commercial buildings. Property owners are able to replace their existing traditional less efficient skylights with our 4ft x 8ft SunTracker(TM) for minimal cost as a means to make their facilities more energy efficient and reduce their energy costs. We believe our SunTracker(TM) product is unique in the following ways: * GPS Controller - Each SunTracker(TM) unit includes a fully self-contained solar powered Global Positioning System ("GPS") controller that tracks the position of the sun and insures maximum light throughout the daytime hours. The use of the GPS Controller and mirrors provide up to three times more light than the light from standard skylights and allows users to turn off their electrical lights for up to 10.5 hours a day. * Light Diffusion and Thermal Barrier - Each unit includes (i) two state-of-the-art prismatic lens that transform the sunlight into high levels of evenly dispersed and diffused natural light, creating a clean, pleasant, abundant natural light that is easier on the eyes, and (ii) a dual panel thermal barrier that prevents the typical heat gain associated with standard skylights from entering into the lighted space resulting in less than one-half the heat of a common fluorescent light fixture. This provides additional savings by reducing the need to run air-conditioning to off-set the heat caused by standard skylights and heat generating light fixtures that with the use of Smart Skylights are turned off during the daytime. 5
* Solar Powered - Each SunTracker(TM) is entirely solar powered. There is no electrical hookup required. The system is designed to store the solar energy created from the solar panel to run the SunTracker(TM) even if the sun is not out. * Mirror Array - Each unit contains either a dynamic single or triple mirror tracking array. The mirrors continuously track the sun across the sky even during winter's low sun angles and provide an abundant source of free light with no flickering or humming of electricity. The mirror array and GPS controller direct the sunlight through two special diffuser lenses, through the lightwell an into the building space. * Acrylic Super-Impact Skylight Dome - Each SunTracker(TM) features a clear, thermally formed, high impact resistant acrylic dome that provides superior strength and UV resistance and is easy to install. In addition, our SunTracker(TM) products provide natural daylighting that is a key consideration when building to United States Green Building Council ("USGBC") standards and for receiving Leadership in Energy and Environmental Design ("LEED") certification. Our Smart Skylights(TM) are Energy Star Products. Smart Skylights(TM) are maintenance free, energy saving, powered by the sun and completely self-contained. Ciralight SunTrackers(TM) are sold with a ten year warranty. MANUFACTURING At the present time, we contract with manufacturers who have expertise in a particular industry to produce the components of our SunTracker(TM) products. All manufacturing is done by companies in the United States and our products are made in the United States. We have an excellent relationship with all our manufactures. We purchase components from our manufacturers by issuing purchase orders. The terms of these purchase orders are typically Net 30 days, although we have elected to pay for our purchases at the time of delivery. Therefore, we have fully paid for our entire inventory of components at our Corona, California warehouse. The terms of our purchase orders with our manufacturers are F.O.B. origin. Therefore, as the purchaser of these component parts, we are responsible for the cost of shipping our components from a manufacturer's location to our warehouse in Corona, California where all our components are stored. As customers purchase our products, the components are picked and kitted at our Warehouse for shipment to the project job site. The assembly and installation of the SunTracker(TM) occurs at the jobsite and is handled by our dealers or distributors and their subcontractors. We have no role or responsibility with respect to the installation or assembly of our products. Our manufacturers were chosen based on two critical factors: (1) the level of quality control programs they have in place at their facilities and (2) their ability to handle large volumes for producing our component parts. All of our manufacturers and suppliers are standard fabrication and assembly companies capable of meeting large volume product demands and, therefore, have excess capacity to handle significant increases in our sales. Although we are dependent on our manufacturers and suppliers, we have alternative firms who could provide the same production to us on short notice. Our manufacturers include the following: Manufacturer Component Location ------------ --------- -------- All Metals Mirror Assembly Texas Angell & Giroux Lightwells California Apex Plastics GPS Controller Case Texas CanFab Roof curbs California Empire Metal Products Lightwells/Roof curbs Arizona KCC International Roof Curbs Kentucky Malcolite Corporation Lenses California 6
Plastic Fabricating Lenses Utah Ray's Plastics Skylight Dome California Replex Plastics Skylight Dome Ohio Solar Industries Dome Metal Frame Arizona Suntron Corporation GPS Electronics and Assembly Texas MARKETS AND MARKETING We are currently marketing our SunTracker(TM) products to Architects, Roofing and General Contractors, Lighting Companies, Solar Companies, Retail Chains, industrial and commercial property owners and managers. Our target properties are warehouses, industrial buildings, retail stores, public facilities, schools and military facilities within the United States. We are working on establishing sales in Canada, Mexico, Europe and in other overseas markets. Our marketing efforts will be directed to create greater awareness of our products in the market place as an innovative, energy saving solution for lighting in the building industry. Our marketing will be geared toward new construction and retrofitting existing buildings. The market for advanced skylights is growing due to pressures on building owners, tenants, schools and government agencies to reduce energy consumption and save on utility costs. Our SunTrackers(TM) are a break-through energy saving product. This movement toward "green" energy solutions and the pressure to reduce the carbon footprint, as well as other environmental initiatives, will continue to spur the growth in this market segment and the need for solutions like our SunTracker(TM). We currently sell our products through a network of dealers and distributors. Dealers and Distributors are typically companies that are already in the lighting, roofing or renewable energy business. Dealers buy our products at an established dealer price and resell the product to end users at the suggested retail price. Distributors are typically identified for foreign countries where they are responsible for purchasing, housing and supplying our products to a network of Dealers they are required to establish within their appointed territories. DEALER AGREEMENTS: Our dealer agreements are non-exclusive as no single dealer has been awarded the exclusive right to market and sell our products within any geographical area. Our dealer agreements typically have an initial term of three years with options to renew for additional one year periods, provided that the dealers have complied with the terms and conditions of their dealer agreements. Our dealers purchase our skylights at our Dealer Price Level and they are encouraged to sell our skylights at our suggested retail price. However, our dealers may sell our skylights at any price they wish. We require our dealers to make a 50% deposit at the time they place an order with the balance of 50% payable upon delivery F.O.B. our Corona warehouse. We may grant better payment terms to dealers who have good payment histories with us, in which case we may grant them Net 21 Day or Net 30 Day terms. Since we ship our skylights F.O.B. our Corona warehouse, our dealers or customers bear the cost of shipping and bear the risk of any loss or damage from shipping. Currently, we have the following dealers: A Greener New Jersey (United States) Adler Technology (United States) AdvanTek (United States) AIA Skylights (United States) Arizona Solar Concepts (United States) ATEE Corp. (Mexico) Bear Electric (United States) Best Contracting Services (United States) 7
BPL Carbon Free Solutions (United States) Centimark Roofing (United States) Chaparral Green Energy Solutions, LLC (United States) City Solar (United States) Concept RHE (Spain) Customized Roofing (United States) Desert Power Inc. (United States) Eco-Smart, Inc. (United States) Energy 21 USA LLC (United States) European Solar Engineering (Denmark) Freelite Skylights (United States) Global NES of Arizona (United States) Global NES of Oregon (United States) Grand Canyon Supplies, Inc. (United States) Greencrest Energy Solutions (United States) Green Tech Design-Build, Inc.(United States) Green Tree Products (United States) GS Consulting Corp S.A. de C. V. (El Salvador) Hallman & Keele (United States) IMASTEC (Spain) Inline Electric (United States) JJ Ltd (United States) Kemper & Associates, Inc., d/b/a Total Roofing & Reconstruction (United States) Lighting Audit Services (United States) Matrix Roofing (United States) MGM Electric Limited (Canada) Mulick Construction (United States) Nevada Energy Audit (United States) Pacific HVAC (United States) PEP Solar (United States) Progressive Roofing (United States) Samjung Tech, Inc. (South Korea) Sola Tech Consulting (United States) Straight Up Energy (United States) Suntricity (United States) SW Daylight (United States) The Energy Solutions Group Worldwide, LLC (United States) Total Roofing & Reconstruction (United States) Urban Green Solutions, Inc. (Puerto Rico) Vega Solar (United States) WePower (United States) DISTRIBUTOR AGREEMENTS: In the international markets, we will generally select large companies to act as our exclusive distributors in a foreign country. Our payment terms with our domestic and international distributors are the same as our terms with our dealers. Our international distributors are responsible for all costs associated with clearing customs and any tariffs. We encourage our international distributors to recruit dealers within their territories to sell our skylights. Currently, we have the following distributors: Ciralight Europe (29 European Union Countries) RSB Construction LTD. (Turkey) ZEEV Shimon & Sons, Ltd. (Israel) 8
In addition we currently have interest from companies wishing to become Dealers or Distributors in Australia, Brazil, Canada, Chili, Germany, Greece, Italy, Indonesia, Japan, Poland and Romania. We are at various stages of discussions and negotiations with these companies and we have not yet reached any definitive terms with any one of these companies. After securing the technology rights to the Suntracker(TM) products, we elected to undertake a process of reviewing and enhancing the design to take it from good quality to industrial grade quality. This process included an improved design of numerous components including the GPS Controller, the post system, the mirror assembly and consolidating the mid-tray frame and dome frame into one frame. At that time, we elected to remove the product from the market until all the improvements were completed. In December 2009, the SunTracker(TM) passed a 30 year life cycle test under extreme environmental conditions. This demonstrated the SunTracker(TM) to be robust and durable. The SunTracker(TM) has since been certified to comply with the American Architecture and Manufacturers Association Certification standards for skylights. We are members of the United States Green Building Council (USGBC) and the Daylighting Collaborative. We are also a U.S. Department of Energy, Energy Star Partner. We intend to increase our marketing efforts in the next few months and this includes recruiting more dealers and distributors and promoting our products through public relations, as well as through direct advertising. Our advertising campaign will be focused on creating consumer awareness of our products and the benefits users of our products will realize through energy and cost savings. Our marketing campaign will include attending industry related business conventions and trade shows, advertising in industry related publications, and directly contacting building industry professionals, property owners and green industry businesses. Our skylights have recently been installed at: Three Google facilities Two Ace Hardware Stores Two Office Depot stores Two IKEA stores, one in Canada and one in the United States Five Whole Foods stores Five Giant Food Stores One Fresh and Easy store 200 units at Patagonia's main facility 80 units at Caterpillar, Belgium 26 units at Boeing 66 units at Johnson & Johnson, Mexico 12 units at Phoenix Sky Harbor Airport 4 units to the Unites States Navy We recently received approval from the Los Angeles Unified School District as well as the Los Angeles Community College District to complete pilot test projects using our Smart Skylights at their facilities. We are developing ongoing relationships with major retailers, big box stores and major corporations and governmental units. COMPETITION Our major competitors in the active skylight market are Solar Tracking Skylights, Inc., Natural Lighting, Inc. and Sundolier. Our major competitors in the passive skylight market are Solatube, Inc., Sun Optics and Velux Skylights. Therefore, our markets are highly competitive and many of our passive skylight competitors have greater financial and human resources that we have, while our active skylight competitors are smaller companies with minor, if any, 9
competitive advantages. We will compete with these competitors by offering better quality and effective products at competitive pricing. If we fail to effectively compete with our competitors, then we may not be able to stay in business. These competitors have already successfully marketed and commercialized products that compete with our products. Our competitors may succeed in developing or licensing products and technologies that are more effective or less costly than our products and the products that we are developing. If we are unable to compete successfully, we will not be able to sell enough products at a price sufficient to permit us to generate profits. OUR INTELLECTUAL PROPERTY Our success depends on the skills of our employees and their ability to continue to innovate and improve our intellectual property. We rely on a combination of copyright, trademark, patent and design laws, trade secrets, confidentiality procedures and contractual provisions to protect our intellectual property rights and proprietary methodologies. We enter into confidentiality agreements with our employees and consultants and we generally control access to and distribution of proprietary information. These agreements generally provide that any confidential information developed by us or on our behalf be kept confidential. Further, we require all employees to execute written agreements assigning to us all rights in all inventions, developments, technologies and other intellectual property created by our employees. We currently own United States Letters Patent No. 7,430,077 for "Solar Tracking Reflector System for Structure Lighting," which issued on September 30, 2008, and which we acquired in December 2009. This patent covers our three mirror system that is included in our Suntracker One(TM) product and expires on May 25, 2027. We also own United States Patent Application No. 12/323,935 for "Solar Tracking Reflector System for Structure Lighting," which was filed on November 26, 2008, and acquired by us in December 2009. Our U.S. patent application covers our "one or more" mirror system and, therefore covers both our Suntracker One(TM) product (which has three mirrors) and our Suntracker Two(TM) product (which has one mirror). On June 14, 2010, the United States Patent and Trademark Office allowed our U.S. Patent Application by issuing a Notice of Allowance and Notice of Allowability. Our application has entered the issue process and should issue in due course. We currently have one European patent application pending before the European Patent Office (European Patent Application No. 07797814.6). We also have one Canadian patent application pending before the Canadian Intellectual Property Office (Canadian Patent Application No. 2,667,258). On June 25, 2010, our Mexican patent application before the Mexican Institute of Industrial Property (Mexican Patent Application No. MX/a/2008/015119) was approved for our three mirror or more design. In addition, we have Canadian, European and Mexican patent applications covering our one or more mirror systems and, therefore, cover both our Suntracker One(TM) and Suntracker Two(TM) products. We do not have any products that are not covered by our US Patent or our US, Canadian, European and Mexican patent applications. Except for our U.S. and Mexico patents and our patent applications pending in Canada, Europe, Mexico and the United States, we have no other patent rights. In addition, we are in the process of registering various trademarks for which we have common law rights. We also own certain trade secrets and formulae. CORPORATE BACKGROUND We were incorporated in the state of Nevada on February 26, 2009, under the name "Ciralight West, Inc." On March 13, 2009, we changed our name to Ciralight Global, Inc. As a result of the acquisition described below, we are a manufacturer and wholesaler of "advanced skylights" for use in warehouses, schools, retail stores, airports and military installations. Prior to our incorporation, there existed a company named "Ciralight, Inc." (referred to herein as "Old Ciralight") that was in the advanced skylights business. By the end of 2008, Old Ciralight was in dire financial straits and 10
was having difficulty retaining staff, making sales, paying for component parts and other trade payables, paying its office and warehouse rents and servicing its heavy debt load. In January 2009, several officers and directors resigned from Old Ciralight and many of its employees either left the company or were laid off. On January 27, 2009, Old Ciralight granted Mr. George Adams, Sr., its only secured creditor, the right to (i) manufacture the Old Ciralight product on an exclusive basis and unconditionally and (ii) market and sell its product, and agreed to ship all of its inventory to a facility owned or controlled by Mr. Adams in Anaheim, California. For all intents and purposes, Old Ciralight ceased its operations on January 27, 2009. The only revenue recognized by Old Ciralight during the quarter ended March 31, 2009, resulted from sales orders for Suntracker products received in 2008 for inventory items that were in inventory at December 31, 2008 and shipped during January 2009. After January 27, 2009, no meaningful or material business activities occurred in Old Ciralight For a few weeks thereafter, the Old Ciralight's staff was reduced to two people who were charged with sorting out the debts and winding down the business. Mr. Adams began working with the people who would become the management and principals of Ciralight Global, Inc. during February 2009 and such management incorporated Ciralight Global, Inc. on February 26, 2009. The original plan between Mr. Adams and Ciralight Global, Inc. was for Ciralight Global, Inc. to handle sales, manufacturing, marketing and fulfillment of Ciralight products on behalf of Mr. Adams. So, Ciralight Global, Inc. immediately began manufacturing the Suntracker One(TM) products, leased warehouse space, negotiated with suppliers for component parts, agreed to repair or replace defective products that had been previously sold by Old Ciralight and installed by Old Ciralight's dealers and contractors. On March 15, 2009, Mr. Adams formally foreclosed on all of the assets of Old Ciralight. By the end of March 2009, Mr. Adams and Ciralight Global, Inc.'s management began negotiations pursuant to which Ciralight Global, Inc. would purchase all of the foreclosed assets from Mr. Adams. In April 2009, we entered into an Exchange of Stock for Assets Agreement with Mr. George Adams, Sr. ("Adams Agreement") to acquire certain assets including, but not limited to, a United States patent, patent applications pending in Canada, Europe, Mexico and the United States, artwork, trademarks, equipment, furniture, databases, technical drawings, promotional materials, trade names and inventory parts and marketing rights related to the Suntracker One(TM) and Suntracker Two(TM) products previously owned and distributed by Ciralight, Inc., a Utah corporation, such assets having been foreclosed on by Mr. Adams, who was the secured creditor of Old Ciralight. We have no affiliation, contractual or otherwise, with Old Ciralight. In April 2009, we acquired all of the above described assets from Mr. Adams, except for the United States patent and the patent applications pending in Canada, Europe, Mexico and the United States, in exchange for 3,200,000 shares of our common stock and 1,000,000 shares of our Series A Preferred Stock. In December 2009, we acquired the United States patent and the patent applications pending in Canada, Europe, Mexico and the United States from Mr. Adams in exchange for the issuance by us of an additional 400,000 shares of our common stock and a convertible promissory note in the amount of $250,000. The note was convertible into shares of our common stock at a conversion rate of one share per $.25 of outstanding principal and interest. Mr. Adams has subsequently converted the note into common stock. As a result of this transaction, Mr. Adams is our largest shareholder. The Adams Agreement also granted Mr. Adams a royalty fee of $20.00 for each Suntracker One(TM) and Suntracker Two(TM) unit or any future units that are based on the patent rights we acquired from him. The maximum royalty fees payable under the Adams Agreement is $2,000,000 based on the sale of 100,000 units. Since we acquired the assets from Mr. Adams, we have worked diligently to improve our brand image and the reputation of our Company and have been very mindful of the potential impact that the defunct Ciralight, Inc. and Mr. Adams' foreclosed on it assets could have or has had on the Company. We have worked very hard to improve the SunTracker One(TM) and SunTracker Two(TM) products by making them more reliable, more functional and more acceptable to dealers, 11
distributors and customers. We have developed excellent relationships with our suppliers and we reached out to the customers who bought skylights from Ciralight, Inc. (Old Ciralight) that may have malfunctioned and have replaced parts and components as necessary by allowing such customers to buy replacement parts and components at our cost. This program of reaching out to those customers has reaped rewards for the Company as we are now receiving new orders from some of Old Ciralight's customers. We do not believe that the fact that Old Ciralight is defunct and has had its assets acquired by its creditors has had any material impact on us due to our proactive engagement with our suppliers, some of whom were creditors of Old Ciralight. HOW TO CONTACT US The Company's principal executive offices are located at 15303 Ventura Blvd., 9th Floor, Sherman Oaks, CA 91403. Our telephone number is (877) 520-5005 COMPETITIVE BUSINESS CONDITIONS The Company competes with many companies in the global markets and many of our competitors are large, well funded companies who have substantially larger staffs and resources than we have at the present time. Unlike the many companies that compete in the global market manufacturing building materials, we are unique. Few companies manufacture our product or anything similar in nature. We intend to compete based on our unique technology and business and government contacts within China. FOREIGN CURRENCY RISK The Company is selling products in the foreign arena and is exposed to foreign currency fluctuations. However, since we quote our prices in U.S. Dollars, we do not feel the risks normally associated with foreign currencies are material to our business. RAW MATERIALS AND SUPPLIES The Company has contact with and access to numerous suppliers of the raw materials and components needed to manufacture our skylights and is not dependent on any one supplier or limited group of suppliers. The components contained in our SunTracker(TM) system are supplied by third party manufacturers and, in most cases, there are alternative sources for each component. Our manufacturers include the following: Manufacturer Component Location ------------ --------- -------- All Metals Mirror Assembly Texas Angell & Giroux Lightwells California Apex Plastics GPS Controller Case Texas CanFab Roof curbs California Empire Metal Products Lightwells/Roof curbs Arizona KCC International Roof Curbs Kentucky Malcolite Corporation Lenses California Plastic Fabricating Lenses Utah Ray's Plastics Skylight Dome California Replex Plastics Skylight Dome Ohio Solar Industries Dome Metal Frame Arizona Suntron Corporation GPS Electronics and Assembly Texas DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS The Company does business with two major customers. Major customers are defined as those customers whose annual revenue is greater to or equal to 10% of annual revenue. Net sales for the years ended December 31, 2011 and 2010 include sales to the following major customers, together with the receivables due from those customers: 12
Sales Year Ended December 31, ----------------------- Customer 2011 2010 -------- ---- ---- Customer A $398,612 $ -- Customer B $173,829 $ 14,852 Accounts Receivable, as of December 31, ----------------------- Customer 2011 2010 -------- ---- ---- Customer A $ 57,873 $ -- Customer B $ 45,807 $ 8,618 EFFECT OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS The Company's common stock is registered pursuant to Section 12(g) of the Securities Exchange Act of 1934 ("1934 Act"). As a result of such registration, the Company is subject to Regulation 14A of the "1934 Act," which regulates proxy solicitations. Section 14(a) requires all companies with securities registered pursuant to Section 12(g) thereof to comply with the rules and regulations of the Commission regarding proxy solicitations, as outlined in Regulation 14A. Matters submitted to stockholders of the Company at a special or annual meeting thereof or pursuant to a written consent will require the Company to provide its stockholders with the information outlined in Schedules 14A or 14C of Regulation 14; preliminary copies of this information must be submitted to the Commission at least 10 days prior to the date that definitive copies of this information are forwarded to stockholders. The Company is also required to file annual reports on Form 10-K and quarterly reports on Form 10-Q with the Commission on a regular basis, and will be required to disclose certain events in a timely manner, (e.g. changes in corporate control; acquisitions or dispositions of a significant amount of assets other than in the ordinary course of business; and bankruptcy) in a Current Report on Form 8-K. We are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. If we are unable to timely comply with Section 404 or if the costs related to compliance are significant, our profitability, stock price and results of operations and financial condition could be materially adversely affected. The Company is required to comply with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002, which requires that we document and test our internal controls and certify that we are responsible for maintaining an adequate system of internal control procedures for the 2011 fiscal year. We are currently evaluating our existing controls against the standards adopted by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). During the course of our ongoing evaluation and integration of the internal controls of our business, we may identify areas requiring improvement, and we may have to design enhanced processes and controls to address issues identified through this review (see Item 9A, below for a discussion of our internal controls and procedures). We believe that the out-of-pocket costs, the diversion of management's attention from running the day-to-day operations and operational changes caused by the need to comply with the requirement of Section 404 of the Sarbanes-Oxley Act could be significant. If the time and costs associated with such compliance exceed our current expectations, our results of operations and the future fillings of our Company could be materially adversely affected. 13
DEPENDENCE ON KEY EMPLOYEES AND NEED FOR ADDITIONAL MANAGEMENT AND PERSONNEL The Company is heavily dependent on the ability of our President, Jeffrey S. Brain, who has contributed essential technical and management experience to our business. The Company will be dependent upon Mr. Brain to recruit good management for the Company. In the event of future growth in administration, marketing, manufacturing and customer support functions, the Company may have to increase the depth and experience of its management team by adding new members. The Company's success will depend to a large degree upon the active participation of its key officers and employees, as well as the continued service of its key management personnel and its ability to identify, hire, and retain additional qualified personnel. There can be no assurance that the Company will be able to recruit such qualified personnel to enable it to conduct its proposed business successfully. EMPLOYEES As of March 18, 2011, we had six full time employees, and no part time employees. We believe that our relations with our employee are good. Our employees are not represented by a union or covered by a collective bargaining agreement. REPORTS TO SECURITY HOLDERS The public may view and obtain copies of the Company's reports, as filed with the Securities and Exchange Commission, at the SEC's Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. Information on the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. Additionally, copies of the Company's reports are available and can be accessed and downloaded via the internet on the SEC's internet site at http://www.sec.gov. ITEM 1A. RISK FACTORS. We are a smaller reporting company and are not required to provide the information required by this item. ITEM 1B. UNRESOLVED STAFF COMMENTS. Not applicable. ITEM 2. PROPERTIES. The Company does not own any real estate. We are currently subleasing our office and warehouse facility at 670 E. Parkridge, Suite 112, Corona, California 92879 for $3,000 a month. The property is owned by one of our Directors, Frederick Feck. This is a written lease and runs month to month. The space consists of approximately 3,500 square feet. We occupied this warehouse facility from March 1, 2009, until September 30, 2009, on a rent free basis. From October 1, 2009, until March 31, 2010, we occupied this warehouse facility under a verbal lease for $3,000 per month. Our board of directors believes this new rental arrangement is fair to the Company. SEE "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." ITEM. 3 LEGAL PROCEEDINGS. We have no legal matters pending against us. On August 15, 2011 we filed a collection action against Nature's Lighting for their failure to pay for product purchased from us. The amount owed to us is $39,000 plus legal fees and costs. On January 30, 2012 we were successful in obtaining a default judgment and now are proceeding to collect the balance owed to us. We are not currently defendants in any legal proceedings. 14
ITEM 4. (REMOVED AND RESERVED). Not applicable PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Our common stock is not currently traded or quoted on any national exchange. Our stock is quoted on the OTCBB market under the symbol "CGHA." Our common stock is considered a "penny stock." The application of the "penny stock" rules to our common stock could limit the trading and liquidity of the common stock, adversely affect the market price of our common stock and increase your transaction costs to sell those shares. The Commission has adopted regulations which generally define a "penny stock" to be any equity security that has a market price (as defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. HOLDERS As of March 23, 2012, there were approximately 178 shareholders of record of the Company's Common Stock and one shareholder of record of the Company's Series A Preferred Stock. DIVIDENDS The Company has not declared any cash dividends with respect to its common stock or preferred stock during the last two fiscal years and does not intend to declare dividends in the foreseeable future. There are no material restrictions limiting or that are likely to limit the Company's ability to pay dividends on its outstanding securities. RECENT ISSUANCES OF UNREGISTERED SECURITIES During the three month period ended March 31, 2011, a total of 56,000 shares of common stock at $.50 per share were issued, consisting of 6,000 shares from sales of our stock through a Private Placement Offering and 50,000 shares for engineering and promotional services rendered. During the three month period ended June 30, 2011, a total of 669,000 shares of common stock were issued, consisting of 667,000 shares, at $.50 per share, from sales of our stock through a Private Placement Offering and 2,000 shares from the exercise of stock options at $.75 per share. During the three month period ended September 30, 2011, a total of 278,360 shares of common stock were issued at $.50 per share, from sales of our stock through a Private Placement Offering. During the three month period ended December 31, 2011, a total of 30,000 shares of common stock were issued at $.50 per share for marketing services rendered. The above shares were issued in reliance on the exemption from registration requirements of the 33 Act provided by Section 4(2) and Regulation D, Rule 506 promulgated thereunder, as the issuance of the stock did not involve a public offering of securities based on the following: * the investors represented to us that they were acquiring the securities for their own account for investment and not for the account of any other person and not with a view to or for distribution, assignment or resale in connection with any distribution within the meaning of the 33 Act; * we provided each investor with written disclosure prior to sale that the securities have not been registered under the 33 Act and, 15
therefore, cannot be resold unless they are registered under the 33 Act or unless an exemption from registration is available; * the investors agreed not to sell or otherwise transfer the purchased securities unless they are registered under the 33 Act and any applicable state laws, or an exemption or exemptions from such registration are available; * each investor had knowledge and experience in financial and other business matters such that he, she or it was capable of evaluating the merits and risks of an investment in us; * each investor was given information and access to all of our documents, records, books, officers and directors, our executive offices in Irvine, California and our warehouse facility in Corona, California, pertaining to the investment and was provided the opportunity to ask questions and receive answers regarding the terms and conditions of the offering and to obtain any additional information that we possesses or were able to acquire without unreasonable effort and expense; * each investor had no need for liquidity in their investment in us and could afford the complete loss of their investment in us; * we did not employ any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio; * we did not conduct, hold or participate in any seminar or meeting whose attendees had been invited by any general solicitation or general advertising; * we placed a legend on each certificate or other document that evidences the securities stating that the securities have not been registered under the 33 Act and setting forth or referring to the restrictions on transferability and sale of the securities; * we placed stop transfer instructions in our stock transfer records; * we sold securities to less than 35 individuals who were not "accredited investors" as defined in Rule 501 of Regulation D promulgated under the 33 Act; * no underwriter was involved in the offering and the only registered broker-dealer involved in the offering was Dave Broderick/WBB Securities to whom we paid commissions in the amount of $31,938; and * we made independent determinations that such persons were sophisticated or accredited investors and that they were capable of analyzing the merits and risks of their investment in us, that they understood the speculative nature of their investment in us and that they could lose their entire investment in us. ISSUER PURCHASES OF EQUITY SECURITIES None. ITEM 6. SELECTED FINANCIAL DATA. Not applicable. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. CAUTIONARY FORWARD - LOOKING STATEMENT The following discussion should be read in conjunction with our financial statements and related notes. Certain matters discussed herein may contain forward-looking statements that are subject to risks and uncertainties. Such risks and uncertainties include, but are not limited to, the following: * the volatile and competitive nature of our industry, * the uncertainties surrounding the rapidly evolving markets in which we compete, * the uncertainties surrounding technological change of the industry, * our dependence on its intellectual property rights, 16
* the success of marketing efforts by third parties, * the changing demands of customers and * the arrangements with present and future customers and third parties. Should one or more of these risks or uncertainties materialize or should any of the underlying assumptions prove incorrect, actual results of current and future operations may vary materially from those anticipated. SEE ALSO the disclosures under "Cautionary Statement" following the Table of Contents in this Annual Report. THE FOLLOWING DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF CIRALIGHT GLOBAL, INC., FOR YEARS ENDED DECEMBER 31, 2011 AND 2010, AND FOR THE PERIOD FROM FEBRUARY 26, 2009 (INCEPTION) TO DECEMBER 31, 2009, SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS, AND THE NOTES TO THOSE FINANCIAL STATEMENTS THAT ARE INCLUDED IN PART IV, ITEM 15 ELSEWHERE IN THIS FILING. REFERENCES TO "WE," "OUR," OR "US" IN THIS SECTION REFERS TO THE COMPANY AND ITS SUBSIDIARIES. OUR DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS BASED UPON CURRENT EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. ACTUAL RESULTS AND THE TIMING OF EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH UNDER THE RISK FACTORS, FORWARD-LOOKING STATEMENTS AND BUSINESS SECTIONS IN THIS PROSPECTUS. WE USE WORDS SUCH AS "ANTICIPATE," "ESTIMATE," "PLAN," "PROJECT," "CONTINUING," "ONGOING," "EXPECT," "BELIEVE," "INTEND," "MAY," "WILL," "SHOULD," "COULD," AND SIMILAR EXPRESSIONS TO IDENTIFY FORWARD-LOOKING STATEMENTS. OVERVIEW Ciralight manufactures patented SunTracker(TM) lighting solutions that enable commercial and industrial buildings to utilize sunlight to illuminate indoor spaces. The SunTracker(TM) unit utilizes a solar powered GPS controller and mirrors to direct sunlight through a skylight diffuser. The result is a self contained, completely sustainable lighting solution that can offer up to 10.5 hours of free indoor light. Using Sun-tracking technology allows our skylights to illuminate buildings longer and more effectively than traditional skylights. Furthermore, the natural diffused light is high quality, more conducive to retail, educational, and industrial purposes. SunTracker(TM) skylights provide the illumination of a 1,000 watt metal halide light fixture. These units are entirely Solar Powered so they do not require any electricity or electrical hookup. Smart SunTrackers(TM) are designed with two heat traps so they prevent the heat gain associated with traditional skylights. We add between one and three new dealers for our patented, SunTracker(TM) each week. Denver-based AIA Industries, Inc., a leader in custom manufacture of quality plastic and structural glass skylights for residential and commercial applications, distributes Ciralight's SunTracker(TM). This is significant because AIA makes their own custom line of skylights and decided to become a dealer for Ciralight because they believe that our SunTracker(TM) technology is the future of eco-friendly, energy-saving, natural light for businesses and homes. We entered into a strategic dealership agreement with Progressive Roofing, a four-state, 8-office design/build and maintenance company responsible for such projects as the Phoenix Cardinals Stadium in Glendale, AZ, the Palo Verde Nuclear Plant in Tonopah, NV, Hartsfield Airport, Atlanta, GA, the Westin Casuarina Resort in Grand Cayman, Bahamas, and many more trophy buildings. Progressive has locations in California, Nevada, New Mexico and Texas, all sunshine states, and for which installations of our Smart Skylights(TM) make the most sense. Mexico City-based, The Global Industry Solution, SA, is an authorized Ciralight Global dealer for Mexico, who joined our other international dealerships in Spain, El Salvador, Canada, South Korea, Turkey, Europe, Israel and Denmark. We 17
are currently in negotiations with companies in Japan, Indonesia, Brazil, Columbia, China, Bolivia, Chili, and Poland. The emphasis on energy-efficient "Green" buildings, maintenance and sustainability make our Smart Skylights(TM) a very desirable addition when architects and builders are planning new construction. We are making good progress towards introducing our Smart Skylights(TM) for homes, which, like our commercial Smart Skylights(TM), will be eligible to receive federal, state and local tax credits and utility incentives as an Energy Saving Green product. Our home Smart Skylights(TM) will deliver the same energy saving benefits as our commercial Smart Skylights(TM), such as improved lighting and improved health due to more natural light and reduced household utility costs. Our 4'x8' SunTracker(TM) , will begin shipping within weeks and we are presently receiving orders for this new popular addition to our product line. We have completed new installations at the Columbus Zoo in Ohio, Market of Choice in Corvallis, Oregon, Fanshawe College and Northern College in Canada, LG facilities in Turkey, and Sahurita High School Gym and Riverside Elementary School in Arizona. Next week we are shipping 48 of our Smart Skylights(TM), for a new Whole Foods Market in Austin Texas and 27 for BD Biosciences in Northern California. We continue to progress on dialogue we have had in the last few months with such potential customers as the U.S. Army Corp of Engineers, City of Los Angeles Mayor's Office, City of Los Angeles Building & Safety Department, California Institute of Technology, American Honda Motor Co., U.S. Naval Facilities Command, Toyota Motor Sales USA, Parsons Construction Co., Turner Construction Company, Los Angeles Community Colleges District, Los Angeles Unified School District, NASA, University of Alabama, Los Angeles County, and others. Every year, Ciralight Global promotes our SunTrackers(TM) at trade shows and conventions to potential new customers. In 2011 we exhibited at numerous conventions and energy shows including; The NASA Energy show at the Davidson Space Center in Huntsville, Alabama (February 2011); Green California in Sacramento, California (April 2011); Go-Green Expo in LosAngeles (April 2011); Cal Tech Energy Efficiency Expo in Pasadena, California (May 2011); Lightfair International in Philadelphia (May 2011); BEX-Asia in Singapore (September 2011); and USGBC's Greenbuild 2011 in Toronto, Canada (October 2011). These trade shows give Ciralight the opportunity to meet decision makers in the sustainable and green building industry. As we continue exhibiting at these shows, it's evident that people are looking for new energy efficiency solutions and are enthusiastic about our SunTracker(TM) products. Throughout the year, Ciralight continued to grow our influential network of distributors and dealers who independently push the marketing and sales of our Ciralight SunTrackers(TM) around the world. During 2011, Ciralight surpassed a significant milestone as we reached the signing of one hundred (100) Dealers worldwide. The number of dealers is even larger today. Our approach is systematic and methodical, as we build the infrastructure necessary to achieve our significant long term growth and sales goals. One of our most significant contracts signed during 2011 was with ABM Industries. ABM Industries is one of the largest facility management companies in the United States. ABM is currently training their nationwide team of 14,600 + facility engineers on the details of our SunTracker(TM) skylights and will begin recommending our SunTrackers(TM) as an energy saving solution for the buildings they manage and maintain. Ciralight Global has established distribution through Europe, South America, Central America, North America and portions of Asia. In 2012, we will continue our efforts to build a broad infrastructure of international distribution as well as strategic relationships that in time, prove its value with significant sales. Our goals involve having distribution on every continent and in every country. Ciralight has spent this time to train, educate, and assist our new dealers and distributors in marketing our products in their territories. Our SunTrackers(TM) are an exceptional energy saving product, but, as with any product, they require time to be specified into a building and ultimately installed. The building industry sales cycle is often 9-12 months or more. As we 18
introduce our product to new dealers in new markets, it requires time to educate and train their teams about our products and how to market our SunTrackers(TM) effectively. Once a customer decides they want to purchase our SunTrackers(TM), their architect will draw up their plans; the plans must be approved by the local agencies, and then construction begins. Often, we find that a new customer will install a few SunTrackers(TM) as a test before eventually committing to a full order. So it can be a lengthy sales process, yet we are seeing the rewards. As awareness of the SunTracker(TM) has spread, so has the diversity of our installation sites. SunTrackers(TM) were recently installed at the Amsterdam International Airport, at Supermarkets in Turkey, at Hawker Centers in Singapore, at two Colleges in Canada, and at a warehouse in Indonesia. This past year our SunTrackers(TM) were also installed at three different Google sites, a General Electric facility in Georgia, a Walgreens in Arizona, a West Marine in Hawaii, and at numerous Eaton Corporation facilities. The New Year will start strong with our first installation of 80 4'x8' SunTrackers(TM) for Caterpillar at their Belgium Headquarters. In January 2011, Ciralight received the prestigious Green Mark certification from the Singapore Green Building Council endorsed by the government of Singapore. GreenTree Products Asia Pte, LTD., Ciralight's exclusive distributor for Singapore, Malaysia and portions of Indonesia, secured the Singapore Green Building Council certification. The certification is based on the SunTrackers capability to bring abundant, consistent natural sunlight into building interiors throughout the day; and Ciralight Global's commitment to environmental practices throughout their own operations The Green Mark Certification allows Singapore building owners that install Ciralight SunTrackers to benefit from incentive programs and grants set up by the Singapore government to encourage green-mindedness. As importantly, installation of the Ciralight SunTrackers can help property owners obtain a BCA Green Mark for their building, a meaningful distinction in the Singapore real estate market. Installations of Ciralight SunTrackers have been completed at Indonesian warehouses, Singapore Hawker Centers, at the Singapore International Airport and at one of the island's largest food companies. With the Green Mark certification, 2012 looks to be a prominent year for GreenTreen Products Asia and Ciralight SunTrackers. Ciralight SunTrackers(TM) have also been installed throughout world by Whole Foods, Staples, Office Depot, Boeing, Google, Caterpillar, LG, IKEA, Walgreens, Ace Hardware, Eaton, Fresh & Easy, Frito Lay, Patagonia and more. We renamed our products as of January 1st, 2011. Our products are no longer referred to as SunTrackerOne, SunTrackerTwo, and SunTrackerThree. Instead, our 4'x4' SunTracker is now called the SunTracker 400, (with an option of a single or triple mirror), and our 4'x8' SunTracker is now called the SunTracker 800. When our smaller model for homes and classrooms is released, it will be called the SunTracker 200. These new model names are simple, intuitive, and reinforce the brand name and image. We were incorporated in the state of Nevada on February 26, 2009, under the name "Ciralight West, Inc." On March 13, 2009, we changed our name to "Ciralight Global, Inc." In April 2009, we entered into an Exchange of Stock for Assets Agreement with Mr. George Adams, Sr. to acquire certain assets including, but not limited to, a United States patent, patent applications pending in Canada, Europe, Mexico and the United States, artwork, trademarks, equipment, furniture, databases, technical drawings, promotional materials, trade names and inventory parts and marketing rights related to the Suntracker One(TM) and Suntracker Two(TM) daylighting products previously owned and distributed by Ciralight, Inc., a Utah corporation, such assets having been foreclosed on by Mr. Adams, who was the secured creditor of Ciralight, Inc. We did not acquire any equity securities, debts, liabilities or financial obligations of Ciralight, Inc., the Prior Company. Ciralight, Inc. is a predecessor to Ciralight Global, Inc., although we have no affiliation, contractual or otherwise, with Ciralight, Inc. or any of its employees, officers or directors. Ciralight, Inc. ceased operations on January 27, 2009. 19
In April 2009, we acquired all of the above described assets from Mr. Adams, except for the United States patent and the patent applications pending in Canada, Europe, Mexico and the United States, in exchange for 3,200,000 shares of our common stock and 1,000,000 shares of our Series A Preferred Stock. In December 2009, we acquired the United States patent and the patent applications pending in Canada, Europe, Mexico and the United States from Mr. Adams in exchange for the issuance by us of an additional 400,000 shares of our common stock and a convertible promissory note in the amount of $250,000. The promissory note we issued to Mr. Adams is convertible into shares of our common stock at a conversion rate of one share per $.25 of outstanding principal and interest. As a result of this transaction, Mr. Adams is our largest shareholder and has voting control over us. As described in the above paragraphs, Ciralight, Inc. is a predecessor to Ciralight Global, Inc., since the major portion of the business and assets of Ciralight, Inc. were acquired by Ciralight Global, Inc. in a series of related successions in each of which the acquiring person or entity acquired the major portion of the business and assets of Ciralight, Inc. In order to provide working capital, Ciralight Global, Inc. sold common stock through a private placement that raised $1,300,000 with the sale of 5,200,000 shares at a price of $0.25 per share from April 30, 2009 to January 15, 2010. During the third and fourth quarters of 2010, the Company sold common stock through a private placement that raised $222,000 with the sale of 444,000 shares at a price of $0.50 per share. During 2011, the Company sold common stock through a private placement that raised $475,680 with the sale of 951,360 shares at a price of $0.50 per share. RISKS, UNCERTAINTIES AND TRENDS RELATING TO THE COMPANY AND INDUSTRY The industrial lighting industry is intensely competitive. We have numerous competitors in the United States and elsewhere. Several of these competitors have already successfully marketed and commercialized products that compete with our products. Our success is dependent up our ability to effectively and profitably produce, market and sell our products. Our business strategy and success is dependent on the skills and knowledge of our management team and consultants. The marketability and profitability of our products is subject to unknown economic conditions, which could significantly impact our business, financial condition, the marketability of our products and our profitability. We are vulnerable to the current economic crisis which may negatively affect our profitability. Our success depends, in part, on the quality of our products. Our SunTracker(TM) products provide natural daylighting that is a key component in many current construction and existing structures. SunTrackers(TM) are maintenance free, powered by the sun and completely self-contained. We are currently marketing our SunTracker(TM) products to warehouse owners, roofing companies, shopping centers, schools and military installations in the United States. We are working on establishing sales in Canada, Mexico and overseas. The market for advanced skylights is growing year over year due to pressures on building owners, tenants, schools and government agencies to reduce energy consumption and expense. The "green" movement, carbon footprint ideology and other environmental initiatives should provide increased growth in our market segment. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our management's discussion and analysis of our financial condition and results of operations are based on our condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 20
While our significant accounting policies are more fully described in Note 3 to our financial statements, we believe that the following accounting policies are the most critical to aid the reader in fully understanding and evaluating this discussion and analysis: BASIS OF PRESENTATION - The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for financial information and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for smaller reporting companies. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of operations of the Company for the years ended December 31, 2011, 2010 and the period from February 26, 2009 (inception) to December 31, 2009, have been reflected herein. REVENUE RECOGNITION - Revenue on our skylights and parts are recognized when the units or parts ship to the customer. INCOME TAXES - The Company accounts for income taxes in accordance with Accounting Standards Codification 740, INCOME TAXES ("ASC 740"). Deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted statutory tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized. The Company uses a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more likely than not to be realized upon settlement. The Company will classify the liability for unrecognized tax benefits as current to the extent that the Company anticipates payment (or receipt) of cash within one year. There were no significant matters determined to be unrecognized tax benefits taken or expected to be taken in a tax return that have been recorded on the Company's consolidated financial statements for the years ended December 31, 2011 and 2010. The Company recognizes interest and penalties related to unrecognized tax benefits in the tax provision. As of and for the years ended December 31, 2011 and 2010, there were no interest or penalties related to income taxes that have been accrued or recognized. INVENTORIES - Inventories, consisting primarily of finished skylight units and parts for sale, are recorded using the average cost method. Inventory acquired from the prior company was booked at the historical cost of the prior company. EARNINGS PER SHARE - Earnings per share is computed in accordance with the provisions of Financial Accounting Standards (FASB) Accounting Standards Codification (ASC) Topic 260 (SFAS No. 128, "EARNINGS PER Share"). Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the period, as adjusted for the dilutive effect of the Company's outstanding convertible preferred shares using the "if converted" method and dilutive potential common shares. Potentially dilutive securities include warrants, convertible preferred stock, restricted shares, and contingently issuable shares. STOCK-BASED COMPENSATION - The Company accounts for stock-based compensation under the provisions of FASB ASC 718 (Statement of Financial Accounting Standards No. 123 (revised 2004), "SHARE-BASED PAYMENT"), which requires the Company to measure the stock-based compensation costs of share-based compensation arrangements based on the grant date fair value and generally recognizes the costs in the financial statements over the employee's requisite service period. Stock-based compensation expense for all stock-based compensation awards granted was based on the grant date fair value estimated in accordance with the provisions of FASB ASC 718. SHIPPING AND HANDLING COSTS - The Company includes shipping and handling costs that are billed to our customers in revenue and the actual costs incurred for shipping and handling are included in cost of goods sold in accordance with the 21
provisions of FASB ASC 605-45-45-20. The related costs are considered necessary to complete the revenue cycle. WARRANTY COSTS - Commencing April 1, 2009, the Company provided a five-year warranty covering the labor and materials associated with its installations. Effective September 1, 2009, the Company changed the coverage to ten years in the U.S. The Company's "advanced skylights" are warranted by the manufacturer for 10 years, generally. The Company (at its option) will repair, replace or give credit for the original purchase price on any of its products or parts. An accrual for a loss contingency has been made, since warranty expenses to date have been consistent and a reasonable estimate of future expenses can be made, in accordance with FASB ASC 460-10-50-8 (c). COMPREHENSIVE INCOME (LOSS) - FASB ASC Topic 220 (Statement of Financial Accounting Standards No. 130, "REPORTING COMPREHENSIVE INCOME") establishes standards for reporting comprehensive income (loss) and its components in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income (loss), as defined, includes all changes in equity during the period from non-owner sources, such as foreign currency translation adjustments. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In 2010, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update ("ASU") to address diversity in practice in interpreting the pro forma revenue and earnings disclosure requirements for business combinations. The ASU specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the current year business combination(s) had occurred as of the beginning of the comparable prior annual reporting period. We prospectively adopted this ASU effective Q1 2011, with no material impact on our consolidated financial statements. In 2011, the FASB issued two ASUs which amend guidance for the presentation of comprehensive income. The amended guidance requires an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The current option to report other comprehensive income and its components in the statement of stockholders' equity will be eliminated. Although the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under existing guidance. These ASUs are effective for us in Q1 2012 and retrospective application will be required. These ASUs will change our financial statement presentation of comprehensive income but will not impact our net income, financial position, or cash flows. In 2011, the FASB issued an ASU which intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The ASU also expands upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The ASU is effective for us in Q1 2012, with early adoption permitted. We do not expect adoption to have an impact on our consolidated financial statements. RESULTS OF OPERATIONS OF THE COMPANY COMPARISON OF THE YEARS ENDED DECEMBER 31, 2011 AND 2010 SALES. Net sales increased 44% from $774,105 in 2010 to $1,111,343 in 2011. Sales and demand for our products have been increasing each quarter. This is a result of our sales and marketing efforts, including greater visibility, customer outreach, customer acceptance, and demonstrated return on investment. COST OF SALES. Cost of sales increased 39% from $609,796 in 2010 to $849,184 in 2011. Cost of sales as a percentage of net sales decreased from 79% in 2010 to 76% in 2011. 22
Cost of sales consists of the cost of our products with related shipping and warranty costs. The reduction of cost of sales as a percentage of net sales was achieved as a result of the Company's implemented changes in its business operations in the ongoing effort to decrease its cost of sales. These include stricter controls over the movement of inventory to reduce losses, damage, and waste, making improvements to the products in order to reduce warranty work, implementing cost effective shipping options available through better pre-planning and scheduling, managing inventory levels by scheduling production to match demand forecasts, changing to more quality oriented suppliers, negotiating more favorable manufacturing agreements, and implementing cost reducing design changes. GROSS PROFIT. Gross profit increased 60% from $164,309 in 2010 to $262,159 in 2011. Gross profit as a percentage of net sales increased from 21% for 2010 to 24% 2011. Our gross profit has increased with continued product enhancements and refinements to our production process. OPERATING EXPENSES. Our operating expenses consist of research and development expenses, selling and marketing expenses and general and administrative expenses. Operating expenses decreased 2% from $1,189,111 in 2010 to $1,162,541 in 2011. Operating expenses as a percentage of net sales decreased from 154% in 2010 to 105% in 2011. Research and development expenses decreased 39% from $61,459 in 2010 to $37,262 in 2011. Research and development as a percentage of net sales decreased from 8% in 2010 to 3% in 2011. During 2010 and 2011, we improved the design and operating efficiency of our product, including the development of our 4'x8' Three(TM). Selling and marketing expenses increased 14% from $211,151 in 2010 to $240,547 in 2011. Selling and marketing expense as a percentage of net sales decreased from 27% for 2010 to 22% for 2011. During 2010 and 2011, our marketing efforts have focused on exhibiting and presenting our patented product line and the introduction of the Suntracker Three(TM). In addition to our marketing strategy with architects and builders planning new construction with the emphasis on energy-efficient "Green" buildings, we have progressed towards introducing our Suntrackers(TM) for homes. General and administrative expenses decreased 3% from $916,501 in 2010 to $884,732 in 2011. General and administrative expenses as a percentage of net sales decreased from 118% in 2010 to 80% in 2011. Lower expenses are a result of the number of changes in the manner in which our business was operated that were initiated in 2009 and fully implemented during 2010. INCOME TAXES. Management has decided not to recognize the tax benefit for the years ended December 31, 2011 and 2010. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS - COMPARISON OF THE YEARS ENDED DECEMBER 31, 2011 AND 2010 Net cash used in operating activities was $679,285 for 2011 and resulted primarily from a net loss of $927,072 partially offset by increases in other payables and decreases in prepayments, deposits, deferred revenue and notes receivable. Net cash used in operating activities was $615,464 for 2010 and resulted primarily from a net loss of $1,034,416 partially offset by increases in accounts payable and decreases in accounts receivables, prepayments and deposits. Net cash flow used in investing activities was $4,262 for 2011. There was no cash used in investing activities for 2010. Net cash provided by financing activities was $577,882 for 2011 and resulted primarily from the sale of common stock for $475,680 and related party advances of $100,000. Net cash provided by financing activities was $552,819 for 2010 and 23
resulted primarily from the sale of common stock for $280,000 and proceeds from a note payable of $275,000. CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS CONTRACTUAL OBLIGATIONS We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations and cash flows. The following table summarizes our contractual obligations as of December 31, 2011, and the effect these obligations are expected to have on our liquidity and cash flows in future periods. Payments Due by Period -------------------------------------------------------------------- Total Less than 1 year 1-3 Years 3-5 Years 5 years + ----- ---------------- --------- --------- --------- Contractual Obligations: Operating Leases $ 43,800 $ 43,800 $ -- $ -- $ -- Commitments to Purchase Inventory 42,235 43,304 -- -- -- -------- -------- -------- -------- -------- Totals: $ 86,035 $ 86,035 $ -- $ -- $ -- ======== ======== ======== ======== ======== ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Our financial statements and supplementary data may be found beginning at page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. ITEM 9A. CONTROLS AND PROCEDURES. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934) were effective. 24
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING Our management evaluated our internal control over financial reporting and there have been no changes during the fiscal quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING We are responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States. This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to an exemption for smaller reporting companies under Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control--Integrated Framework. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2011, our internal control over financial reporting was not effective in the following area: TIMELY RECONCILIATION OF ACCOUNTS During the December 31, 2011 and December 31, 2010 audits, a large number of adjusting journal entries were proposed to properly reconcile account balances at year end. A large number of adjusting journal entries being proposed during the audit process suggests that the Company's financial records are not properly reconciled at year end. This is an indication that the Company's controls may not be operating effectively to ensure that accounts are reconciled on a timely basis. ITEM 9B. OTHER INFORMATION. Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The information required by this Item regarding our directors, executives and corporate governance will be set forth in our Proxy Statement to be filed in connection with our 2012 Annual Meeting of Shareholders (the "Proxy Statement") and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item regarding executive compensation will be set forth in our Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The information required by this Item regarding security ownership of certain beneficial owners and management and related shareholder matters will be set forth in our Proxy Statement and is incorporated herein by reference. 25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE. The information required by this Item regarding certain relationships and related transactions and director independence will be set forth in our Proxy Statement and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. The information required by this Item regarding principal accountant fees and services will be set forth in our Proxy Statement and is incorporated herein by reference. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (a) (1) Financial Statements Financial statements for Ciralight Global, Inc. listed in the Index to Financial Statements and Supplementary Data on page F-1 are filed as part of this Annual Report. (a) (2) Financial Statement Schedule Financial Statement Schedule for Ciralight Global, Inc. listed in the Index to Financial Statements and Supplementary Data on page F-1 are filed as part of this Annual Report. (a) (3) See the "Index to Exhibits" set forth below. (b) See Exhibit Index below for exhibits required by Item 601 of Regulation S-K 26
EXHIBIT INDEX List of Exhibits attached or incorporated by reference pursuant to Item 601 of Regulation S-B Exhibit No. Description ----------- ----------- 3(i).1* Articles of Incorporation of Ciralight West, Inc. filed February 26, 2009, with the Secretary of 3(i).2* Certificate of Amendment to the Articles of Incorporation filed on March 13, 2009, with the Secretary of State of Nevada(changing name to Ciralight Global, Inc.). 3(i).3* Certificate of Amendment to the Articles of Incorporation filed on April 22, 2009, with the Secretary of State of Nevada. 3(ii)* By-Laws of Ciralight Global, Inc. 4.1* Certificate of Designation of Series A Preferred Stock filed on July 22, 2009, with the Secretary of State of Nevada 4.2** 2010 Employee and Consultant Stock Incentive Plan 4.3*** 2012 Employee and Consultant Stock Incentive Plan 10.1* Exchange of Stock for Assets Agreement dated as of April 1, 2009, by and between Ciralight Global, Inc. and George Adams, Sr. 10.2* Amendment to Exchange of Stock for Assets Agreement by and between Ciralight Global,Inc. and George Adams, Sr. dated December 15, 2009. 10.3* Assignment of Issued United States Patent and Pending United States Patent Application dated December 17, 2009 10.4* Domestic Non-Exclusive Dealer Agreement(undated and unsigned prototype) 10.5* Domestic Non-Exclusive Distribution Agreement(undated and unsigned prototype) 10.6* Domestic Non-Exclusive Dealer Agreement by and between Ciralight Global, Inc. and Globalight Energy Solutions, LLC dated as of December 1, 2009 10.7* Domestic Non-Exclusive Dealer Agreement by and between Ciralight Global, Inc. and Chaparral Green Energy Solutions, LLC dated as of January 1, 2010 10.8* Domestic Non-Exclusive Dealer Agreement dated December 1, 2009, by and between Ciralight Global, Inc. and Green Tech Design-Build, Inc. 10.9* International Distribution Agreement dated January 15, 2010, by and between Ciralight Global, Inc. and ZEEV Shimon & Sons, Ltd. 10.10* International Dealership Agreement dated June 18, 2009, by and between Ciralight Global, Inc. and RSB Construction LTD. 10.11* Domestic Non-Exclusive Dealer Agreement dated April 1, 2010, by and between Ciralight Global, Inc. and J-MACS Consulting, LLC. 10.12* Domestic Non-Exclusive Dealer Agreement dated April 15, 2010, by and between Ciralight Global, Inc. and The Energy Solutions Group Worldwide, LLC. 27
10.13* Domestic Non-Exclusive Dealer Agreement dated April 15, 2010, by and between Ciralight Global, Inc. and Kemper & Associates, Inc., d/b/a Total Roofing & Reconstruction. 10.14* Domestic Non-Exclusive Dealer Agreement dated December 1, 2009, by and between Ciralight Global, Inc. and Eco-Smart, Inc. 10.15* Commercial Lease Agreement dated April 1, 2010, by and between Ciralight Global, Inc. and Frederick Feck. 10.16* Material Liability Agreement dated September 3, 2009, by and between Ciralight Global, Inc. and Suntron Corporation. 10.17* Material Terms and Conditions of Verbal Office Lease for Executive Offices in Irvine, California. 10.18* Material Terms and Conditions of Verbal Office Lease for Warehouse/Offices in Corona, California 14* Code of Business Conduct and Ethics 21***** Subsidiaries. 31.1**** Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 31.2**** Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 32.1**** 906 Certification of Principal Executive Officer 32.2**** 906 Certification of Principal Financial Officer 101***** Interactive data files pursuant to Rule 405 of Regulation S-T. ---------- * Incorporated by reference from the Company's Form S-1 registration statement filed with the Securities and Exchange Commission (File No. 333-165638) that went effective on July 29, 2010. ** Incorporated by reference Exhibit 99.1 of the Company's Form 8-K Current Report filed with the Commission on January 6, 2010. *** Incorporated by reference to Exhibit 4.1 of the Company's Post-effective Amendment No. 1 to Form S-8 registration statement filed with the Commission on February 14, 2012. **** Filed herewith. ***** Previously filed. 28
SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized. Ciralight Global, Inc. Dated: August 20, 2012 /s/ Jeffrey S. Brain ------------------------------------- By: Jeffrey S. Brain Its: President and Chief Executive Officer In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Dated: August 20, 2012 /s/ Jeffrey S. Brain ------------------------------------- By: Jeffrey S. Brain Its: President, Chief Executive Officer and Director (Principal Executive Officer) Dated: August 20, 2012 /s/ Jarett Fenton ------------------------------------- By: Jarett Fenton Its: Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Dated: August 20, 2012 /s/ Frederick Feck ------------------------------------- By: Frederick Feck Its: Corporate Secretary and Director 29
CIRALIGHT GLOBAL, INC. INDEX TO FINANCIAL STATEMENTS Page Number ------ Report of Independent Registered Public Accounting Firm F-2 Balance Sheets as of December 31, 2011 and 2010 F-3 Statements of Operations for the years ended December 31, 2011 and December 31, 2010 F-4 Statement of Changes in Stockholder's Equity (Deficit) for the years ended December 31, 2011 and December 31, 2010 F-5 Statements of Cash Flows for the years ended December 31, 2011 and December 31, 2010 F-6 Notes to Financial Statements F-7 F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors Ciralight Global, Inc. Sherman Oaks, California We have audited the accompanying balance sheets of Ciralight Global, Inc. as of December 31, 2011 and 2010, and the related statements of operations, stockholders' equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ciralight Global, Inc. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. /s/ HJ Associates & Consultants, LLP ----------------------------------------------- HJ Associates & Consultants, LLP Salt Lake City, Utah March 30, 2012 F-2
CIRALIGHT GLOBAL, INC BALANCE SHEETS December 31, ----------------------------------- 2011 2010 ------------ ------------ ASSETS CURRENT ASSETS: Cash $ 97,443 $ 203,108 Restricted Cash 7,600 -- Accounts receivable 175,235 148,787 Notes receivable - related party -- 75,454 Inventory 197,619 228,106 Prepaid expenses and other current assets 16,090 53,804 ------------ ------------ TOTAL CURRENT ASSETS 493,987 709,259 ------------ ------------ Property and equipment, net 6,928 10,024 Intangible assets, net 27,198 28,861 ------------ ------------ TOTAL ASSETS $ 528,113 $ 748,144 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable $ 128,764 $ 211,015 Advances payable - related party 300,000 200,000 Accrued Expenses - related party 151,813 18,249 Deferred Revenue 30,932 -- Other payables 18,426 27,123 ------------ ------------ TOTAL CURRENT LIABILITIES 629,935 456,387 ------------ ------------ STOCKHOLDERS' EQUITY (DEFICIT) Preferred stock - $.001 par value; 10,000,000 shares authorized, 1,000,000 Redeemable Series A Preferred shares issued and outstanding 1,000 1,000 Common stock - $.001 par value; 50,000,000 shares authorized, 14,322,567 and 13,289,207 shares issued and outstanding, respectively 14,322 13,289 Additional paid-in capital 2,664,633 2,132,173 Accumulated deficit (2,781,777) (1,854,705) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (101,822) 291,757 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 528,113 $ 748,144 ============ ============ The accompanying notes are an integral part of these financial statements. F-3
CIRALIGHT GLOBAL, INC. STATEMENTS OF OPERATIONS For the Years Ended December 31, ----------------------------------- 2011 2010 ------------ ------------ Sales $ 1,111,343 $ 774,105 Cost of goods sold 849,184 609,796 ------------ ------------ Gross profit 262,159 164,309 ------------ ------------ OPERATING EXPENSES Research and development expenses 37,262 61,459 Selling and marketing expenses 240,547 211,151 General and administrative expenses 884,732 916,501 ------------ ------------ TOTAL OPERATING EXPENSES 1,162,541 1,189,111 ------------ ------------ Loss from operations (900,382) (1,024,802) ------------ ------------ OTHER EXPENSE Interest expense, net (44,337) (9,614) Gain on extinguishment of debt 17,647 -- ------------ ------------ TOTAL OTHER EXPENSE (26,690) (9,614) ------------ ------------ NET LOSS $ (927,072) $ (1,034,416) ============ ============ BASIC LOSS PER SHARE $ (0.07) $ (0.09) ============ ============ WEIGHTED AVERAGE SHARES USED IN PER SHARE CALCULATION 13,947,917 11,729,651 ============ ============ The accompanying notes are an integral part of these financial statements. F-4
CIRALIGHT GLOBAL, INC STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 Preferred Stock Common Stock --------------- ---------------- Additional Par Par Paid in Accumulated Total Shares Value Shares Value Capital Deficit Equity ------ ----- ------ ----- ------- ------- ------ BALANCE DECEMBER 31, 2009 1,000,000 1,000 10,368,000 10,368 1,225,665 (820,289) 416,744 Common Stock Issued For Private Placement at $0.25 -- -- 232,000 232 57,768 -- 58,000 Common Stock Issued For Private Placement at $0.50 -- -- 444,000 444 221,556 -- 222,000 Common Stock Issued As Anti-Dilution Shares For Compensation And Services Rendered at $0.25 -- -- 282,353 282 70,306 -- 70,588 Common Stock Issued For Accrued Compensation at $0.25 -- -- 359,505 359 89,517 -- 89,876 Common Stock Issued For Conversion of Notes Payable and Interest at $0.25 -- -- 1,552,408 1,553 386,549 -- 388,102 Common Stock Issued For Conversion of Notes Payable and Interest at $0.50 -- -- 50,941 51 25,419 -- 25,470 Stock Options Issued For Services -- -- -- -- 51,574 -- 51,574 Stock Offering Costs -- -- -- -- (2,181) -- (2,181) Rent Donation by Related Party -- -- -- -- 6,000 -- 6,000 Net Loss -- -- -- -- -- (1,034,416) (1,034,416) --------- ------- ---------- ------- ---------- ----------- ----------- BALANCE DECEMBER 31, 2010 1,000,000 1,000 13,289,207 13,289 2,132,173 (1,854,705) 291,757 Common Stock Issued For Private Placement at $0.50 -- -- 951,360 951 474,729 -- 475,680 Common Stock Issued For Services at $0.50 -- -- 80,000 80 39,920 -- 40,000 Common Stock Issued From Exercise of Stock Options at $0.75 -- -- 2,000 2 1,498 -- 1,500 Stock Offering Costs -- -- -- -- (1,300) -- (1,300) Stock Options Issued For Services -- -- -- -- 9,611 -- 9,611 Stock Options Issued For Financing Costs -- -- -- -- 34,440 -- 34,440 Commissions on Sales of Common Stock -- -- -- -- (32,438) -- (32,438) Rent Donation by Related Party -- -- -- -- 6,000 -- 6,000 Net Loss -- -- -- -- -- (927,072) (927,072) --------- ------- ---------- ------- ---------- ----------- ----------- BALANCE DECEMBER 31, 2011 1,000,000 $ 1,000 14,322,567 $14,322 $2,664,633 $(2,781,777) $ (101,822) ========= ======= ========== ======= ========== =========== =========== The accompanying notes are an integral part of these financial statements. F-5
CIRALIGHT GLOBAL, INC STATEMENTS OF CASH FLOWS For the Years Ended December 31, ----------------------------------- 2011 2010 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $ (927,072) $ (1,034,416) Adjustments to reconcile net loss to net cash used in operating activities: Common stock issued for compensation and services 40,000 -- Options issued for services 9,611 51,574 Depreciation and amortization 9,021 11,976 Contribution of rent from a related party 6,000 6,000 Bad debt expense 25,896 39,273 Gain on extinguishment of debt (17,647) -- Changes in operating assets and liabilities (Increase) decrease in Restricted Cash (7,600) -- (Increase) decrease in Deferred Revenue 30,932 -- (Increase) decrease in inventory 30,487 (51,585) (Increase) decrease in accounts receivable (52,344) 112,487 (Increase) decrease in prepayments and deposits 37,715 81,587 (Increase) decrease in note receivable - related party 35,244 (5,589) Increase (decrease) in accounts payable (42,042) 156,596 Increase in other payables 142,514 16,633 ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (679,285) (615,464) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of business assets (4,262) -- ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (4,262) -- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Cash from sale of common stock 475,680 280,000 Cash from exercise of options 1,500 -- Options issued for financing costs 34,440 -- Payments of commission on common stock sales (32,438) -- Proceeds from advances payable - related party 100,000 -- Proceeds from note payable -- 275,000 Stock offering costs (1,300) (2,181) ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 577,882 552,819 ------------ ------------ Net (decrease) increase in cash (105,665) (62,645) Cash, beginning of period 203,108 265,753 ------------ ------------ CASH, END OF PERIOD $ 97,443 $ 203,108 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ -- $ 9,614 ============ ============ Income taxes paid $ -- $ -- ============ ============ NON-CASH INVESTING AND FINANCING ACTIVITIES Common stock issued for accrued compensation $ -- $ 89,876 ============ ============ Debt and liabilities settled with common stock $ -- $ 484,160 ============ ============ Exchange of Note Receivable for Legal Fees $ 40,210 $ -- ============ ============ The accompanying notes are an integral part of these financial statements. F-6
CIRALIGHT GLOBAL, INC. NOTES TO THE FINANCIAL STATEMENTS 1. Background and Basis of Presentation: Ciralight Global, Inc. (the "Company") was incorporated in the State of Nevada on February 26, 2009. The Company is in the business of designing, developing, and distributing proprietary advanced day lighting systems for traditional non-residential markets that benefit from natural lighting. In April 2009, we entered into an Exchange of Stock for Assets Agreement with Mr. George Adams, Sr. ("Adams Agreement") to acquire certain assets including, but not limited to, a U.S. patent, patent applications pending in Canada, Europe, Mexico and the United States, artwork, trademarks, equipment, furniture, databases, technical drawings, promotional materials, trade names and inventory parts and marketing rights related to the SunTracker One(TM) and SunTracker Two(TM) daylighting products previously owned and distributed by Ciralight, Inc., a Utah corporation, such assets having been foreclosed on by Mr. Adams, who was the secured creditor of Ciralight, Inc. Ciralight, Inc. is a predecessor to the Company, although we have no affiliation, contractual or otherwise, with Ciralight, Inc. or any of its employees, officers or directors. Ciralight, Inc., the company whose assets were foreclosed on by Mr. Adams, was also in the business of designing, developing, and distributing proprietary advanced day lighting systems for traditional non-residential markets that benefit from natural lighting. Ciralight, Inc. ceased operations on March 14, 2009, following the foreclosure by Mr. Adams. Since the acquisition of the assets was through a foreclosure, the former company and its officers remain liable for the Ciralight Inc.'s debts and the Company has no financial responsibility for those debts. None of the employees or management of Ciralight Inc. are involved in the Company. The business operations of our Company are located in Irvine, California and the Company operates with four employees, the Chief Executive Officer, the Chief Financial Officer / Chief Operations Officer, a warehouse manager and an executive assistant. In April 2009, we acquired all of the above described assets from Mr. Adams, except for the U.S. patent and the patent applications pending in Canada, Europe, Mexico and the United States, in exchange for 3,200,000 shares of our common stock and 1,000,000 shares of our Series A Preferred Stock. On December 15, 2009, we acquired the U.S. patent and patent applications pending in Canada, Europe, Mexico and the United States from Mr. Adams in exchange for the issuance by us of an additional 400,000 shares of our common stock and a convertible promissory note in the amount of $250,000. The note is convertible into shares of our common stock at a conversion rate of one share per $.25 of outstanding principal and interest. As a result of this transaction, Mr. Adams is our largest shareholder. Aside from our U.S. patent and our four pending patent applications, we have no other patent rights. Reclassifications Certain balances in prior year financial statements have been reclassified to conform to the current year presentation. 2. Liquidity and Operations: The Company had net losses of $927,072, and $1,034,416 for the years ended December 31, 2011, and December 2010, respectively, As of December 31, 2011, the Company had cash of approximately $105,000. In addition, the Company had accounts receivable of approximately $175,000, inventory on hand at a cost valuation of approximately $198,000, all fully paid for, and accounts payable of approximately $129,000. The revolving line of credit consists of advances from related parties and amounted to $300,000 as of December 31, 2011. The Company finalized an agreement with the Adams family in which the Company will grant one stock option for each dollar loaned by the F-7
Adams family for the maximum amount borrowed by the Company against the line of credit. The agreement is for a term of one year and the options will have an exercise price of $.50 per option, will be exercisable over five years and will vest quarterly, based on the amount of credit line outstanding at the end of each calendar quarter. In addition, the interest rate agreed upon is 2% over the treasury rate on the outstanding amount of the credit line. The Company has experienced losses primarily attributable to research, development, marketing and other costs associated with the strategic plan to develop as a world class supplier of sustainable lighting technologies. Cash flows from operations have not been sufficient to meet our obligations. Therefore, we have had to raise funds through several financing transactions. At least until we reach breakeven volume in sales and develop and/or acquire the capability to manufacture and sell our products profitably, we will need to continue to rely on cash from external financing sources. Our operations during the year ended December 31, 2011 were financed by product sales contracts, common stock issuances, as well as from working capital reserves. At fiscal year end, the Company had $105,000 of cash and cash equivalents and short term investments. As discussed in Note 14 below, on March 23, 2012, the company obtained an additional $500,000 line of credit to meet operational and working capital needs. Management believes that with the additional line of credit that there is sufficient liquidity to carry on operations for the next twelve months. However, there can be no assurance that management will be able to fully deliver on its business plans. 3. Summary of Significant Accounting Policies: Concentration of Cash Risk The Company maintains its cash accounts primarily with banks located in Utah. The total cash balances are insured by the FDIC up to $250,000 per bank. At times, the amount of the Company's cash and cash equivalent exceeds the balance insured by the FDIC. Accounts Receivable - The Company's accounts receivable are unsecured and the Company is at risk to the extent such amounts become uncollectible. Management continually monitors accounts receivable balances and provides for an allowance for doubtful accounts at the time collection becomes questionable based on payment history or age of the receivable. The Company sells products and services generally on terms of receiving a 50% deposit prior to shipment and the remaining 50% within 21 days of date of shipment. The Company charges nominal financing fees on late payments. Accounts receivable are charged to the allowance for bad debts when the Company has exhausted all reasonable means of collection. At December 31, 2011, management deemed that all accounts receivable were fully collectible and that no bad debt reserve was required. Inventory - Inventory consists of finished units, parts and packaging materials and is stated at lower of historical cost or current cost. Management will establish a reserve for damaged and discontinued inventory when determined necessary. At December 31, 2011 no reserve was required. Property and Equipment - Property and equipment are stated at historical cost, which consists of the net book value of the assets carried on the prior company's books. Depreciation is computed over the estimated useful lives of the assets using the straight-line method generally over a 3- to 5-year period. Leasehold improvements will be amortized on the straight-line method over the life of the related lease. Expenditures for ordinary maintenance and repairs are charged to expense as incurred. Upon retirement or disposal of assets, the cost and accumulated depreciation are eliminated from the account and any gain or loss is reflected in the statement of operations. Depreciation expense for property and equipment is recorded as either cost of goods sold or general and administrative expense, depending on the use of the assets. Stock Offering Costs - During 2010 and 2011, the Company recorded the organizational costs associated with the private placement offering as additional paid in capital and expensed the costs associated with taking the company public. F-8
Impairment of Long Lived Assets - The Company evaluates its long-lived assets for impairment, in accordance with FASB ASC 360-10, when events or changes in circumstances indicate that the related carrying amount may not be recoverable. Impairment is considered to exist if the total estimated future cash flow on an undiscounted basis is less than the carrying amount of the related assets. An impairment loss is measured and recorded based on the discounted estimated future cash flows. Changes in significant assumptions underlying future cash flow estimates or fair values of assets may have a material effect on the Company's financial position and results of operations. No such impairment was indicated at December 31, 2011. Shipping and Handling Costs - The Company includes shipping and handling costs that are billed to our customers in revenue and the actual costs incurred for shipping and handling are included in costs of goods sold in accordance with the provisions of FASB ASC 605-45-45-20. The related costs are considered necessary to complete the revenue cycle. Revenue Recognition - The Company recognizes revenue from product sales when persuasive evidence of an arrangement exists, shipment has occurred, the seller's price to the buyer is fixed or determinable and collectability is reasonably assured. Warranty Costs - Commencing April 1, 2009, the Company provided a five-year warranty covering the labor and materials associated with its installations. Effective September 1, 2009, the Company changed the coverage to ten years in the U.S. The Company's "advanced skylights" are warranted by the manufacturer for 10 years, generally. The Company (at its option) will repair, replace or give credit for the original purchase price on any of its products or parts. An accrual for a loss contingency has been made, since warranty expenses to date have been consistent and a reasonable estimate of future expenses can be made, in accordance with FASB ASC 460-10-50-8 (c)). Changes in the liability for product warranty were as follows: Product Warranty -------- Liability at December 31, 2009 $ 9,476 Settlements made during the period (7,425) Change in liability for warranties issued during the period 4,415 Change in liability for preexisting warranties 3,010 ------- Liability at December 31, 2010 $ 9,476 Settlements made during the period -- Change in liability for warranties issued during the period -- Change in liability for preexisting warranties -- ------- Liability at December 31, 2011 $ 9,476 ======= Research and Development Expenses - Research and development expenses are charged to operations in the period incurred. The amounts expensed for the years ended December 31, 2011, and 2010 were $37,262, and $61,459, respectively. Selling and Marketing Expenses - Selling and marketing expenses are expensed as incurred. These expenses were $240,547, and $211,151, respectively, for the years ended December 31, 2011, and December 31, 2010 and consisted of the following: F-9
2011 2010 -------- -------- Booth rental and advertising fees $ 26,827 $ 17,367 Event staffing, travel and shipping 53,943 25,705 Marketing consultants and materials 69,167 29,326 Royalty fees 22,140 13,240 Commissions 63,210 111,393 Sales support, recruitment and travel 5,260 14,120 -------- -------- Total Selling and Marketing Expenses $240,547 $211,151 ======== ======== The Adams Agreement described in Note 1 above, also granted Mr. Adams a royalty fee of $20.00 for each SunTracker One(TM) and SunTracker Two(TM) unit or any future units that are based on the patent rights we acquired from him. The maximum royalty fees payable under the Adams Agreement is $2,000,000 based on the sale of 100,000 units. At December 31, 2011, accrued royalties in the amount of $35,389, related to our sale of 1,769 units, is reflected on our financial statements. General and Administrative Expenses - General and administrative expenses are expensed as incurred. These expenses were $884,732, and $916,501, respectively, for the years ended December 31, 2011 and December 31, 2010 and consisted of the following: 2011 2010 -------- -------- Computer and internet 17,723 13,042 Insurance 60,554 32,824 Membership fees 4,452 6,445 Payroll and compensation 486,407 340,096 Accounting fees 94,227 104,728 Legal fees 39,111 152,871 Consulting fees 40,987 89,018 Rent and occupancy expenses 12,823 20,186 Warehouse expenses 65,022 54,706 Travel expenses 19,800 21,839 Office and administrative expenses 17,730 41,473 Bad debt expense 25,896 39,273 -------- -------- Total General & Administrative Expenses $884,732 $916,501 ======== ======== Concentrations of Credit Risk - Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Financial instruments potentially subjecting the Company to concentrations of credit risk consist principally of accounts receivable. As of December 31, 2011, three distributors had balances representing 72% or more of the Company's accounts receivable. Use of Estimates - The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue F-10
and expenses during the reporting period. Significant estimates include the Company's debt discount, and share-based compensation expense. Actual results could differ from these estimates. Stock-Based Compensation - The Company accounts for stock-based compensation under the provisions of FASB ASC 718 (Statement of Financial Accounting Standards No. 123 (revised 2004), "SHARE-BASED PAYMENT"), which requires the Company to measure the stock-based compensation costs of share-based compensation arrangements based on the grant date fair value and generally recognizes the costs in the financial statements over the employee's requisite service period. Stock-based compensation expense for all stock-based compensation awards granted was based on the grant date fair value estimated in accordance with the provisions of FASB ASC 718. The Company measures compensation expense for its non-employee stock-based compensation under FASB ASC 505-10 and 50, "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services". The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company's common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty's performance is complete. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital. The Company recognizes stock compensation expense by recording employee stock-based compensation using the fair value recognition provisions of Accounting Standards Codification ("ASC") Topic 718 ("ASC 718") using the modified prospective transition method, and recording non-employee stock-based compensation expense in accordance with ASC Topic 505. Income Taxes - The Company accounts for its income taxes under the provisions of FASB-ASC-10 "Accounting for Income Taxes." This statement requires the use of the asset and liability method of accounting for deferred income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes, at the applicable enacted tax rates. The Company provides a valuation allowance against its deferred tax assets when the future realizability of the assets is no longer considered to be more likely than not. Convertible Notes Payable - The Company accounts for its convertible notes payable under the provisions of FASB ASC 470 (Staff Position No. APB 14-1 "Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (including partial cash settlement"). FASB ASC 470 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by FASB ASC 470-20-65-1 (paragraph 12 of APB Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants"). Additionally, FASB ASC 470 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The Company accounts for uncertain tax positions in accordance with FASB ASC 740-10, 30 and 270, "Accounting for Uncertainty in Income Taxes." The application of income tax law is inherently complex. As such, the Company is required to make certain assumptions and judgments regarding its income tax positions and the likelihood whether such tax positions would be sustained if challenged. Interest and penalties related to uncertain tax provisions are recorded as a component of the provision for income taxes. Interpretations and guidance surrounding income tax laws and regulations change over time. As such, changes in the Company's assumptions and judgments can materially affect amounts recognized in the Company's consolidated balance sheets and statement of operations. F-11
4. Balance Sheet Information: Cash consisted of the following at December 31, 2011 2010 -------- -------- Checking account $ 87,292 $201,376 Savings accounts 8,435 502 Petty cash 1,716 1,230 -------- -------- Total Cash and cash equivalents $ 97,443 $203,108 ======== ======== Notes receivable - related party - As of December 31, 2010, the Company held a note receivable from the former President and Chief Executive Officer of the Company, with an original balance of $69,865. This note accrued interest at an annual rate of 8% from the effective date of January 15, 2010. Certain terms of this note receivable were amended and replaced on March 18, 2010, with the following terms: The Company was granted a security interest in and to 329,647 shares of Company common stock owned by the former President and CEO as collateral for the repayment of the note receivable and the note receivable is due and payable on November 1, 2010. The balance of the note, including accrued interest, at December 31, 2010 was $75,454. On January 3, 2011, the Company recorded the satisfaction for the full amount of principal and accrued interest due on the note receivable. Inventory consisted of the following at December 31, 2011 2010 -------- -------- Finished units and components $190,084 $205,501 Packaging crates and materials 7,535 22,605 -------- -------- Total Inventory $197,619 $228,106 ======== ======== Prepaid expenses and other current assets consist of the following at December 31, 2011 2010 -------- -------- Purchase order prepaid deposits $ 11,930 $ 43,304 Deposits on account -- 10,500 Prepaid expenses 4,160 -- -------- -------- Total Prepayments and deposits $ 16,090 $ 53,804 ======== ======== Purchase order prepaid deposits represent the prepayment required under the agreements with several suppliers of our inventory components. F-12
Property and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are expensed as incurred; additions, renewals and betterments are capitalized. Depreciation of property and equipment is provided using the straight-line method with estimated lives ranging from 3 to 5 years as presented in the following schedule. Property and equipment consist of the following at December 31: 2011 2010 -------- -------- Furniture and equipment $ 10,513 $ 7,950 Vehicles 2,771 2,771 Tooling costs 24,683 22,983 Convention display 1,817 1,817 -------- -------- Property and equipment 39,784 35,521 -------- -------- Less Accumulated depreciation (32,856) (25,497) -------- -------- Total Property and equipment, net $ 6,928 $ 10,024 ======== ======== Depreciation expense for the annual periods ended December 31, 2011, and 2010 was $7,359, and $10,313, respectively, and was recorded as cost of goods sold. The use of the above property and equipment determines if the depreciation is recorded as cost of goods sold or as general and administrative expenses. Intangible assets are stated at cost, net of accumulated amortization. Amortization of intangible assets is provided using the straight-line method with estimated lives of 20 years as follows at December 31, 2011 2010 -------- -------- Patent and patent applications $ 30,593 $ 30,593 Less Accumulated amortization (3,395) (1,732) -------- -------- Total Intangible assets, net $ 27,198 $ 28,861 ======== ======== Amortization expense for the annual periods ended December 31, 2011, and 2010 was $1,663, and $1,663, respectively, was related to the Company's patent rights and was recorded as cost of goods sold. Organizational Costs - The Company's startup and organizational expenses were expensed as legal and accounting fees under general and administrative expenses. Advances payable-related party - On December 30, 2010, Terry Adams advanced the Company $200,000 for short term working capital purposes and in 2011, Mr Adams advanced an additional $100,000 to the Company, as represented by the advances payable-related party amount of $300,000 at December 31, 2011. Related accrued interest of $8,508 is included in the Other Payables amount on the Company's financial statements. F-13
Other Payables - The Company had Other Payables consisting of the following at December 31, Other Payables 2011 2010 -------- -------- Accrued warranty expense $ 9,476 $ 9,476 Accrued compensation 8,950 17,647 -------- -------- Total Other payables $ 18,426 $ 27,123 ======== ======== Other Payables - Related Party 2011 2010 -------- -------- Royalty Fees - Related Party $ 35,389 $ 18,249 Accrued Compensation - Related Party 107,916 0 Accrued Interest 8,508 0 -------- -------- Total Other Payables - Related Party $151,813 $ 18,249 ======== ======== Royalty Fees Payable - The Adams Agreement described in Note 1 above, granted Mr. Adams a royalty fee of $20.00 for each SunTracker One(TM) and SunTracker Two(TM) unit or any future units that are based on the patent rights we acquired from him. The maximum royalty fees payable under the Adams Agreement is $2,000,000 based on the sale of 100,000 units. At December 31, 2011 and 2010, accrued royalties totaled $35,389 and $18,249, respectively. Deferred Revenue - Shipments that were staged and ready for shipment were recorded as deferred revenue. Upon shipment to customers, the sale will be recorded as revenue. Deferred Revenue totaled $30,932 at December 31, 2011 5. Stockholders' Equity: Common stock: The Company is authorized to issue up to 50,000,000 shares of common stock with a par value of $0.001, under terms and conditions established by the Board of Directors. The Company had 14,322,567 issued and outstanding common stock shares as of December 31, 2011. Details of the issued and outstanding common stock shares are shown below. Common stock shares issued as of December 31, 2011 are as follows: Amount of Shares Description Issued ----------- ---------- Stock issued for acquisition of assets 3,600,000 Stock issued for legal services (founder's shares) 240,000 Stock issued for consulting services (founder's shares) 240,000 Stock issued as compensation (founder's shares) 1,120,000 Stock issued to private offering subscribers 6,595,360 Stock issued for compensation and services rendered 721,858 Stock issued for conversion of note payable 1,803,349 Stock issued for exercise of stock options 2,000 ---------- Total common stock shares issued 14,322,567 ========== F-14
During the three month period ended March 31, 2010, a total of 873,858 shares of common stock at $.25 per share were issued on January 15, 2010, consisting of 232,000 shares from sales of our stock through a Private Placement Offering, 282,353 shares as anti-dilution shares for compensation and services rendered and 359,505 shares for accrued compensation and bonus compensation. During the three month period ended September 30, 2010, a total of 1,576,408 shares of common stock were issued, consisting of 1,552,408 shares at $.25 per share for the conversion of notes payable and accrued interest for the aggregate amount of $388,102 and 24,000 shares from sales of our stock through a Private Placement Offering at $.50 per share for an aggregate amount of $12,000. During the three month period ended December 31, 2010, a total of 470,941 shares of common stock were issued, consisting of 50,941 shares at $.50 per share for the conversion of a note payable and accrued interest in the amount of $25,470 and 420,000 shares from sales of our stock through a Private Placement Offering at $.50 per share for an aggregate amount of $210,000. During the three month period ended March 31, 2011, a total of 56,000 shares of common stock at $.50 per share were issued, consisting of 6,000 shares from sales of our stock through a Private Placement Offering and 50,000 shares for engineering and promotional services rendered. During the three month period ended June 30, 2011, a total of 669,000 shares of common stock were issued, consisting of 667,000 shares, at $.50 per share, from sales of our stock through a Private Placement Offering and 2,000 shares from the exercise of stock options at $.75 per share. During the three month period ended September 30, 2011, a total of 278,360 shares Of common stock were issued at $.50 per share, from sales of our stock through a Private Placement Offering. During the three month period ended December 31, 2011, a total of 30,000 shares of common stock were issued for marketing services rendered and valued at the aggregate amount of $15,000. Preferred stock: The Company is authorized to issue 10,000,000 shares of preferred stock, par value $0.001 per share. Currently, we have 1,000,000 shares of preferred stock issued and outstanding. As part of the purchase contract for the acquisition of assets, we issued 1,000,000 shares of Series A Preferred Stock to the seller of those assets, Mr. George Adams, Sr. The Series A Preferred Stock has the following rights and references: Voting Rights: As long as the holder of our Series A Preferred Stock owns all 1,000,000 shares of the Company's Series A Preferred Stock and at least 3,200,000 shares of the Company's common stock, such holder shall have the right to vote 51% of the total votes necessary for the election of directors and for any acquisition or merger transaction. Redemption Rights: The Company will have the right to redeem shares of the Series A Preferred Stock by paying Mr. Adams $1.00 per share. Such redemption may occur any time the Company has money legally available for such redemption. Shares Issued: 1,000,000 shares have been issued to George Adams, Sr. No other shares of preferred stock shall be issued by the Company that would grant the holder(s) equal or superior rights to the Series A Preferred Stock. 6. Stock Options and Warrants: As of December 31, 2011, the Company had not issued any warrants. In January 2010, we entered into a stock option agreement with an individual in recognition of his past activities in the development of the products manufactured by the Company. The individual has the option to purchase up to F-15
75,900 shares of common stock at $.75 per share. The option expires the sooner of one year after October 19, 2010, the effective date of the Company's registration statement or five years from the date of the stock option agreement. On December 30, 2010, the Company's Board of Directors approved and adopted the Company's 2010 Employee and Consultant Stock Incentive Plan ("Plan") and reserved a total of 800,000 shares of common stock for issuance pursuant to the Plan. The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company by offering them an opportunity to participate in the Company's future performance through awards of Options, Restricted Stock and Stock Bonuses. On December 30, 2010, the Board of Directors granted a total of 605,000 options at an exercise price of $.425 per share, exercisable over five years from the date of grant. We entered into eight stock option agreements with five individuals in recognition of various services performed for the Company. The individuals have the option to purchase a certain amount of shares of common stock at $.425 per share. The options expire on December 15, 2015. Jeffrey S. Brain, the Company's President, Chief Executive Officer and Director, entered into four stock option agreements relating to assisting the Company with its registration process and becoming a publicly traded Company, entering into a certain contract with a major customer and for serving on the Company's board of directors. Mr. Brain was granted options to purchase an aggregate of 275,000 shares of common stock. Frederick Feck, the Company's Corporate Secretary and Director, entered into a stock option agreement for serving on the Company's board of directors and was granted options to purchase 100,000 shares of common stock. Jacqui Matsumoto, a Company employee, entered into a stock option agreement for significant contributions to the Company and was granted options to purchase 30,000 shares of common stock. David E. Wise, the Company's corporate securities counsel, entered into a stock option agreement for legal services to the Company and was granted options to purchase 100,000 shares of common stock. Terry Adams, a Company founder and investor, entered into a stock option agreement for significant contributions to the Company and was granted options to purchase 100,000 shares of common stock. Stock options exercisable into an aggregate of 978,900 shares of the Company's common stock were outstanding on December 31, 2011, of which 580,900 were vested on the date granted and 100,000 are scheduled to vest during 2012. No options were exercised during the year ended December 31, 2010. The Black-Scholes option-pricing model was used to estimate the option fair values , in accordance with the provisions of Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure." This option-pricing model requires a number of assumptions, of which the most significant are, expected stock price volatility, the expected pre-vesting forfeiture rate and the expected option term (the amount of time from the grant date until the options are exercised or expire). Since the Company's stock is not yet trading nor does it have an extended history of stock prices or volatility, expected volatility and average contractual life variables were estimated utilizing a weighted average of comparable published volatilities and contractual lives based on industry comparables. Expected pre-vesting forfeitures were estimated based on expected employee turnover. The fair value of options granted during the year ended December 31, 2011 was estimated as of the grant date using the Black-Scholes option pricing model with the following assumptions: a dividend yield of zero percent, an expected volatility of between 70.5% and 71.5%, a risk-free interest rate of 0% and a remaining contractual life of between 1.0 and 5.0 years. In April 2011, in consideration of the Adams agreeing to offer the Company advances up to $300,000, the Company agreed to grant the Adams 300,000 stock options at an exercise price of $.50 per option that will be exercisable over five years. The options will vest over one year at 75,000 options per quarter. In addition, 2,000 stock options were exercised at $.75 per option during April 2011. On January 1, 2012, the Board of Directors granted a total of 400,000 options at an exercise price of $0.47 per share, exercisable over five years from the date of grant. We entered into stock option agreements with three individuals in recognition of serving on the Company's board during 2011. The individuals have F-16
the option to purchase shares of common stock at $0.47 per share, which expires on December 31, 2016. Jeffrey S. Brain, the Company's President, Chief Executive Officer and Director, Frederick Feck, the Company's Corporate Secretary and Director and Terry Adams, Company Director, were each granted options to purchase 100,000 shares of common stock. In addition, David E. Wise, the Company's corporate securities counsel, entered into a stock option agreement for legal services to be performed for the Company during 2012. Mr. Wise was granted options to purchase 100,000 shares of common stock. The following table summarizes the activity of stock options for the years ended December 31, 2011 and 2010: Weighted Number of Average Shares Exercise Outstanding Price ----------- ----- Balance, December 31, 2009 -- $ -- Options granted 680,900 0.46 Options exercised -- -- Options forfeited or expired -- -- -------- -------- Balance, December 31, 2010 680,900 0.46 Options granted 300,000 0.50 Options exercised (2,000) 0.75 Options forfeited or expired -- -- -------- -------- Balance, December 31, 2011 978,900 $ 0.47 ======== ======== The weighted average fair values of options granted during the years ended December 31, 2011 and 2010 were $0.15 and $0.09 per option, respectively. The values recorded for the outstanding exercisable options at December 31, 2011 and 2010 were $34,440 and $51,574, respectively. 7. Commitments and Contingencies: The Company, as of December 31, 2011 has no additional financial commitments that would represent long term commitments on behalf of the Company. Operating Leases -- The Company has not entered into any long term leases. The Company is currently leasing approximately 3,500 square feet of warehouse space in Corona, California, on a verbal month to month basis from one of our Directors, Frederick Feck. Commencing October 1, 2009, the Company paid $3,000 per month for the Corona, California warehouse space. For business office space, the Company has chosen to share space with iCapital to reduce its administrative cost by sharing costs, avoiding setup costs for phones, internet, furnishings, etc as well as office staffing. Commencing May 1, 2009, the Company paid $3,000 per month for the office space which is located in Irvine, California on a verbal month to month lease. Commencing April 1, 2010, we began renting an executive suite in Corona, California for $150 a month on a month to month basis and terminated the arrangement and rental payments for the executive offices in Irvine, California. In February 2010, we entered into an eighteen month services agreement with a construction data company regarding Smart BIM; the construction and maintenance of databases relating to customers, sales leads and marketing strategies. Before the first payment was made, SmartBim sold their BIM operation to a third party. We determined that the organizational changes that the contractor made in their operation made the contract non viable. We terminated the agreement on September, 20 2011 in favor of a one-time payment to the contractor of $2,660. The Company, as of December 31, 2011 has no additional financial commitments that would represent long term commitments on behalf of the Company. Capital Leases - The Company has not entered into any kind of capital leases for furnishings, equipment or for any other purposes. F-17
Prepaid Inventory - Our agreements with several of our inventory component suppliers generally provide that between 50% and 60% of the purchase order price is due upon the placement of an order, with the remaining balance due upon completion and shipment of the order, normally within 30 days. Purchase order prepaid deposits are included in the balance sheet as Prepaid expenses and other current assets. As of December 31, 2011, purchase order prepaid deposits totaled $11,930 with primarily four of our major suppliers. 8. Related Party Transactions: As described in Note 7, above, the Company leases warehouse space from one of our directors, Frederick Feck and a portion of our CEO, Jeffrey Brain's, residence is utilized as an office. The Company has recorded contributed capital of $6,000 relating to the value of the use of the residence for the benefit of the Company for the nine months ended December 31, 2011. In January 2010, we entered into a nonexclusive distributorship agreement with Chaparral Green Energy Solutions, LLC, an entity in which our securities attorney, David E. Wise, Esq., owns a 50% equity interest. This non-exclusive dealer agreement with the Company is to sell products in Texas and is on the same terms, conditions and pricing as other dealer agreements. Thus, Mr. Wise's company will not receive any beneficial or special treatment over our other dealers or distributors. The terms and conditions of the dealer agreement with Chaparral Green Energy Solutions, LLC are the same as for the other dealer and distributorship agreements. Therefore, the agreement with Chaparral Green Energy Solutions, LLC does not contain preferential or more favorable terms or conditions than agreements with our other dealers or distributors. In January 2010, we also entered into nonexclusive dealer agreements with both Green Tech Design-Build, Inc., an entity located in Salt lake City, Utah, and Eco-Smart, Inc., an entity located in Sarasota, Florida. In addition, we entered into an exclusive international distribution agreement with Zeev Shimon & Sons, Ltd., an entity located in Petah-Tikva, Israel. During the first quarter of 2011, Terry Adams and George Adams, Sr. each advanced the Company $100,000 for short term working capital purposes, as represented by the advances payable-related parties amount of $200,000 at June 30, 2011. In December 2011, Terry Adams and George Adams, Sr. advanced the Company $50,000 each for a total of $100,000 for short term working capital purposes. The Adam's have agreed to advance the Company up to $300,000 at an interest rate of two percent over the prime interest rate. Interest of $8,508 has been recorded for year ended December 31, 2011, making a total amount due of $308,508. On April 1, 2011, in consideration of the Adams agreeing to offer the Company advances of up to $300,000, the Company agreed to grant the Adams 300,000 stock options at an exercise price of $.50 per option that will be exercisable over five years. The options will vest over one year at 75,000 options per quarter. 9. Share Based Compensation In January 2010, 352,941 common stock shares at $.25 per share, with an aggregate value of $88,235, were issued as compensation and for services rendered in order to satisfy the anti-dilution rights. The Chief Executive Officer and Chief Financial Officer of the Company were each due $30,000 in aggregate compensation resulting from $3,000 per month accrued for each of them from March through December 2009. In addition, the Chief Financial Officer was due additional compensation of $29,876 for the period from February 26, 2009 (inception) to December 31, 2009. Our board of directors granted anti-dilution rights to Jeffrey Brain, iCapital Finance, Inc. (a company owned by Randall Letcavage, our former Chief Executive Officer, and his business partner, Rosemary Nguyen), Randall Letcavage and David E. Wise, our securities counsel. These anti-dilution rights entitled Jeffrey Brain, iCapital Finance, Inc., F-18
Randall Letcavage and David E. Wise to acquire additional shares of our common stock at $.25 per share in order to maintain their original percentage ownership in the our common stock. The rights entitled the holders to acquire additional shares as a result of the private offering conducted by the Company. The anti-dilution rights agreement entitled the holders to acquire their additional shares prior to March 31, 2010, at the same share price of $.25 that subscribers were purchasing stock for in the private offering. The holders, other than iCapital Finance, exercised their rights during December 2009. iCapital Finance did not exercise their dilution rights which remained on the company balance sheet in the form of common stock payable in the amount of $17,647. In the fourth quarter of 2011, After appropriate consideration by management and counsel, the company has determined that these rights no longer exist and has consequently extinguished the debt, resulting in an associated gain of $17,647. 10. Income Taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Net deferred tax liabilities consist of the following components as of December 31, 2011 and 2010: 2011 2010 ---------- ---------- Deferred tax assets NOL carryover $ 941,200 $ 610,000 Accrued expenses-related party 59,000 -- Research and Development credit 2,500 -- Depreciation 800 6,100 Deferred tax liabilities -- -- Valuation allowance (1,003,500) (616,100) ---------- ---------- Net deferred tax asset $ -- $ -- ========== ========== The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income from continuing operations for the years ended December 31, 2011, and 2010 due to the following: 2011 2010 ---------- ---------- Depreciation $ 1,400 $ -- Gain in extinguishment of debt 6,900 -- Book Income (361,500) (403,500) Accrued expenses-related party 52,000 5,600 Stock and options for services and contributed rent 21,700 103,300 Meals & Entertainment 200 800 Valuation allowance 279,300 293,800 ---------- ---------- $ -- $ -- ========== ========== At December 31, 2011, the Company had net operating loss carryforwards of approximately $1,003,500 that may be offset against future taxable income from the year 2011 through 2031. No tax benefit has been reported in the December 31, 2011 consolidated financial statements, since the potential tax benefit is offset by a valuation allowance of the same amount. F-19
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years. 11. Legal Matters: We have no legal matters pending against us. On August 15, 2011 we filed a collection action against Nature's Lighting for their failure to pay for product purchased from us. The amount owed to us is $39,000 plus legal fees and costs. On January 30, 2012 we were successful in obtaining a default judgment and now are proceeding to collect the balance owed to us. 12. Change in Officers and Directors: On March 18, 2010, Randall Letcavage resigned as Chief Executive Officer, President and a director of the Company in order to continue and concentrate on his other businesses. On March 19, 2010, a majority of Company directors resolved to accept Randall Letcavage's resignation as of March 18, 2010, appointed Jeffrey Brain to serve as the Company's Chief Executive Officer and President in addition to his existing positions of Chief Operating officer and Chief Financial Officer and appointed Terry Adams a member of the Board of Directors of the Company at such time as the Company obtains Director and Officer liability insurance. As of December, 2011, Terry Adams is not a Director, since the insurance coverage has not been obtained. 13. Major Customers Major customers are defined as those customers whose annual revenue is greater to or equal to 10% of annual revenue. Net sales for the years ended December 31, 2011 and 2010 include sales to the following major customers, together with the receivables due from those customers: Sales Year Ended December 31, ----------------------- Customer 2011 2010 -------- ---- ---- Customer A $398,612 $ -- Customer B $173,829 $ 14,852 Accounts Receivable, as of December 31, ----------------------- Customer 2011 2010 -------- ---- ---- Customer A $ 57,873 $ -- Customer B $ 45,807 $ 8,618 F-20
14. Subsequent Events: The Company has performed an evaluation of subsequent events pursuant to ASC 855 and is not aware of any subsequent events which would require recognition or disclosure in the financial statements other than as follows. On January 1, 2012, the Board of Directors granted a total of 400,000 options at an exercise price of $0.47 per share, exercisable over five years from the date of grant. We entered into stock option agreements with three individuals in recognition of serving on the Company's board during 2011. The individuals have the option to purchase shares of common stock at $0.47 per share, which expires on December 31, 2016. Jeffrey S. Brain, the Company's President, Chief Executive Officer and Director, Frederick Feck, the Company's Corporate Secretary and Director and Terry Adams, Company Director, were each granted options to purchase 100,000 shares of common stock. In addition, David E. Wise, the Company's corporate securities counsel, entered into a stock option agreement for legal services to be performed for the Company during 2012. Mr. Wise was granted options to purchase 100,000 shares of common stock. On March 23, 2012, the company entered into a revolving line of credit with the Adams family, a related party, in the amount of up to $500,000. The line of credit is for a period of six months at an interest rate of prime plus 2%. In the event that the loan balance is not fully repaid at the end of the six month term, then the outstanding balance plus accrued interest shall be convertible to common stock at the rate of $0.10 per share. The company will utilize this facility to fund operations and position the company to further access capital markets. F-21