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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

☒	Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the fiscal years ended December 31, 2014 and December 31, 2013
	or
☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from__________ to__________

Delaware (State or other jurisdiction of incorporation or organization)		45-1629984 (I.R.S. Employer Identification No.)
2620 Thousand Oaks Blvd., Suite 4000 Memphis, Tennessee (Address of principal executive offices)		38118 (Zip Code)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common Stock, $0.0001 par value

Yes  ☐

No   ☒

Yes  ☐

No   ☒

Yes  ☐

No   ☒

Yes  ☐

No   ☒

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☐		Smaller reporting company ☒

Yes  ☐

No   ☒

 

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EXPLANATORY NOTE

 

Throughout this annual report on Form 10-K, the terms “we,” “us,” “our,” “Green Ballast,” and “Company,” refer to Green Ballast, Inc., unless the context indicates otherwise.

This report on Form 10-K is a comprehensive filing for the fiscal years ended December 31, 2014 and 2013, and the interim periods within 2014 and 2013 as well as the three months ended September 30, 2013.  This report is being filed by us in order to become current in our filing obligations under the Securities Exchange Act of 1934, as amended, or the Exchange Act.  This is our first periodic filing since we filed our Quarterly Report for the three months ended June 30, 2013.  We refer to this report herein as the Comprehensive Form 10-K.

Readers should be aware that several aspects of this report differ from other annual reports. First, this report is for each of the fiscal years ended December 31, 2014 and 2013, in lieu of filing separate reports for each of those fiscal years. Second, because of the amount of time that has passed since our last periodic report was filed with the Securities and Exchange Commission, or the SEC, the information relating to our business and related matters is focused on our more recent periods.

We were unable to file the above referenced periodic reports primarily due to our inability to generate net income from operations and our limited access to financing. As a result, the Company was unable (i) to satisfy significant payables due to third parties, including its independent auditors, for work performed for the Company, (ii) to maintain an adequate financial staff, and (iii) to retain the necessary advisors to prepare and complete the financial reports required by the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the rules and regulations of the SEC.

Due to these constraints, we were unable to prepare and file the required reports with the SEC under the Exchange Act starting in October 2013.  This Comprehensive Form 10-K should be read together and in connection with the other reports filed by us with the SEC for a comprehensive description of our current financial condition and operating results. In the interest of complete and accurate disclosure, we have included current information in this Comprehensive Form 10-K for all material events and developments that have taken place through the date of filing of this Comprehensive Form 10-K.

 

FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” within the meaning of the federal securities laws, which involve risks and uncertainties. Forward-looking statements include all statements that do not relate solely to historical or current facts, and you can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “projects,” “continue,” “initiative” or “anticipates” or similar expressions that concern our prospects, objectives, strategies, plans or intentions. All statements made relating to our operating and growth strategies, product development, energy cost savings, customer relationships, sales strategies and future growth prospects are forward-looking statements.

These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe our assumptions are reasonable, it is very difficult to predict the impact of known factors, and, of course, it is impossible to anticipate all factors that could affect our actual results. These factors include, but are not limited to: our future financial performance, including our revenue, cost of revenue, operating expenses and ability to achieve and maintain profitability; our ability to market, commercialize and achieve market acceptance for our daylight harvesting ballasts, wireless programmable ballasts or any other product candidates or products that we may develop; our ability to innovate and keep pace with changes in technology; the success of our marketing and business development efforts; our ability to maintain, protect and enhance our intellectual property; the effects of increased competition in our market; our ability to effectively manage our growth and successfully enter new markets; and the attraction and retention of qualified employees and key personnel.

All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.  The forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

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PART I

 

Overview

Green Ballast, Inc. is a Delaware corporation incorporated on April 13, 2011. We develop, market and distribute energy-efficient electronic ballasts for fluorescent fixtures in the commercial lighting industry. An electronic ballast is a device used with a fluorescent bulb to regulate the amount of electric current delivered to start and operate the bulb.  It supplies the initial electricity to the bulb that creates light, and then it regulates the amount of electricity flowing through the bulb.  We offer energy-efficient electronic ballasts as an alternative to traditional ballasts and existing daylight harvesting ballasts, also referred to as dimming ballasts. In addition to being energy-efficient, our ballasts are cost-effective, simple to install, low-maintenance, environmentally friendly and compatible with existing building management systems.

 

As described above under the heading “Explanatory Note,” this Comprehensive Form 10-K is being filed by us in order to become current in our filing obligations under the Exchange Act.  As a result, this report is for each of the fiscal years ended December 31, 2014 and 2013, in lieu of filing separate reports for each of those fiscal years. Additionally, because of the amount of time that has passed since our last periodic report was filed with the SEC, the information included herein relating to our business and related matters is focused on our more recent periods.

Our Products

Our current product line consists of our daylight harvesting ballasts. Within this line we have several models that vary by bulb size, wattage and voltage.  For example, our daylight harvesting ballast is available in models that can be applied to two-lamp, three-lamp, or four-lamp light fixtures. Our diverse product portfolio will give our customers the ability to choose products that meet their specific needs. Our ballasts come with a 5-year limited warranty covering defective materials and workmanship. If the ballast fails to operate during the warranty period, we will replace the ballast and pay for the installation of the new ballast. The various features of our product lines are further described below.

Daylight Harvesting Ballast Line

Each of the ballasts offered within our daylight harvesting ballast line operate in the manner set forth below. The ballast is the hub, that is, the control features are located within each ballast, making it completely self-contained and capable of adjusting the lamp output to optimal light level, fixture by fixture. This is accomplished via the following two technologies working simultaneously and seamlessly:

Tuning

The ballast can be custom-tuned to the optimal light level for each tenant’s space. As a result, we are able to offer our customers various desired visual environments with a single product. For example, property management building owners can install a consistent solution for the entire building, while providing tenants with flexibility to select specific illumination levels to best suit their needs. This level of customization offers single tenant solutions for each area of their facility. Tenants can achieve their optimal working environment needs while maximizing base energy-efficiency and environmental benefits. Baselines can be tuned from 100% to 40% maximum output for the first phase of savings.

Daylight Harvesting

Our ballasts have an individual photo sensor that measures the amount of ambient light in a room and seamlessly maintains the desired and tuned light levels that then reduce the fixture’s energy consumption. This is achieved without any calibration or commissioning. In contrast to some alternate solution providers that use centralized zoned photo controls, our solutions provide optimal energy savings and the customer’s desired consistent visual environment from perimeter edge to innermost lighting fixtures. Consulting efforts with our customers regarding tuning level and daylight harvesting can yield energy savings between 30% to 70%.

 

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Sales and Marketing

We currently market our products to (i) commercial real estate end-users, (ii) energy service companies, (iii) original equipment manufacturers, and (iv) electrical lighting product distributors. We continue to evaluate which of these market channels we will focus on primarily in order to maximize our selling and marketing efforts.

End-Users

We market our ballasts directly to commercial real estate end-users which include commercial real estate developers, commercial building owners and managers, and tenants of commercial buildings. We will continue to track which areas of the country have the highest utility rates and higher rebate programs, and we will target end-users operating in those areas.

Energy Service Companies

We have developed relationships with leading national and regional energy service companies, or ESCOs. These are businesses that develop, install, and arrange financing for projects designed to improve the energy-efficiency and maintenance costs for facilities over a seven to twenty year time period. ESCOs offer the end-user a turn-key package for implementing energy-reduction products in new construction and renovations.  ESCOs have the technical expertise to promote our products to their customers.

Original Equipment Manufacturers

Additionally, we market our products to original equipment manufacturers, or OEMs, that manufacture light fixtures to include our ballasts as part of the overall fixtures they sell to the end-user. Like ESCOs, OEMs also have the technical expertise to promote our products to their customers.

Electrical Lighting Product Distributors

We market our products to the leading electrical lighting product distributors in the commercial lighting industry.

Other Marketing Channels

We also leverage our sales and marketing efforts off of various rebate programs offered by utility companies for energy-efficient products. We target areas of the country where the utility companies provide the largest rebates for the purchase and installation of our products and where energy costs are the highest. This means that our customers are able to immediately begin enjoying the full energy savings of our products.  We also participate in other utility rebate programs across the country.

 

Dependence on Key Customers

Our dependence on individual key customers can vary from period to period as a result of the significant size of some of our retrofit and new construction projects. As large retrofit and new construction projects are a significant component of our total sales plan, we may experience more customer concentration in given periods.  In those periods in which our sales are concentrated in a few large customers, a reduction in sales from or loss of those customers would have had a material adverse effect on our results of operations and financial condition.

Research and Development

Shortly after we acquired the patented technology for our ballasts in April 2011, our engineers commenced work to improve our ballasts.  We redesigned the internal components of the ballasts so that all features are self-contained and installation is easier.  Also, the new design shortens production runtime and reduces manufacturing costs.  We have developed several models of the daylight harvesting ballast that vary by bulb size, wattage, and voltage.  During the fiscal year ended December 31, 2014 and December 31, 2013, we did not spend a material amount on research and development activities.

 

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Manufacturing

Currently, we outsource the manufacturing of our ballasts to DuroPower, Inc., headquartered in Covina, California, and with manufacturing facilities in Beijing, China, who is able to provide us with any currently requested supply. DuroPower, Inc. is a leading manufacturer and supplier of advanced electronic ballasts for the fluorescent lighting industry.

The manufacturing process is essentially “an assembly process.” The components used in manufacturing our ballasts are off-the-shelf products.  The technology our manufacturer employs is off-the-shelf technology.  The “value-add” is in the savings resulting from the methodology in the way our manufacturer combines these components and applies today’s technology. Presently, we do not own any warehouses to store our products. We use third-party logistics providers to ship and store our products.

Competition

The commercial lighting industry is highly competitive. As further described below, we face competition from numerous types of vendors.

Traditional and Daylight Harvesting Ballasts

We primarily compete with vendors of commercial lighting products who offer traditional or daylight harvesting ballasts. Such companies include Lutron, Philips, Sylvania, General Electric and others.  These companies have significantly greater financial, marketing and other resources than us, and they have longer operating histories, more customers and a better brand recognition.  The ballasts currently offered by these companies, however, require installation of costly external components to achieve the daylight harvesting capabilities and addressability features which are built into our ballasts. As a result, we believe the benefits of our ballasts such as greater energy-efficiency, lower cost, shorter installation time, subtleness of dimming technology, and ability to integrate with existing building management systems provide us with an advantage over those companies.

LED Industry

We also compete with members of the light emitting diodes, or LED, industry which have begun to develop commercial lighting products using the LED technology.

 

Intellectual Property

We protect our intellectual property rights by relying on patents, trademarks, trade secret laws, federal, state and common law rights, as well as contractual restrictions. We own the trademark to our slogan “The Future of Fluorescent Lighting” and our Green Ballast logo. We own a patent covering the control system and self-containment technology incorporated into our ballasts. This patent expires in 2024.

Regulations, Standards and Approvals

All electronic products must be submitted to, and approved by, a testing agency such as Underwriters Laboratories, or UL, before they can be sold in the United States.  Our ballasts are pre-tested for UL safety compliance in accordance with UL’s guidelines. In addition, we pre-test to verify that our ballast design meets our performance and reliability standards and that all settings, inputs and responses work as designed. We also pre-test to estimate the design life of the ballast.

UL has approved the available models of our daylight harvesting ballast for use in the United States. Additionally, the ballasts we have developed are designed in accordance with all applicable construction and operation standards established by the National Electrical Manufacturers Association and American National Standards Institute. We are also required to meet local electrical codes and industry standards of the American Society of Heating, Refrigerating and Air-Conditioning Engineers; International Electrical Code; California Title 24 Building Efficiency and the Consortium of Energy Engineers. Our ballasts currently meet the codes, regulations and industry standards applicable to them. Except for standard business licenses, we are not required to obtain any additional governmental approvals.

 

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Employees

At December 31, 2014 and 2013, we had a total of one and seven full-time employees, respectively, and one and zero contractors and consultants, respectively, who provide marketing, accounting or engineering services.

Not required.

Not applicable.

We maintain our leased corporate offices at 2620 Thousand Oaks Boulevard, Suite 4000, Memphis, Tennessee.  We believe our current facilities are adequate to meet current and near-term operating requirements.

In our last periodic report filed with the SEC on August 14, 2013, we disclosed that on June 28, 2013, we terminated William H. Bethell’s employment with the Company for cause and removed him as our Chief Financial Officer and Treasurer. On July 10, 2013, we were named as a respondent in a complaint filed by Mr. Bethell with the American Arbitration Association in Memphis, Tennessee. In the complaint, Mr. Bethell alleged a breach of contract, and asserted that we terminated his employment in contravention of his employment contract. The complaint seeks monetary damages for unpaid salary through the termination date and for the remainder of the term of his employment contract, additional shares of Common Stock of the Company and the release of Mr. Bethell from certain non-compete and confidentiality agreements. We believe we properly terminated Mr. Bethell’s employment, and that we have strong defenses to this claim. The arbitrators were recently selected and the arbitration is proceeding.

In our last periodic report filed with the SEC on August 14, 2013, we disclosed that on August 5, 2013, we filed a lawsuit in the United States District Court for the Western District of Tennessee, Western Division against Mr. Bethell, GNAC, LLC, Nick Bussanich and various unnamed defendants. Our lawsuit alleged that Messers. Bethell and Bussanich defamed the Company, violated non-compete agreements and non-disclosure agreements and breached their fiduciary duty and duty of loyalty by, among other things, soliciting sales from our then-current customers and communicating untrue information about us. The lawsuit further alleged that the various defendants conspired together and tortuously interfered with our business relationships and induced our employees to breach their contracts with us. Subsequently, we voluntarily dismissed the lawsuit.

Other than the disclosure provided above, we are not currently aware of any legal proceedings ongoing, pending, or threatened, which are expected to have a material adverse effect on our business or financial condition, and no such legal proceedings occurred during the fiscal years ended December 31, 2014 and December 31, 2013.

Not applicable.

 

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PART II

 

Market Information

In April 2012, our common stock was approved for quotation on the Over-the-Counter Bulletin Board , or OTCBB, operated by FINRA and on the OTCQB operated by OTC Markets Group under the symbol “GBLL.”  In January 2013, our common stock ceased to be quoted on the OTCBB and began being quoted on the OTCQB.  Currently, our common stock is being quoted on the OTC Pink Sheets.  Thus, there is no established public trading market for our common stock, resulting in high and low bid information for our common stock for the quarterly periods within fiscal years 2014 and 2013 being unavailable.

Holders

As of June 2, 2015, there were approximately 138 holders of record of our common stock.

Dividends

We have not declared or paid any dividends on our common stock. Future dividends, if any, will be determined by our board of directors in light of circumstances then existing.

Securities Authorized for Issuance Under Equity Compensation Plans

Our sole equity compensation plan is our 2011 Restricted Stock Plan, or the Plan. The Plan is intended to advance our and our stockholders’ best interests by attracting, retaining, and motivating key employees and consultants with additional incentives through awards of restricted stock. The Plan will terminate on December 31, 2017. The Plan provides that our board of directors, itself or by committee, will administer the Plan.  The board of directors or a committee (whichever is applicable) has the flexibility to determine the timing and amount of restricted stock awards to be granted to eligible participants, who are our key employees and consultants. The board of directors or a committee may also establish performance criteria for the restricted stock awards or take any action necessary to administer the Plan.

The maximum aggregate number of shares that we may issue under the Plan is 57,500,000 shares of our common stock. If any of the awards granted under the Plan expire, terminate, are canceled, or are forfeited for any reason before they have been exercised, vested or issued in full, the unused shares subject to those expired, terminated, canceled or forfeited awards will again be available for grant under the Plan. During fiscal years 2014 and 2013, all but one of our employees was terminated.  All shares held by these terminated employees were forfeited pursuant to the terms of the Plan.  We did not pay any consideration to such terminated employees in respect of such forfeited shares.  As of June 2, 2015, 13,901,960 shares of restricted stock are authorized and available for issuance under the Plan.

Recent Sales of Unregistered Equity Securities

From October 2012 to January 2013, the Company entered into purchase agreements with certain accredited investors pursuant to which the Company issued eleven 8% Mandatorily Convertible Notes (the “Investor Notes”) in the aggregate principal amount of $675,000 and an aggregate of 675,000 shares of common stock, $0.0001 par value per share for aggregate proceeds of $675,000. These Investor Notes matured on October 16, 2013 and had a principal balance of $675,000 as of that date. The common stock was recorded at its fair value of $140,000. A resulting discount to the Investor Notes was recognized as an adjustment to interest expense over the life of the note using a method that approximates the effective-interest method.  Upon a closing of a subsequent private placement of our equity or equity linked securities (a “Subsequent Offering”) and upon the completion of a recapitalization of our capital stock resulting in the reduction of the number of shares of our outstanding Common Stock (each, a “Conversion Event”), the outstanding principal amount of each Investor Note is automatically convertible into shares of our Common Stock.  The number of shares of Common Stock to be issued upon conversion is equal to (a)(i) the principal amount of the Investor Note (ii) divided by the pre-money valuation of the Company used in the Subsequent Offering, and then (iii) multiplied by the number of shares of Common Stock outstanding after the Conversion Event (the “Base Number”), plus (b) 20% of the Base Number.  On the conversion date, all accrued but unpaid interest on the Notes will be forgiven.  The Investor Notes have an outstanding aggregate principal balance of $675,000 as of December 31, 2014 and 2013.

 

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In July 2014, the Company entered into an agreement with a financial advisory firm to provide strategic, financial, operational and other relevant advisory services to help optimize the Company’s growth strategy and enhance shareholder value.  The Company agreed to pay a monthly retainer fee of $20,000 during term of Agreement.  From July 2014 to December 2014, the Company borrowed the total sum of $60,000 from an accredited investor to pay said retainer fees, by issuing three 8% convertible notes in the aggregate principal amount of $60,000 (the “July 2014 Notes”).  The July 2014 Notes are convertible into common stock at the option of the holder on a dollar for dollar basis on the same terms as other investors when a conversion event occurs as defined in the July 2014 Notes.

The offers, sales and issuances of the securities described above were deemed to be exempt from registration under the Securities Act of 1933 in reliance on Rule 506 of Regulation D, in that the issuance of securities to the accredited investors did not involve a public offering, and on Section 4(2)(a) of the Securities Act.  The recipient of securities in each of these transactions represented to us that the securities were acquired for investment only and not with a view to or for sale in connection with any distribution thereof.

Not applicable.

You should read the following discussion of our results of operations and financial condition with the financial statements and related notes included elsewhere in this Comprehensive Form 10-K.  This discussion contains forward-looking statements.  Actual results may differ materially from those contained in any forward-looking statements.

 

We are an innovator, developer and marketer of energy-efficient electronic ballasts in the commercial lighting industry.  Our daylight harvesting ballasts conserve energy and can greatly reduce the energy costs of operating commercial buildings.  With rising utility rates, dwindling natural resources, an inadequate national power grid and regulatory mandates to conserve energy, we believe our products are positioned to take advantage of this market opportunity.

 

Since our inception on April 13, 2011, we have focused our efforts on building our business operations and making further refinements and developments to our technology. We have not generated any significant revenues and have used cash realized from our initial capitalization, borrowings and from our recent private offerings to fund our operating expenses.

As described above under the heading “Explanatory Note,” this Comprehensive Form 10-K is being filed by us in order to become current in our filing obligations under the Exchange Act.  The discussion that follows includes a discussion of our results of operations and financial condition for the fiscal years ended December 31, 2014 and December 31, 2013 and the interim periods within 2014 and 2013 as well as the three months ended September 30, 2013.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses.  Our estimates are based on assumptions we believe are reasonable under the circumstances.  We will evaluate our estimates on an ongoing basis and make changes as experience develops or as we become aware of new information.  Actual results may differ from these estimates. 

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements. 

 

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Revenues

We recognize revenue when all of the following conditions exist: (i) persuasive evidence of an arrangement between us and our customer, (ii) delivery has occurred, (iii) the revenue amount is determinable, and (iv) collection is reasonably assured. Valuation allowances are established for estimated returns, allowances, and discounts at the time revenue is recognized.

Product Warranties

We provide a limited warranty covering defective materials and workmanship.  We generally provide for a 5-year warranty on our products.  In the event a claim is made by a customer on a warranty, we will replace the product and reimburse the purchaser $10.00 per ballast to defray any installation costs.  We accrue estimated warranty costs at the time products are sold. 

Income Taxes

Our financial statements include an estimate of income taxes assessed for any legal jurisdiction in which we operate.  These income taxes include both a current amount, as well as a deferred portion which results from a variety of temporary book versus tax treatment differences, including net operating loss carryforwards. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet. Once established, any deferred tax asset must be evaluated to determine whether it is more likely than not that the future tax benefits will be realized, including the likelihood that we will generate sufficient future taxable income to utilize the full amount. When facts and circumstances warrant, we will establish, increase or reduce valuation allowances associated with deferred tax assets in order to reflect which assets meet the more-likely-than-not realizability test. Based on the cumulative losses and lack of operating history, we have recorded a valuation allowance against our net deferred tax assets as we believe that it is more likely than not that these deferred tax assets will not be realized.

Impairment of Long-Lived Assets

We account for long-lived assets in accordance with the provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 350, Intangibles – Goodwill and Other (ASC 350). We periodically evaluate long-lived assets for indicators that would suggest that the carrying amount of the assets may not be recoverable. The judgments regarding the existence of such indicators are based on factors such as operating performance, market conditions, and legal factors. The valuation of long-lived assets requires the use of judgment in evaluating these indicators.

In accordance with ASC 350, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. Our long-lived assets consist primarily of a patent which has a definite life.

Based on the current and projected near term operating results for the Company, the ability to project long-term operating results is not considered reliable. Therefore, management has decided that the intangibles are impaired as of December 31, 2014. The Company determined the fair value exceeded the carrying value as of December 31, 2014 and 2013.  The Company relied on a recent third-party purchase of a portion of the Company’s indebtedness, which is secured primarily by the intangibles, in order to estimate the fair value of the intangibles. This method indicated that the carrying value of the intangibles is less than the implied fair value. Accordingly, no impairment charge was recognized.

 

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Results of Operations

Results of Operations for the Years Ended December 31, 2014 and 2013

Revenue

For the year ended December 31, 2014, we had revenue of approximately $318,022, compared with revenue of $1,446,365 for the year ended December 31, 2013.    The decrease of our revenue was principally due to our limited business operations during fiscal year 2014. 

Net Loss

For the year ended December 31, 2014, our net loss was approximately $1,166,786 compared with a net loss of $2,704,859 for the year ended December 31, 2013.  Our losses in 2014 decreased primarily due to our limited business operations during fiscal year 2014.

Operating Expenses

Operating expenses include sales and marketing expenses, compensation-related costs of our employees, dedicated general and administrative activities, legal fees, audit and tax fees, consultants and professional services and general corporate expenses. 

Total operating expenses were $808,452 for the year ended December 31, 2014 compared with $2,324,528 for the year ended December 31, 2013.  The decrease in our operating expenses were principally due to our limited business operations during fiscal year 2014.

Interest Expense

Net interest expense was $492,802 for the year ended December 31, 2014 compared with $721,476 for the year ended December 31, 2013.   The decrease in our interest expense was principally due to our limited operations during fiscal year 2014, and the satisfaction of certain of our indebtedness.

Comparison of the Three Months Ended September 30, 2014 to the Three Months Ended September 30, 2013

For the three months ended September 30, 2014, we had revenue of approximately $33,028, compared with revenue of $242,411 for the three months ended September 30, 2013.   The decrease was principally due to our limited business operations during fiscal year 2014. 

During the three months ended September 30, 2014, our net sales were $33,028, cost of sales were $16,190 and our gross profit was $16,838, compared with net sales of $242,411, cost of sales of $219,436 and gross profit was $22,975 for the three months ended September 30, 2013.

For the three months ended September 30, 2014, our operating expenses were $176,496, compared with operating expenses of $140,251 for the three months ended September 30, 2013, resulting in our operating loss of $159,658 for the third quarter of 2014.

Comparison of the Three Months Ended June 30, 2014 to the Three Months Ended June 30, 2013

For the three months ended June 30, 2014, we had revenue of approximately $98,831, compared with revenue of $462,686 for the three months ended June 30, 2013.   The decrease was primarily due to our limited business operations during fiscal year 2014.

During the three months ended June 30, 2014, our net sales were $98,831, cost of sales were $13,574 and our gross profit was $85,257, compared with net sales of $462,686, cost of sales of $335,385 and gross profit was $127,301 for the three months ended June 30, 2013. 

For the three months ended June 30, 2014, our operating expenses were $189,911, compared with operating expenses of $874,975 for the three months ended June 30, 2013, resulting in our operating loss of $104,654 for the second quarter of 2014.

 

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Comparison of the Three Months Ended March 31, 2014 to the Three Months Ended March 31, 2013

For the three months ended March 31, 2014, we had revenue of approximately $178,072, compared with revenue of $233,351 for the three months ended March 31, 2013.   The decrease was primarily due to our limited business operations during fiscal year 2014.

During the three months ended March 31, 2014, our net sales were $178,072, cost of sales were $146,771 and our gross profit was $31,301, compared with net sales of $233,351, cost of sales of $71,564 and gross profit was $161,787 for the three months ended March 31, 2013. 

For the three months ended March 31, 2014, our operating expenses were $348,535, compared with operating expenses of $1,081,187 for the three months ended March 31, 2013, resulting in our operating loss of $317,234 for the first quarter of 2014.

Comparison of the Years Ended December 31, 2013 and 2012

You should read the following discussion of relating to our results of operations and financial condition for the fiscal year ended December 31, 2012 with the financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, which was filed with the SEC on April 1, 2013.

Revenue

For the year ended December 31, 2013, we had revenue of approximately $1,446,365, compared with revenue of $815,021 for the year ended December 31, 2012.    The increase was principally due to continued sales and marketing efforts and acceptance by our customers in 2013. 

Net Loss

For the year ended December 31, 2013, our net loss was approximately $2,704,859 compared with a net loss of $5,661,932 for the year ended December 31, 2012.  Our losses in 2013 decreased primarily due to our limited business operations during fiscal year 2013 and our reduction in expenses related to research and development.

Operating Expenses

Operating expenses include sales and marketing expenses, compensation-related costs of our employees, dedicated general and administrative activities, legal fees, audit and tax fees, consultants and professional services and general corporate expenses. 

The total operating expenses were $2,324,528 for the year ended December 31, 2013 compared with $4,968,581 for the year ended December 31, 2012.  The decrease as principally due to reduction in expenses related to personnel and research and development.

Interest Expense

Net interest expense was $721,476 for the year ended December 31, 2013 compared with $792,490 for the year ended December 31, 2012.   The decrease was principally due to a decrease in amortization of debt discounts for the Gemini and GBL Notes. 

 

Comparison of the Three Months Ended September 30, 2013 to the Three Months Ended September 30, 2012

For the three months ended September 30, 2013, we had revenue of approximately $242,411, compared with revenue of $88,667 for the three months ended September 30, 2012.   The increase was principally due to an increase in distributor revenue. 

 

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During the three months ended September 30, 2013, our net sales were $242,411, cost of sales were $219,436 and our gross profit was $22,975, compared with net sales of $88,667, cost of sales of $63,171 and gross profit was $25,496 for the three months ended September 30, 2012.  The increase was principally due to an increase in distributor revenue.

For the three months ended September 30, 2013, our operating expenses were $140,251, compared with operating expenses of $1,072,608 for the three months ended September 30, 2012, resulting in our operating loss of $117,276 for the third quarter of 2013.

Liquidity and Capital Resources

Since our inception in April 2011, we have relied primarily on funds raised through the sale of our securities and from borrowings to fund our operations. The Company did not experience a substantial increase in sales in fiscal years 2014 and 2013, including the interim periods contained therein, and additional financing was needed to fund our operations.  To meet our liquidity needs during fiscal years 2014 and 2013, we raised approximately $1.1 million by issuing notes and shares of our common stock.

Due to our net losses and negative cash flow from our operations since inception, and our expectation that these conditions will continue for the foreseeable future, there is substantial doubt about our ability to continue as a going concern.  Our ability to continue as a going concern is subject to our ability to obtain necessary funding from outside sources, including additional funding from the sale of our equity or debt securities and short-term financings, and to increase sales of our products.  We are presently engaged in discussions with several potential investors in order to raise the additional funds needed to sustain our operations.

We anticipate that our sales will remain at their current level so that, along with funds generated by additional financing, we should be able to fund our limited operations for the remainder of 2015.  However, there can be no assurance that we will be successful in obtaining such funding.  Even if we are successful in raising the additional funds, we could incur unexpected costs or expenses or fail to collect on our accounts receivable, or experience other unexpected cash requirements that could force us to seek additional financing.  In addition, if we issue additional equity or debt securities, stockholders are likely to experience additional dilution, and the new equity securities may have rights, preferences or privileges that are superior to those of existing holders of our common stock. 

If we are unsuccessful in obtaining additional financing, we will be required to further reduce the scope of our operations, further reduce our commercialization efforts and take other action to substantially reduce our expenses.  There is no assurance that such activity will be sufficient to maintain operations until any additional financing can be located.  If we fail to obtain such financing or if we are unable to increase our sales and decrease, or delay paying, our expenses, we will have to discontinue our operations. 

Off-Balance Sheet Arrangements

As of December 31, 2014 and 2013, we had no off-balance sheet arrangements that have, or are reasonably likely to have a current or future effect on our financial conditions, results of operations, liquidity, capital expenditures or capital resources.

 

Not applicable.

 

Information called for by this item is set forth in the Company’s financial statements and supplementary data contained in this Comprehensive Form 10-K on page F-1.  Quarterly financial information is included in order to become current with our SEC filings.  The quarterly financial information included in this Comprehensive Form 10-K has not been reviewed by our independent registered public accountants.

 

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None.

 

Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer/Chief Financial Officer and Principal Accounting Officer, the Company conducted an evaluation of the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(a) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on these evaluations, the principal executive officer and principal financial officer have identified a material weakness in our internal control over financial reporting. Suspended operations subsequent to June 30, 2013 resulted in the lack of full-time employees devoted to financial reporting. Therefore, non-routine transactions related to debt, revenue, equity, and inventory were improperly recorded. These non-routine transactions, as well as issues with cutoff, resulted in numerous changes during the audit. The Company is in the process of regaining control of financial reporting by enhancing review procedures and dedicating resources to ensure that transactions are properly recorded in accordance with GAAP. Because of the material weakness and our inability to timely file our periodic reports with the SEC, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at the following dates:  December 31, 2014, September 30, 2014, June 30, 2014, March 31, 2014, December 31, 2013 and September 30, 2013.

 

Management’s Annual Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.  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 in accordance with generally accepted accounting principles.

 

Even effective internal controls, no matter how well designed, have inherent limitations such as the possibility of human error or of circumvention or overriding of controls, and consideration of cost in relation to benefit of a control. Moreover, effectiveness must necessarily be considered according to the existing state of the art of internal control. Further, because of changes in conditions, the effectiveness of internal controls may diminish over time.

 

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013 and December 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

 

Based on these evaluations under the framework in Internal Control-Integrated Framework, we identified a material weakness in our internal control over financial reporting.  A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

Suspended operations subsequent to June 30, 2013 resulted in the lack of full-time employees devoted to financial reporting.  Therefore, non-routine transactions related to debt, revenue, equity and inventory were improperly recorded.  These non-routine transactions, as well as issues with cutoff, resulted in numerous changes during the audit.  The Company is in the process of regaining control of financial reporting by enhancing review procedures and dedicating resources to ensure that transactions are properly recorded in accordance with GAAP.

 

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The Remediation Plan

Although as of December 31, 2014 and December 31, 2013, respectively, we had not yet remediated the material weakness in our internal control over financial reporting identified during our 2013 through 2014 reviews, management has initiated the following remediation steps to address the material weakness described above:

 

●	We will continue to focus on improving the skill sets of our accounting and finance function, through education and training;

●	We will continue to consider the engagement of qualified professional consultants to assist us in cases where we do not have sufficient internal resources, with management reviewing both the inputs and outputs of the services;

●

Upon the successful completion of a financing sufficient to support operations for at least two years, we will consider the hiring of additional accounting and finance staff with the commensurate knowledge, experience and training necessary to complement the current staff in the financial reporting functions; and

●	We will further develop our financial statement closing and reporting practices to include additional levels of checks and balances in our procedures and timely review.

 

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the fiscal years ended December 31, 2014 and December 31, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.  However, as discussed above, we have identified a material weakness in our internal control over financial reporting.

This annual report does not include an attestation report of our independent auditors regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent auditors pursuant to temporary rules of the SEC that permit our company to provide only management’s report in this annual report.

 

Item 9B. Other Information

None.

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PART III

Item 10.  Directors, Executive Officers and Corporate Governance

The following are the names of our current executive officers and directors, as well as those who served as executive officers and directors during the fiscal years ended December 31, 2014 and 2013, their present (or former) positions with the Company and certain biographical information.  Their respective backgrounds are described below.

As of the date of this Comprehensive Form 10-K, our only director is J. Kevin Adams.

NAME		AGE		POSITION
J. Kevin Adams		54		Chief Executive Officer/President/Director
Penelope Springer		46		Principal Accounting Officer
William Bethell (1)		58		Chief Financial Officer/Treasurer/Director
Kevin Clarkson(2)		52		Executive Vice President-Product Development/Director
Mary F. Sharp (3)		66		Secretary/Director
John H. Lamberson, Jr. (4)		45		Director
Peter J. Weisman (5)		47		Director

 

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(1)	Mr. Bethell was terminated for cause on June 28, 2013.  Mr. Bethell resigned as a director on August 18, 2013.

(2)	Mr. Clarkson resigned on January 17, 2014.

(3)	Ms. Sharp resigned on January 17, 2014.

(4)	Mr. Lamberson, Jr. resigned on January 17, 2014.

(5)	Mr. Weisman resigned on August 14, 2013.

Executive Officers

J. Kevin Adams has served as our Chief Executive Officer, President and a director since April 2011.  Mr. Adams is responsible for all of our business operations.  Mr. Adams oversees all key client relationships as well as the marketing of new business and investment opportunities.  Since 1997, Mr. Adams has also been the Chief Executive Officer of CB Richard Ellis Memphis, LLC, a leading commercial real estate services firm located in Memphis, Tennessee (“CBRE | Memphis”) and a part of the CBRE Group, Inc. network.  Mr. Adams devotes an amount of his business time serving as our Chief Executive Officer as he deems necessary and appropriate to perform his duties and to help us grow and prosper.  Mr. Adams received his Bachelor of Business Administration from Southern Methodist University. We believe Mr. Adams is qualified to serve on our board of directors because of his significant business experience as an executive officer of other companies.  Mr. Adams also has extensive experience in large scale commercial real estate.

Penelope Springer has served as our principal accounting officer since June 2013.  Ms. Springer is also the Chief Financial Officer of CBRE | Memphis.  At CBRE | Memphis, Ms. Springer is responsible for all financial operations of the company, including budgeting, financial analysis and reporting, commission-generated revenue, and the monitoring of compliance with established accounting policies and procedures.  Prior to joining CBRE | Memphis Memphis in 1994, Ms. Springer worked with one of the largest and most respected accounting firms in the country, Coopers and Lybrand, which is now doing business as PricewaterhouseCoopers.  During her five years at Coopers and Lybrand, she was a senior associate in the audit department.

William Bethell served as our Chief Financial Officer and Treasurer from April 2011 until his termination in June 2013, and as a director from April 2011 until his resignation in August 2013.  During his tenure, Mr. Bethell oversaw our regulatory compliance, investor relations, finance, accounting, human resources, and information technology and assisted in operations.

Kevin Clarkson served as our Executive Vice President – Product Development and a director from April 2011 until January 17, 2014.  During his tenure, Mr. Clarkson was responsible for sales, marketing, research and development.

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Former Non-Employee Directors

Mary F. Sharp served as a director from April 2011 to January 17, 2014.  Since 2005, Ms. Sharp has been the Chief Operating Officer of CBRE | Memphis. Ms. Sharp oversees the asset services division of CBRE | Memphis and the company’s business operations, including business planning, human resources, and marketing.

John H. Lamberson, Jr. served as a director from April 2011 to January 17, 2014.  Mr. Lamberson became Executive Vice President of CBRE | Memphis in 2005. In that capacity, Mr. Lamberson is responsible for directing all investment sales operations and financial analysis projects of the company.

Peter J. Weisman served as a director from April 2011 to August 14, 2013.  Mr. Weisman is an attorney with the law firm of Peter J. Weisman, P.C. and has practiced in the small-cap investment management industry since 2001. Mr. Weisman was nominated to our board of directors in accordance with our contractual arrangements with Gemini Master Fund, Ltd., which has since been terminated.

Audit Committee

Currently, our board of directors serves as the Audit Committee of the Company.  We do not have an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K.  At this time, no qualified candidates have been identified and there can be no assurance that we can attract and retain an independent director to act as our “audit committee financial expert.”

Code of Ethics

We are committed to maintaining the highest standards of business conduct, which we believe are essential to running our business efficiently, serving our shareholders well, and maintaining integrity in the marketplace. The board of directors has adopted a Code of Ethics for senior executives, which provide the framework for the governance of the Company. A copy of our Code of Ethics may be found on our website at www.greenballastinc.com.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors, executive officers, and beneficial owners of more than 10% of our common stock to file reports regarding their ownership and changes in ownership of our common stock with the SEC, and to furnish us with copies of all Section 16(a) reports that they file.

To our knowledge, based solely on review of the copies of such reports furnished us and representations that no other reports were required, during the fiscal years ended December 31, 2014 and December 31, 2013, all Section 16(a) filing requirements applicable to our directors, executive officers, and beneficial owners of more than 10% of our common stock were completed on a timely basis.

Item 11.  Executive Compensation

Summary Compensation Table

The following table sets forth summary compensation information, for the individuals serving as our principal executive officer and our other two most highly compensated executive officers, each of whom is a named executive officer.

 

		Year		Salary				Bonus				Stock Awards (1)				Option Awards				Nonequity Incentive Plan Compensation				Nonqualified Deferred Compensation Earnings				All Other Compensation (2)				Total Compensation
J. Kevin Adams		2014			—				—				—				—				—				—				—				—
President and Chief		2013		$	21,875				—				—				—				—				—				—			$	21,875
Executive Officer
William Bethell (3)		2014			—				—				—				—				—				—				—				—
Chief Financial Officer		2013		$	29,167				—				—				—				—				—				—			$	29,167

 

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(1)

The amounts in the Stock Awards column represent grant date fair value computed in accordance with FASB ASC Topic 718. Stock Awards consist of restricted stock issued under the 2011 Restricted Stock Plan. The grant date fair value per share is equal to $0.045 per share. See note 9 to our Financial Statements contained in our Comprehensive Form 10-K for a discussion of assumptions used to determine fair value of Stock Awards.

(2)	Represents premiums for life and accidental death insurance that we paid on behalf of the named executive.

(3)	Mr. Bethell was terminated for cause on June 28, 2013.

 

 

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Outstanding Equity Awards

The table below sets forth information regarding the outstanding equity awards held by our named executive officers at December 31, 2014.

 

		Stock Awards
Name		Number of Shares of Stock that Have Not Vested				Market Value of Shares of Stock that Have Not Vested				Equity Incentive Plan Awards: Number of Unearned Shares That Have not Vested(1)				Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares that Have Not Vested(2)
J. Kevin Adams (3)			10,777,133			$	2,694,283				—				—
William Bethell (4)			4,311,120			$	1,077,780				—				—

 

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(1)	These shares vest in accordance with the Restricted Stock Plan and the respective stock award agreement for each named executive officer. See “Executive Compensation - Restricted Stock Plan” for a description of the vesting conditions.

(2)

Shares of our common stock were not traded on any market at December 31, 2014. As such, the closing market price of our common stock cannot be used at this time to compute the market value of the unvested shares. We believe the market price of the unvested shares is $0.25 per share based on the last offering price of shares of our common stock sold to our stockholders in a private offering.

(3)	Mr. Adams has assigned all of his unvested shares to the Adams Family Limited Partnership and various estate planning trusts. Mr. Adams’ wife is the general partner and Mr. Adams is a limited partner of the Adams Family Limited Partnership.

(4)	Mr. Bethell was terminated for cause on June 28, 2013.

The table below sets forth information regarding the outstanding equity awards held by our named executive officers at December 31, 2013.

 

		Stock Awards
Name		Number of Shares of Stock that Have Not Vested				Market Value of Shares of Stock that Have Not Vested				Equity Incentive Plan Awards: Number of Unearned Shares That Have not Vested(1)				Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares that Have Not Vested(2)
J. Kevin Adams (3)			10,002,065			$	2,500,516				775,068			$	193,767
William Bethell (4)			4,311,120			$	1,077,780				—				—

 

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(1)	These shares vest in accordance with the Restricted Stock Plan and the respective stock award agreement for each named executive officer. See “Executive Compensation - Restricted Stock Plan” for a description of the vesting conditions.

(2)

Shares of our common stock were not traded on any market at December 31, 2013. As such, the closing market price of our common stock cannot be used at this time to compute the market value of the unvested shares. We believe the market price of the unvested shares is $0.25 per share based on the last offering price of shares of our common stock sold to our stockholders in a private offering.

(3)	Mr. Adams has assigned all of his unvested shares to the Adams Family Limited Partnership and various estate planning trusts. Mr. Adams’ wife is the general partner and Mr. Adams is a limited partner of the Adams Family Limited Partnership.

 

(4)	Mr. Bethell was terminated for cause on June 28, 2013.

 

 

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Executive Employment Agreements

We have entered into employment agreements with our Chief Executive Officer and Chief Financial Officer each of whom is a named executive officer.  In March 2014, we terminated the employment agreement between us and our Chief Financial Officer.  As described below, the employment agreement between us and our Chief Executive Officer automatically renewed for an additional year in March 2014.  The following are descriptions of these employment agreements.

J. Kevin Adams. On June 23, 2011, we entered into an employment agreement with J. Kevin Adams in connection with Mr. Adams’ employment as Chief Executive Officer (the “Adams Employment Agreement”). The Adams Employment Agreement runs until March 31, 2014 with automatic renewals thereafter for terms of one year each.  Mr. Adams received a base salary of $131,250 for fiscal year 2011 and $225,000 for fiscal year 2012.  Pursuant to the terms of the Adams Employment Agreement, Mr. Adams was entitled to receive a base salary of $250,000 for fiscal year 2013, and $275,000 for fiscal year 2014.  Due to our inability to generate sufficient revenue our limited access to financing, Mr. Adams only realized $21,875 and $0.00 in actual base salary in 2013 and 2014, respectively.  Mr. Adams was issued 16,499,700 restricted shares which are to vest and become unrestricted in accordance with the terms of Mr. Adams’ Restricted Stock Award Agreement and our 2011 Restricted Stock Plan described below.

Mr. Adams’ duties will include all duties and responsibilities required of the Chief Executive Officer.  During the term of his employment, Mr. Adams is entitled to two weeks of vacation to be used at a time that is mutually convenient with his duties and his obligations to us. Pursuant to the terms of the Adams Employment Agreement , Mr. Adams is entitled to bonus awards under the agreement in the amount of $250,000 for fiscal year end 2013, and $275,000 for fiscal year end 2014.  Mr. Adams’ bonus awards are conditioned upon the following occurrences:

●

The vesting conditions set forth in our 2011 Restricted Stock Plan must have been met.  Any accrued or deferred bonus compensation will be prorated and earned in one-third increments as each of the three vesting conditions set forth in the 2011 Restricted Stock Plan are met.

 

●

Green Ballast LLC has either received or has the ability to realize in cash any outstanding balance of its initial investment of $3,000,000 in us.

●

Our board of directors has approved the payment of the bonus compensation after considering, among other things, the availability of sufficient funds for payment of such compensation.

Mr. Adams is also eligible for discretionary bonus compensation.  The discretionary bonus compensation may be received in lieu of, but not in addition to, any other bonus compensation.  The discretionary bonus compensation is determined considering, but not being limited by, the following criteria:

●

Successful efforts to cause Underwriters Laboratories to transfer the existing Axis Technologies Inc. file to the us;

●

Successful efforts to cause a first or second tier public accounting firm to accept us as an audit client;

●

Successful efforts to cause any major utility company to acknowledge our products qualify for such utility company’s rebate program;

●

The availability of funds to pay bonus compensation; and

●

Such other facts as either Mr. Adams or our board of directors shall submit for consideration.

No bonuses were paid during fiscal year 2013 or fiscal year 2014.

 

 

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Upon vountary termination of employment, Mr. Adams must forfeit all unvested restricted stock.  Upon termination of Mr. Adam’s employment by us with or without cause, Mr. Adams will be entitled to retain a portion of his unvested restricted stock in accordance with his Restricted Stock Award Agreement.

 

Upon permanent disability or death, Mr. Adams’ estate is entitled to any earned but unpaid base salary and bonus compensation and the reimbursement of business expenses incurred.  In the event of permanent disability or death, and if Mr. Adams or Mr. Adams’ heirs elect for COBRA premium health care coverage, we will pay the COBRA premiums for up to six months for Mr. Adams and Mr. Adams’ surviving spouse and children in the event of permanent disability and Mr. Adams’ surviving spouse and children in the event of death.  In the event of death, all unvested restricted stock shall immediately vest and Mr. Adams’ estate will be entitled to all vested stock.

If Mr. Adams’ employment is terminated by him or by us for cause, he would be entitled to any earned but unpaid base salary and bonus compensation and the reimbursement of business expenses incurred. If we terminate Mr. Adams’ employment without cause, he is entitled to a lump sum amount of any earned but unpaid base salary and bonus compensation, the balance of Mr. Adams’ base salary through the term of the agreement and the reimbursement of business expenses incurred. In the event of termination without cause, and if Mr. Adams elects for COBRA premium health care coverage, we will pay the COBRA premiums for up to six months for Mr. Adams and his surviving spouse and children.

Upon a change of control, all options and restricted stock granted to Mr. Adams that is not considered deferred compensation for Code Section 409A shall become fully vested on the date of the change of control.

William Bethell. On June 23, 2011, we entered into an employment agreement with William Bethell in connection with Mr. Bethell’s employment as Chief Financial Officer (the “Bethell Employment Agreement”). Mr. Bethell’s employment with the Company was terminated on June 28, 2013 and the Bethell Employment Agreement was terminated in March 2014.  Mr. Bethell received a base salary of $131,250 for fiscal year 2011 and a base salary of $225,000 for fiscal year 2012.  Pursuant to the terms of the Bethell Employment Agreement, Mr. Bethell was entitled to receive a base salary of $250,000 for fiscal year 2013, and $275,000 for fiscal year 2014.  Mr. Bethell was issued 16,499,700 restricted shares during his tenure as Chief Financial Officer and Treasurer, but 6,466,680 shares were forfeited upon his termination.

Pursuant to the Bethell Employment Agreement, upon a termination for cause, Mr. Bethell would be entitled to any earned but unpaid base salary and bonus compensation and the reimbursement of business expenses incurred. Upon a termination without cause, Mr. Bethell is entitled to a lump sum amount of any earned but unpaid base salary and bonus compensation, the balance of Mr. Bethell’s base salary through the term of the agreement and the reimbursement of business expenses incurred. In the event of termination without cause, and if Mr. Bethell elects for COBRA premium health care coverage, we will pay the COBRA premiums for up to six months for Mr. Bethell and his surviving spouse and children.  Mr. Bethell’s termination was for cause.

Upon a change of control, all options and restricted stock granted to Mr. Bethell that are not considered deferred compensation for Code Section 409A shall become fully vested on the date of the change of control.

Potential Payments Upon Termination or Change in Control

Information regarding potential payments to our named executive officers upon termination or a change in control was detailed in the above section on Executive Employment Agreements.

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Restricted Stock Plan

We have established the 2011 Restricted Stock Plan. The Plan is intended to advance our and our stockholders’ best interests by attracting, retaining, and motivating key employees and consultants with additional incentives through awards of restricted stock. The Plan will terminate on December 31, 2017. The Plan provides that our board of directors, itself or by appointing committee, will administer the Plan.  The board of directors or a committee (whichever is applicable) has the flexibility to determine the timing and amount of restricted stock awards to be granted to eligible participants, who are our key employees and consultants. The board of directors or committee may also establish performance criteria for the restricted stock awards or take any action necessary to administer the Plan.

All restricted stock issued under a restricted stock award will vest as follows:

●

1/3 of such restricted stock will vest on the first date we attain an average market capitalization for any 10 trading days during any 15 consecutive trading day period in excess of $15.87 million;

 

●

1/3 of such restricted stock will vest on the first date we attain an average market capitalization for any 10 trading days during any 15 consecutive trading day period in excess of $60 million; and

●

1/3 of such restricted stock will vest on the first date we attain an average market capitalization for any 10 trading days during any 15 consecutive trading day period in excess of $120 million.

In addition, restricted stock will vest upon a change in control and upon the death of the participant under the restricted stock award. The board of directors or committee may, in its discretion, accelerate the vesting of restricted stock or waive or amend any conditions of a grant of a restricted stock award.

A participant under a restricted stock award may vote and receive dividends on the restricted stock before it has vested.

 

If the participant is no longer a consultant or, in the case of an employee, has voluntarily terminated his or her employment before the participant’s restricted stock vests, the participant will forfeit all of his or her unvested restricted stock. If an employee is terminated by us before the employee’s restricted stock has vested, the employee may retain the equivalent of 1/60^th of the employee’s unvested restricted stock for every month or partial month of employment prior to termination. In such event, the retained restricted stock will vest in the same manner and amount had the employee remained employed at the time the vesting conditions set forth above occur, if at all.

The maximum aggregate number of shares that we may issue under the Plan is 57,500,000 shares of our common stock. If any of the awards granted under the Plan expire, terminate, are canceled, or are forfeited for any reason before they have been exercised, vested or issued in full, the unused shares subject to those expired, terminated, canceled or forfeited awards will again be available for grant under the Plan. During fiscal years 2014 and 2013, all but one of our employees was terminated.  Employees forfeited shares that were unearned based on their service periods.  We did not pay any consideration to such terminated employees in respect of such forfeited shares.  As of June 2, 2015, 13,901,960 shares of restricted stock are authorized and available for issuance under the Plan.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Security Ownership of Management

The table below sets forth information, as of the dates indicated, with respect to the beneficial ownership (as defined in Rule 13d-3 of the Exchange Act) of our common stock by each of our directors and our named executive officers, and all of our directors and executive officers as a group.

The persons named in the tables below have sole voting and investment power with respect to all shares of common stock owned by them, unless otherwise noted.

In accordance with the rules of the SEC, a person is deemed to be the beneficial owner, for purposes of this table, of any shares of our common stock if he or she has voting or investment power with respect to such security. This includes shares (a) subject to warrants or rights exercisable within sixty (60) days, (b) issuable upon conversion of a convertible note, and (c)(1) owned by a spouse, (2) owned by other immediate family members, or (3) held in trust or held in retirement accounts or funds for the benefit of the named individuals, over which shares the person named in the table may possess voting and/or investment power. Any shares not outstanding which are subject to options, warrants, rights or conversion privileges are deemed to be outstanding for the purpose of computing the percentage of outstanding shares of the class owned by such person but are not deemed to be outstanding for the purpose of computing the percentage of the class by any other person.

 

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Unless otherwise indicated, the address of each beneficial owner is c/o Green Ballast, Inc., 2620 Thousand Oaks Blvd., Suite 4000, Memphis, Tennessee 38118.

 

		As of February 12, 2014						As of June 2, 2015
Name and Address of Beneficial Owner (1)		Amount and Nature of Beneficial Ownership (2)			Percent of Class (2)			Amount and Nature of Beneficial Ownership (2)			Percent of Class (2)
J. Kevin Adams		24,609,450	(8)		26.15	%		24,609,450	(8)		32.73
Penelope Springer		20,000			*			20,000			*
William Bethell (3)		9,700,020	(9)		10.31	%		9,700,020	(9)		12.90	%
Kevin Clarkson (4)		3,029,375			3.22	%		3,069,375			4.08	%
John H. Lamberson, Jr.(5)(6)		40,000			*			40,000			*
Mary F. Sharp (6).		—			*			—			*
Peter J. Weisman (7)		2,000,000	(10)		2.13	%		—			*
All directors and executive officers as a group (7 persons)		39,398,845			41.86	%		37,438,845			49.80	%

 

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*

Less than 1%

(1)

The address of each beneficial owner is c/o Green Ballast, Inc., 2620 Thousand Oaks Blvd., Suite 4000, Memphis, Tennessee 38118.

(2)

Computed in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended.  Includes shares of common stock subject to options exercisable within 60 days of February 12, 2014 and June 2, 2015, as applicable, and shares of restricted stock for which the indicated persons have sole voting power, but not sole investment power.  There were 94,115,609 shares of common stock outstanding on February 12, 2014 and 75,182,829 shares of common stock outstanding on June 2, 2015.

(3)

Mr. Bethell was terminated for cause on June 28, 2013.

(4)

Mr. Clarkson resigned on January 17, 2014.

(5)

Mr. Lamberson resigned on January 17, 2014.

(6)

Ms. Sharp resigned on January 17, 2014.

(7)

Mr. Weisman resigned on August 14, 2013.

(8)

Includes 8,609,450 shares owned of record in the name of Adams Family Limited Partnership, 8,000,000 shares owned by various estate planning trusts in the name of J. Kevin Adims, and 8,000,000 shares owned of record in the name of Sara E. Adams Family Trust.

(9)

Includes 9,700,020 shares owned of record in the name of Bethell Family Limited Partnership

(10)

All shares are owned by GB Solutions, LLC, an entity controlled by Mr. Weisman.

Security Ownership of Certain Beneficial Owners

The table below sets forth information, as of the dates indicated, with respect to the beneficial ownership (as defined in Rule 13d-3 of the Exchange Act) of our common stock by each person or group of persons known to us to be the beneficial owner of 5% or more of our outstanding common stock.

The persons named in the tables below have sole voting and investment power with respect to all shares of common stock owned by them, unless otherwise noted.

In accordance with the rules of the SEC, a person is deemed to be the beneficial owner, for purposes of this table, of any shares of our common stock if he or she has voting or investment power with respect to such security. This includes shares (a) subject to warrants or rights exercisable within sixty (60) days, (b) issuable upon conversion of a convertible note, and (c)(1) owned by a spouse, (2) owned by other immediate family members, or (3) held in trust or held in retirement accounts or funds for the benefit of the named individuals, over which shares the person named in the table may possess voting and/or investment power. Any shares not outstanding which are subject to options, warrants, rights or conversion privileges are deemed to be outstanding for the purpose of computing the percentage of outstanding shares of the class owned by such person but are not deemed to be outstanding for the purpose of computing the percentage of the class by any other person.

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		As of February 12, 2014						As of June 2, 2015
Name and Address of Beneficial Owner		Amount and Nature of Beneficial Ownership			Percent of Class (1)			Amount and Nature of Beneficial Ownership			Percent of Class (2)
Gemini Master Fund, Ltd. (3)		11,153,147(4)			11.85%			—(5)			*
IRC - Interstate Realty Corporation (6)		20,437,500(7)			21.72%			5,000,000(7)			6.65%

 

(1)

Percentage ownership is based on 94,115,609 shares of common stock outstanding on February 12, 2014.

(2)

Percentage ownership is based on 75,182,829 shares of common stock outstanding on June 2, 2015.

(3)

The address of Gemini Master Fund, Ltd. is c/o Gemini Strategies, LLC, 619 South Vulcan, Suite 203, Encinitas, California 92024.

(4)

Amount based on Schedule 13G filed on February 12, 2014 with the SEC by Gemini Master Fund, Ltd.

(5)

Amount based on Schedule 13G filed on February 10, 2015 with the SEC by Gemini Master Fund, Ltd.

(6)

The address of IRC - Interstate Realty Corporation is 2620 Thousand Oaks Blvd., Suite 4000, Memphis, Tennessee 38118.

(7)

All shares are owned by Green Ballast LLC, a Tennessee limited liability company of which IRC - Interstate Realty Corporation is the managing member. J. Kevin Adams is the Chairman and CEO of IRC - Interstate Realty Corporation and disclaims beneficial ownership of the shares.

Item 13.  Certain Relationships and Related Transactions, and Director Independence

 

Other than compensation arrangements of our directors and executive officers, we describe below those transactions occurring during the fiscal year ended December 31, 2013 and the fiscal year ended December 31, 2014 where we were or will be a party, where the amounts involved exceeded the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two fiscal years, and any of our directors, executive officers or holders of more than 5% of our common stock, or any member of the immediate family of the foregoing persons, had or will have a direct or indirect material interest.

Lease

We sublease our principal offices from CBRE | Memphis for $5,000 per month.  We accrue any unpaid amounts for rent as an account payable.  We paid $0 to CBRE | Memphis and accrued $60,000 for rent for both years ended December 31, 2014 and 2013 for the office space provided.  Our Chief Executive Officer, J. Kevin Adams is the chief executive officer of CBRE | Memphis. We believe the terms and amounts being paid for these services and for our subleased offices are no less favorable than the terms we could have obtained from unaffiliated third parties.

Accounting and Marketing Services

On April 15, 2011, we entered into an accounting services agreement and a marketing services agreement with IRC – Interstate Realty Corporation, which is a related party through its ownership of our common stock and through its chairman and chief executive officer, who is J. Kevin Adams, our Chief Executive Officer.  The agreement for accounting and marketing services had an initial term of one year, subject to automatic one-year extensions unless we or IRC – Interstate Realty Corporation provides written notice of termination. We paid $0 to IRC – Interstate Realty Corporation and accrued $42,000 for fees for both fiscal years ended December 31, 2014 and 2013 for the accounting and marketing services provided.

 

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Transactions with Green Ballast, LLC

The managing member of GBL is IRC - Interstate Realty Corporation.  J. Kevin Adams, our Chief Executive Officer and President, is the Chairman and Chief Executive Officer of IRC - Interstate Realty Corporation.  In January 2014, we borrowed $241,517 from IRC, to fund operations (the “January 2014 Note”).  The January 2014 Note bore interest at 8% per annum, matures on January 1, 2016, and was unsecured.  In December 2014, we entered into a stock surrender agreement with GBL.  GBL owned 20,437,500 shares of our common stock and 1,400,000 shares of our preferred stock at December 18, 2014.  Pursuant to the agreement, GBL surrendered 13,437,500 shares of common stock and 1,400,000 shares of preferred stock to us.  Additionally GBL forgave all preferred dividends in arrears totaling $315,412. GBL received no consideration for the stock other than the benefits we will receive.

Borrowings

In August 2013, we borrowed an aggregate of $100,000 from J. Kevin Adams, our Chief Executive Officer and President, in order to fund operations (the “August 2013 Notes”).  The August 2013 Notes bore interest at 12% per annum, matured on December 16, 2013, and were secured by accounts receivable, inventory and funds received upon sale of inventory or payment on accounts.  As of December 31, 2013, the August 2013 Notes were outstanding.  During August 2014, $67,000 was repaid and $33,000 remained outstanding as of December 31, 2014.

Director Independence

Our common stock is quoted on the OTC Pink Sheets, which does not require director independence requirements.  However, for purposes of determining director independence, we have applied the definitions set forth in NASDAQ Rule 5605(a)(2) which state, generally, that a director is not considered to be independent if he or she is, or at any time during the past three years was, an employee of the company; or if he or she (or his or her family member) accepted compensation from the company in excess of $120,000 during any twelve month period within the three years preceding the determination of independence.  We have determined that our current director is not “independent” as defined under NASDAQ Rule 5605(a)(2) and the related rules of the Securities and Exchange Commission.  We have also determined that, during fiscal 2014 and 2013, each of Mary F. Sharp, John H. Lamberson, Jr. and Peter Weisman were “independent” as defined under NASDAQ Rule 5605(a)(2) and the related rules of the Securities and Exchange Commission.  Ms. Sharp and Messrs. Lamberson and Weisman resigned as directors on January 17, 2014, January 17, 2014 and August 13, 2013, respectively.

Item 14.  Principal Accountant Fees and Services

 

During the fiscal years ended December 31, 2014, December 31, 2013 and December 31, 2012, fees for services provided by KPMG LLP, our former independent registered public accounting firm, were as follows:

		Fiscal Year Ended December 31, 2014				Fiscal Year Ended December 31, 2013				Fiscal Year Ended December 31, 2012
Audit Fees		$	0			$	24,000			$	130,000
Tax Fees		$	0			$	0			$	15,000
Total		$	0			$	24,000			$	145,000

“Audit Fees” consist of fees incurred for services rendered for the audit of our annual financial statements, review of our quarterly financial statements and other service normally provided in connection with statutory and regulatory filings. “Tax Fees” are fees billed for tax compliance, tax advice and tax planning.

Audit Committee Pre-Approval Policy

The Board pre-approves audit services, audit-related services and non-audit services provided by KPMG LLP, and will not approve services that the Board determines are outside the bounds of applicable laws and regulations. Pre-approval may also be given as part of the Board’s approval of the scope of the engagement of KPMG LLP or on an individual explicit case-by-case basis before KPMG LLP is engaged to provide each service.

 

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PART IV

Item 15.  Exhibits and Financial Statement Schedules

The following documents are filed as part of this report:

1.	Financial Statements and Schedules - The list of financial statements and schedules set forth in the Index to Financial Statements on page F-1 is incorporated herein by reference.

2.	Exhibits - The exhibits listed in the accompanying Exhibit Index following the signature page to this report.

 

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In March 2014, notification of disposition of collateral held by the Company’s noteholders, Gemini and GBL, was given to Company.  Gemini proposed to sell all property and assets of the Company at a foreclosure sale to the highest qualified bidder held in May 2014.  The sale did not take place because Gemini agreed to sell its debt to LIG.

In December 2014, an Assignment of the Gemini Note was entered into from Gemini to LIG.  The outstanding principal balance of $1,600,000, the warrants to purchase an aggregate of 5,000,000 shares of common stock and 1,017,384 shares of common stock owned by Gemini were transferred to LIG.  Also, 2,000,000 shares of common stock owned by GB Solutions, LLC, a related party to Gemini, were also transferred to LIG.

Since each of the Gemini Note, GBL Note, Investor Notes and August 2013 Notes have matured, the Company is accruing late fees and penalty interest.

Summary of Indebtedness:

 

		December 31, 2014				December 31, 2013
GBL Note		$	1,600,000			$	1,600,000
Gemini Note			1,600,000	(1)			1,600,000
Investor Notes			675,000				675,000
August 2013 Notes			33,000				100,000
October 2013 Note			—				208,725
January 2014 Note			241,517				—
July 2014 Notes			60,000				—
Less unamortized discounts on above Notes			—				(11,709	)
Total debt		$	4,209,517			$	4,172,016
Less current maturities of debt			(4,209,517	)			(4,172,016	)
Long term debt		$	—			$	—

 

(1)  The Gemini Note was owned by LIG, LLC as of December 31, 2014.

The debt agreements contain various nonfinancial covenants.

 

(6)

Income Taxes

The recorded income tax expense rate differs from the U.S. federal income tax rate of 34% as a result of nondeductible interest expense related to the GBL and Gemini Notes, as well as the Company recording a 100% valuation allowance on all of its net temporary deductible differences, including net operating loss carryforwards.

The reconciliation between the federal statutory tax rate and the Company’s effective tax rate for the years ended December 31, 2014 and 2013 is as follows:

		December 31, 2014				December 31, 2013
Expected federal tax benefit			34.00	%			34.00	%
Increase (reduction) resulting from:
State tax-net of federal tax benefit			2.28				3.11
Nondeductible expenses			(15.94	)			(9.35	)
Valuation Allowance			(20.34	)			(27.76	)
Effective tax			—	%			—	%

 

As of December 31, 2014, the Company has estimated that it has approximately $8,535,000 of U.S. federal and state net operating loss carryforwards, which expire beginning 2026, available to offset future taxable income.

The significant components of deferred income taxes as of December 31, 2014 and 2013 are as follows:

 

			December 31, 2014				December 31, 2013
Deferred tax assets:
Provision for bad debts		$	1,182			$	8,595
Warranty reserve			7,658				7,658
Intangible Amortization			2,487				1,275
Other			766				766
Net operating loss carry forwards			3,268,069				3,029,492
Deferred tax assets			3,280,162				3,047,786
Deferred tax liabilities:
Depreciation			(928	)			(5,877	)
Deferred tax liabilities			(928	)			(5,877	)
Net deferred tax asset			3,279,234				3,041,909
Valuation allowance			(3,279,234	)			(3,041,909	)
		$	—			$	—

 

The valuation allowance for deferred tax assets as of December 31, 2014 and 2013 was $3,279,234 and $3,041,909, respectively. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  Management considers the scheduled reversal of deferred tax liabilities (including the impact of carryforward periods) and projected future taxable income in making this assessment.  Based upon the lack of operating history of the Company, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences, including net operating loss carryforwards.  No unrecognized tax benefits exist as of December 31, 2014 and 2013.

Internal Revenue Code Section 382 places a limitation (the “Section 382 limitation”) on the amount of taxable income which can be offset by net operating loss carryforwards after a change in control (generally greater than a 50% change in ownership) of a loss corporation.  Generally, after a control change, a loss corporation cannot deduct operating loss carryforwards in excess of the Section 382 limitation.  The Company will continue to evaluate whether these changes have occurred and whether it is subject to any Section 382 limitations.  If these changes have occurred, the ultimate realization of the net operating losses could be permanently impaired.

 

 

(7)

Stockholders’ Equity

 

(a)

Common Stock

 

Holders of common stock are entitled to one vote per share, to receive dividends and, upon liquidation or dissolution, are entitled to receive all assets available for distribution to stockholders. The holders have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares. Common stock is subordinate to the preferred stock with respect to dividend rights and rights upon liquidation, winding-up, and dissolution of the Company.

 

During 2013, the Company issued 25,000 shares of common stock totaling $5,021.  In December 2014, a Stock Surrender Agreement was entered into by the Company and GBL.  GBL owned 20,437,500 shares of common stock and 1,400,000 shares of preferred stock of the Company at December 18, 2014.  In order to help facilitate potential restructuring of the Company for the benefit of all shareholders and creditors, GBL surrendered 13,437,500 shares of common stock and 1,400,000 shares of preferred stock to the Company.  GBL received no consideration for the stock other than the benefit the Company will receive in its restructuring process.  GBL then transferred 5,000,000 shares to IRC - Interstate Realty Corporation. GBL then sold 2,000,000 shares of common stock to other investors. After surrendering the stock and selling the shares, GBL owned 0 shares of common stock and 0 shares of preferred stock as of December 31, 2014.  Dividends of $315,412 were also forgiven during December 2014.

 

(b)

Common Stock Warrants

 

In connection with the issuance of the Gemini Note to purchase intellectual property from Gemini, warrants to acquire 5,000,000 shares of common stock were issued. These warrants consist of the following:

 

 

The forced exercise provisions are not enforceable (a) to the extent that their enforcement would result in Gemini owning in excess of 9.9% of the Company’s outstanding shares of common stock; (b) if at any time during the previous six months the Company forced the exercise of any of the warrants; (c) if the Company fails to maintain an effective registration statement and current prospectus covering the resale of the shares underlying the warrants; (d) if the shares underlying the warrants fail to be, or fail to remain, listed, or quoted on an acceptable trading market; (e) if the Company fails to authorize and reserve for issuance the requisite number of shares of common stock; (f) if the Company enters bankruptcy or insolvency proceedings or breaches the terms of the warrants; (g) if the volume weighted average price of the common stock drops to or below $0.50 per share; or (h) if the daily dollar trading volume of the common stock drops to or below $30,000. The warrants are valid for seven years following the date of issuance.

 

GREEN BALLAST, INC.

Notes to Financial Statements

December 31, 2014 and 2013

 

LIG may redeem the warrants for cash at the value of the warrants if the Company fails to: (a) use reasonable efforts to file a registration statement registering the common stock underlying the warrants; (b) reasonably diligently respond to comments from the Securities and Exchange Commission (the “SEC”) in connection with the registration of common stock; (c) use best efforts to cause the common stock underlying the warrants to be registered; or (d) take any action to voluntarily withdraw registration of the common stock underlying the warrants.

 

The warrants were determined to have a fair value of approximately $61,000 and are recorded as a component of stockholders’ equity and as a discount to the Gemini Note that is amortized over its life using a method that approximates the effective-interest method. In 2012, the Company and Gemini agreed to modify the terms of the warrants to lower the exercise price to $0.25 per warrant share. This transaction resulted in an increase in the fair value of the warrants of $58,467 and was recorded as an increase to additional paid-in capital and a discount to the Gemini Note that is amortized over the life of the Note.

As discussed in note 5, Gemini assigned its outstanding warrants to LIG, LLC in December 2014.

 

(8)

8% Series A Redeemable Preferred Stock

 

Authorized capital stock includes 8% Series A redeemable preferred stock with a par value of $1.00 per share. The Series A redeemable preferred stock pays a fixed dividend of $0.08 per share, per year, payable monthly and has a liquidation value of $1.00 per share.

 

In connection with the relative fair value allocation between the common stock and GBL Note issued as part of its initial capitalization, the Company recognized a discount on the 8% Series A redeemable preferred stock of approximately $605,000. As a majority of the Company’s board of directors are employees of GBL’s parent company, the 8% Series A redeemable preferred stock is considered redeemable at the option of the holder and, therefore, is classified outside of permanent equity.

As discussed in note 7 (a), GBL surrendered its 1,400,000 shares of preferred stock of the Company in December 2014.

 

(9)

Stock Compensation Plan

 

In 2011, the Company adopted a restricted stock compensation plan (the “Plan”) pursuant to which the Company’s board of directors may grant unvested shares of common stock (stock awards) to officers and key employees and consultants approved by the board of directors. On June 23, 2011, the Company granted 57,500,000 shares of common stock, which represented the maximum aggregate number of common stock that may be issued under the Plan. Included in the 57,500,000 shares that were granted were 1,350,000 shares that were granted to certain consultants in exchange for services provided to the Company, as further discussed in note 7. The grant date fair value of these restricted shares was approximately $61,000.

 

The stock awards will vest if the following market conditions are met:

 

 

In addition, the stock awards will vest upon a change of control of the Company or upon the death of the participant under the Plan. The board of directors may, in its discretion, accelerate the vesting of a stock award or waive or amend any conditions of a stock award grant under the Plan. A participant may vote and receive dividends on the stock award before it has vested. The participant may not sell, assign, transfer, or pledge the stock award until it has vested subject to the restriction described above. In addition, if the stock award vests, the participant may not transfer or pledge the stock award until GBL has either received or has the ability to realize an amount equal to its initial capital contribution of $3 million. If the participant is no longer a consultant or, in the case of an employee, has voluntarily terminated his or her employment before the participant’s stock award vests, the participant will forfeit all of his or her unvested stock award. If an employee is terminated by the Company before the employee’s stock award has vested, the employee may retain the equivalent of 1/60th of the employee’s unvested stock award for every month or partial month of employment prior to termination. In such event, the retained stock award will vest in the same manner and amount had the employee remained employed at the time the vesting conditions set forth above occur, if at all. The stock awards include restrictions on transferability, as determined by Company’s board of directors.

 

The Company’s stock awards qualify for classification as equity, and such awards contain no provisions to allow an employee to force cash settlement by the Company. The initial measurement date is the date the stock awards were granted. The fair value of these stock awards is $0.045 per share.

 

The first one-third of such restricted stock was vested because the conditions were met.  Due to the termination of employment contracts, the awards became service period awards and reallocated over the employees’ service periods.  This resulted in an adjustment to APIC.  In 2013, the total amount of compensation expense for the restricted shares award to employees was decreased by $517,718 and adjustment to outside consultants was decreased by $18,467.

(10)

Related Parties

 

The Company subleases its principal offices from CBRE | Memphis for $5,000 per month.  The Company accrues any unpaid amounts for rent as an account payable.  The Company paid $0 to CBRE | Memphis and accrued $60,000 for rent for both years ended December 31, 2014 and 2013 for the office space provided.  The Company’s Chief Executive Officer, J. Kevin Adams is the chief executive officer of CBRE | Memphis. The Company believes the terms and amounts being paid for these services and for our subleased offices are no less favorable than the terms we could have obtained from unaffiliated third parties.

On April 15, 2011, the Company entered into an accounting services agreement and a marketing services agreement with IRC – Interstate Realty Corporation, which is a related party through its ownership of the Company’s common stock and through its chairman and chief executive officer, who is J. Kevin Adams, the Company’s Chief Executive Officer.  The agreement for accounting and marketing services had an initial term of one year, subject to automatic one-year extensions unless we or IRC – Interstate Realty Corporation provides written notice of termination. The Company paid $0 to IRC – Interstate Realty Corporation and accrued $42,000 for fees for both fiscal years ended December 31, 2014 and 2013 for the accounting and marketing services provided.

The managing member of GBL is IRC - Interstate Realty Corporation.  J. Kevin Adams, the Company’s Chief Executive Officer and President, is the Chairman and Chief Executive Officer of IRC - Interstate Realty Corporation.  In January 2014, the Company borrowed $241,517 from IRC, to fund operations (the “January 2014 Note”).  The January 2014 Note bore interest at 8% per annum, matures on January 1, 2016, and was unsecured.  The Company also borrowed an additional $26,971 from IRC which it repaid to IRC in 2014.  In December 2014, the Company entered into a stock surrender agreement with GBL.  Pursuant to the agreement, GBL surrendered 13,437,500 shares of common stock and 1,400,000 shares of preferred stock to the Company.  GBL received no consideration for the stock other than the benefits the Company will receive.

In August 2013, the Company borrowed an aggregate of $100,000 from J. Kevin Adams, the Company’s Chief Executive Officer and President, in order to fund operations (the “August 2013 Notes”).  The August 2013 Notes bore interest at 12% per annum, matured on December 16, 2013, and were secured by accounts receivable, inventory and funds received upon sale of inventory or payment on accounts.  As of December 31, 2013, the August 2013 Notes were outstanding.  During August 2014, $67,000 was repaid and $33,000 remained outstanding as of December 31, 2014.

 

Additionally, see note 5 for a summary of related party indebtedness outstanding at December 31, 2014 and 2013.

 

(11)

Commitments and Contingencies

 

Warranties

 

The Company provides standard warranties on all of its products for the repair or replacement of defective products within five years from the date of purchase. The Company has recourse provisions that would allow recovery of warranty costs from its suppliers. The Company has not incurred any significant warranty claims since its inception.

 

 

Other than the disclosure provided above, the Company is not currently aware of any legal proceedings ongoing, pending, or threatened, which are expected to have a material adverse effect on the Company’s business or financial condition, and no such legal proceedings occurred during the fiscal years ended December 31, 2014 and December 31, 2013.