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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
 3 Months Ended
Mar. 31, 2024
Accounting Policies [Abstract]  
Basis of Presentation

Basis of Presentation

 

The accompanying consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated financial statements as of March 31, 2024 and for the three months ended March 31, 2024 and 2023 are unaudited. The results of operations for the interim periods are not necessarily indicative of the results of operations for the respective fiscal years. The consolidated statement of financial condition at December 31, 2023 has been derived from the audited financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statement presentation. The accompanying consolidated financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 for additional disclosures and accounting policies.

 
Use of Estimates

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

 

Such estimates and assumptions impact both assets and liabilities, including but not limited to: net realizable value of accounts receivable and inventory, estimated useful lives and potential impairment of property and equipment, the valuation of intangible assets, estimate of fair value of share based payments and derivative liabilities, estimates of fair value of warrants issued and recorded as debt discount, estimates of tax liabilities and estimates of the probability and potential magnitude of contingent liabilities.

 

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future nonconforming events. Accordingly, actual results could differ significantly from estimates.

 
Reclassifications

Reclassifications

 

For comparability, reclassifications of prior-year balances were made to conform with current-year presentations, such as sales and marketing expenses which were previously included in selling, general, and administrative expenses in the 2023 comparable period.

 
Basis of Consolidation

Basis of Consolidation

 

The consolidated financial statements include the results of the Company and one of its subsidiaries, SQL Lighting and Fans LLC from January 1, 2023 and the results from its remaining subsidiaries, Belami, Inc., BEC, CA 1, Inc., BEC CA 2, LLC, Luna BEC, Inc., and Confero Group LLC from April 28 2023. All intercompany balances and transactions have been eliminated in consolidation.

 

 
Cash, Cash Equivalents, and Restricted Cash

Cash, Cash Equivalents, and Restricted Cash

 

The Company considers all highly liquid securities with original maturities of three months or less when acquired to be cash equivalents. The Company’s cash composition was as follows:

 

   March 31,
2024		   December 31,
2023		 
         
Cash and cash equivalents  $14,146,785   $16,810,983 
Restricted cash   5,642,878    5,619,270 
Total cash, cash equivalents and restricted cash  $19,789,663   $22,430,253 

 
Restricted Cash

Restricted Cash

 

The Company issued a letter of credit of $2.8 million in September 2023 to use as collateral for certain obligations to one of its lessors. The letter of credit was issued by a financial institution and was secured by cash of $2.8 million as of March 31, 2024 and December 31, 2023. Additionally, pursuant to the Company’s acquisition of Belami, Inc., the Company placed $750,000 in an escrow account. Furthermore, the Company secured a line of credit of $2.0 million with cash of the equivalent amount.

 
Customer Contracts Balances

Customer Contracts Balances

 

Accounts receivables are recorded in the period when the right to receive payment or other consideration becomes unconditional. Accounts receivables are recorded at the invoiced amount and are not interest bearing. The Company maintains an allowance for doubtful accounts based upon an estimate of probable credit losses in existing accounts receivable. The majority of the Company’s accounts receivable are from third-party payers and are paid within a few days from the order date. The Company determines the allowance based upon individual accounts when information indicates the customers may have an inability to meet their financial obligations, historical experience, and currently available evidence. As of March 31, 2024, and December 31, 2023, the Company’s allowance for doubtful accounts was $54,987 and $54,987, respectively. The Company determines an allowance for sales returns based upon historical experience. As of March 31, 2024, and December 31, 2023, the Company’s allowance for sales returns was $185,501 and $182,584, respectively and is recorded as accrued expenses in the accompanying consolidated financial statements.

 

The Company defers the revenue related to undelivered customer orders for which it was paid or has a right to be paid at each measurement date. Such amounts are recognized as deferred revenues in the accompanying balance sheet. Deferred revenues amounted to $ 1,616,038 and $1,475,519 as of March 31, 2024 and December 31, 2023, respectively.

 

The costs associated with such deferred revenues are recognized as deferred charges in the accompanying balance sheet. Such charges include the carrying value of related inventory, freight, and sales charges. The deferred charges amounted to $ 245,734 and $224,445 as of March 31, 2024 and December 31, 2023, respectively.

 
Inventory

Inventory

 

Inventories are stated at the lower of cost, determined on the first-in, first-out (FIFO) method. Cost principally consists of the purchase price (adjusted for lower of cost or market), customs, duties, and freight. The Company periodically reviews historical sales activity to determine potentially obsolete items and evaluates the impact of any anticipated changes in future demand.

 

   Match 31,
2024		   December 31,
2023		 
Inventory, component parts  $2,944,213   $2,230,252 
Inventory, finished goods   2,133,511    2,495,482 
Allowance   (1,300,000)   (1,300,000)
Inventory-total   3,777,724    3,425,734 

 

The Company will maintain an allowance based on specific inventory items that have shown no activity over a reasonable period of time. The Company tracks inventory as it is repurposed, disposed, scrapped or sold at below cost to determine whether additional items on hand should be reduced in value through an allowance method. The Company has recorded an allowance of $1.3 million as of March 31, 2024 and December 31, 2023.

 
GE Agreements

GE Agreements

 

The Company has two U.S. and global agreements with General Electric (“GE”) related to the Company’s products.

 

  ●A U.S. and Global Licensing and Master Service Agreement dated December 4, 2023, which replaced a prior agreement under similar terms. The agreement expires on December 4, 2028 and includes automatic renewal provisions. Pursuant to such agreement, GE’s licensing team has the rights to exclusively license certain of the Company’s Standard and Smart plug-and-play products set forth in a statement of work in the U.S. and worldwide. Pursuant to the agreement, the Company expects that GE’s licensing team will seek and arrange licensee partners for our products in the U.S. and globally, including negotiating agreement terms, managing contracts, collecting payments, auditing partners, assisting with patent strategy and protection, and assisting in auditing product quality control under the “Six Sigma” guidelines. For products licensed to third parties, the Company and GE will each receive a specified percentage of the earned revenue realized from such licensing, unless otherwise provided in the applicable statement of work.
    
  ●A letter agreement dated November 28, 2023. The agreement expires on December 15, 2027 and includes a repayment plan relating to certain amounts due under the U.S. and Global Trademark Agreement dated June 15, 2011 (as later amended), which expired November 30, 2023, between SQL Lighting & Fans, LLC and GE Trademark Licensing, Inc. Under this new payment arrangement, the Company was required to pay a revised royalty payment obligation of $2.7 million in the aggregate (the “Royalty Payment”), payable in quarterly installments beginning on December 15, 2023 and ending on December 15, 2026 and an additional obligation equal to either a $1 million convertible promissory note, subject to agreement on terms, or otherwise $1.4 million payable in 2027. As of March 31, 2024, the Company owed $3.7 million in royalty payment obligations. On April 11, 2024, the Company amended the payment arrangement and issued a convertible promissory note, (the “GE Note”), for the additional obligation, thereby reducing the payment obligations by $400,000. A detailed description of the GE Note is set forth in Note 7 below.

 

 
Loss Per Share

Loss Per Share

 

Basic net earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common stocks, common stock equivalents and potentially dilutive securities outstanding during each period.

 

The Company uses the “treasury stock” method to determine whether there is a dilutive effect of outstanding convertible debt, option and warrant contracts. For the three-month ended March 31, 2024, and 2023, the Company recognized net loss and a dilutive net loss, and the effect of considering any common stock equivalents would have been antidilutive for the period. Therefore, a separate computation of diluted earnings (loss) per share is not presented for the periods presented.

 

The Company had the following anti-dilutive common stock equivalents as of March 31, 2024, and March 31, 2023:

 

   March 31,
2024		   March 31,
2023		 
Stock warrants   2,049,147    2,063,522 
Stock options   36,156,476    33,114,250 
Convertible notes   5,487,260    3,536,668 
Preferred stock   –    880,400 
Total   43,692,883    39,594,840 

 
Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on its consolidated financial statements.